Indonesia│ 25 May 2022 │ Sector Note
Bottoming cost of fund amid acceleration in QT │PDF
Reserve Requirement Ratio to increase to 9% by Sep 22.
In yesterday’s board of governors’ meeting, BI decide to accelerate Quantity Tightening (QT) by increasing RRR to 9% for conventional banks (which would be the highest ever, going as far back as just before the AFC in 1997), effective in Sep 22 vs. previous plan of only 6.5%, sharply higher than 3.5% in Feb 22 and 5% as of Mar 22. Meanwhile, RRR for syariah banks will be increased to 7.5%, also effective by Sep 22 (Fig 3). RRR hike is the precursor to normalize the monetary policy amid inflation pressure. Banks which have been enjoying lower cost of fund (CoF), particularly in 2021, saw their NIM boosted. The big banks’ CoF was the lowest ever, at less than 2% in 2021 and 1Q22 (Fig 1), as the system CASA ratio reached the highest ever at 62% in Mar 22 (Fig 2). We believe CoF has bottomed amid an accelerating QT environment.
Manageable negative NIM impact at 3-32bp.
Based on our calculation (Fig 4), the annualised NIM impact is 3-32bp for banks that we track. We estimate BCA (BBCA IJ) and BSI (BRIS IJ) to be least impacted, by c.6bp and 12bp, respectively, while BBYB and ARTO most adversely hit, by 70bp and 30bp, respectively. Banks with lower CoF/higher CASA ratio would generally be less worse off by the higher RRR, all else the same. In practice, we project the negative impact on banks’ NIM/earnings from higher RRR could be less severe than our calculations due to: 1) RRR comprises of two components – daily and average balance; and 2) the increase shall be spread out vs our estimates which are based on annualisation.
Liquidity tightening albeit still flush.
According to BI, the higher RRR shall absorb c.Rp110tr from the financial system. Including the previous RRR hikes, some Rp375tr (~5% of system’s deposit as of Mar 22) shall be absorbed. In comparison, the liquidity injection in 2020-21 reached around Rp900tn due to combination of monetary expansion and RRR cut. We note that liquidity has tightened as exhibited by declining liquid asset to deposit ratio, which fell from 35% in Dec 21 to 32% in Mar 22 and declining further to 29% in Apr 22. Nonetheless, LDR remained relatively low at 81% in Mar 22 vs. pre-Covid level in Dec 19 of 97%.
Current account surplus should support deposit growth.
Our house view that current account shall remain positive at 0.4-0.6% of GDP in FY22F should support robust deposit growth, as evidenced by strong correlation between current account and deposit growth (Fig 8). This shall help the loan growth recovery momentum to continue, notwithstanding QT. In Apr 22, loan growth accelerated to 9.1%, the highest since Aug 19 (Fig 9).
Net-net, banks’ share prices may be under pressure in the short term.
Whilst we expect earnings hit from higher RRR is a manageable c.2% of FY22F consensus PATMI (Fig 5), banks’ share prices need to adjust to a higher discount rate. That banks’ share prices have outperformed the JCI YTD amid huge foreign inflow earlier in the year suggest that they may take the brunt as foreign sold aggressively (Fig 12 & 13). Longer term, we think Indonesia banks shall weather through the higher policy rate and yield with limited impact to earnings, cushioned by the comfortable provision coverage, hence credit cost should still decline yoy within managements’ target despite a more challenging macro environment. More positively, bank share prices eventually rallied post RRR hikes in 2010 and early 2022 (Fig 14 & 15).
Disclaimer: no part of this report may be reproduced or distributed in any manner without written permission of BNI Sekuritas and its affiliates. BNI Sekuritas and its affiliates specifically prohibits the redistribution of this report, electronically or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect. This email may contain privileged and/or confidential information. If you are not the named recipient or addressee, you are hereby notified that any use, review, disclosure, or copying of the contents herein is strictly prohibited. If you have received this email by mistake, please notify the sender immediately by reply email and discard/destroy all its contents. This email is for informational purposes and should not be constructed as a solicitation or offer to buy or sell securities or related financial instruments.