Indonesian banking sector - Lending rate disclosure may keep lending competition tight - Deutsche Bank

Lending rate disclosure to go ahead as of 31 March
The Bank of Indonesia (BI) has provided more details regarding banks' lending rate disclosure requirements. As many as 44 banks with assets of Rp10tr or more will likely be required to disclose their rupiah prime lending rates for corporate, retail and consumer loans. Over time, this change should keep intense lending competition intact. Consequently, we reiterate BNI, Mandiri and BCA as our top picks in the sector. We also believe that these banks have lower earnings risks than peers.

More clarity into what constitutes a prime lending rate
There is now less ambiguity in regards to the components of the prime lending rate. According to BI, the prime lending rate should be gauged by: 1) cost of funds, 2) “overhead” costs related to loan underwriting and 3) margins determined for the various types of loans offered. Banks will need to disclose corporate, retail and consumer loan rates. These lending rates will be required to be published in: 1) the announcement board of the banks’ branches, 2) the banks’ online websites and 3) newspapers (along with the banks’ quarterly financials).

Banks with low COF, LDR to have fewer risks of lower re-pricing vs. peers
Aside from these disclosures of prime lending rates, we have seen evidence of a declining lending rate trend largely due to competition. Even so, this development should bode well for our top picks (BNI, Mandiri and BCA), as their low COFs and LDRs should increasingly become a competitive advantage. Pricing competition in the sector will likely intensify as borrowers become more aware of the different rates offered on the market. Our top picks should have fewer risks of lower loan re-pricing than their peers. Currently, the rate differentials between banks with the highest and lowest lending rates and NIM have declined to 8.4% and 5.1%, respectively, down from the 21-month peaks of 11.4% and 8%, respectively. Additionally, with lower lending rates and margins, robust volume of loan growth will likely become an increasingly important earnings driver.

Focus on banks with lower earnings risk such as BNI, Mandiri, and BCA
Despite near-term concerns over rising inflation weighing on Indonesian banking stocks, we retain our long-term Overweight call. Two key risks to the sector are lower spreads due to lending and funding competition, and higher credit costs. We maintain BNI, Mandiri and BCA as our top picks given their lower earnings risks versus peers. We derive our target prices using the Gordon Growth Model. Other risks are macroeconomic and regulatory changes (e.g. an asymmetrical increase in reserve requirements).