Banks
Liquidity may ease faster, but stable Rupiah is needed for the rally to sustain
- An early rate cut may ease liquidity pressure faster, while some loans and marketable securities are at risk of lower yield.
- Banking sector share prices have a high negative correlation with USD/IDR, which could put the sector under selling pressure once again.
- Share price rally provides a window to neutralize position amid our concern on asset quality. We maintain our Neutral rating.
Liquidity easing may come faster than expected
Bank Indonesia unexpectedly decided to cut its benchmark rate by 25bps (from 6.00% to 5.75%) on January 15, 2025, resulting in a share price rally in the banking sector. The benchmark rate cut will benefit banks with a higher portion of TD, such as BBTN (52%), BRIS (38%), and BBRI (36%). This could also alleviate pressure on BMRI and BBNI, which have c. 40% of their CA deposits in the special rate category. On the other hand, BBCA, with its strong CASA franchise and fewer special rate deposits, will benefit less.
Higher downside risk from floating, managed rate loan, and HQLA
In terms of loan yield, BBCA and BBRI have the upper hand with their fixed/floating rate of 50/12% and 60/7% of total loans, respectively, as of Sep24. The banks believe they can manage the rate of managed-rate loans steady amid a lower benchmark rate. If this does not hold true, this could put BBNI and BMRI at higher risks as they have 54% and 44% managed-rate loan portions, respectively. If the lower benchmark rate translates to lower bond/SRBI yields (unlike in the Sep24 rate cut), this will ease liquidity pressure in the banking system. However, this will negatively impact BBCA as secondary reserves form a third of its EA, while the other big 3 banks form c. 25%.
Risk from weaker Rupiah
On the other hand, we note that the banking sector share price has a high inverse correlation (77%) with USD/IDR in FY24, which was partly due to their high foreign ownership. We believe the rally has to be supported by Rupiah stabilization if it is to continue.
Maintain Neutral, with BBCA remaining as our top pick
Despite a more positive outlook on the liquidity front, our main concern on asset quality remains. We believe the share price rally provides a window to reduce positions to Neutral. We still favor BBCA (Buy, TP: Rp11,800) given its robust asset quality, high fixed-rate loan portion, and underweight local fund position. Upside risks to our view are Rupiah stabilization and further ST rate cuts, while the downside risk is significantly deteriorating asset quality.
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