Indonesia Banks Big Picture - How Banks Are Funding Loan Growth - Citigroup

 Deposit Cost flat even with 25% loan growth —One data point that surprised clients during our recent marketing trip was relatively stable-declining deposit costs, despite high loan growth. Our analysis shows that this is due to 1) ample system liquidity due to a foreign exchange reserves build up and 2) large banks opting to raise LDR and not competing for deposits. We expect this trend to continue as BBCA, BMRI and BBNI are operating with incremental LDR of >100%. The risks are 1) reversal of foreign exchange reserves, 2) government over-borrowing/under spending as it mops up the liquidity, and 3) BMRI and BBNI resuming aggressive deposit mobilization to leverage their balance sheets post rights issue. We maintain our Buys on BMRI and BBRI and Top Sell on BBCA, on its expensive valuations

 Only BBRI among “Big 4” growing Deposits— Divergent trends are evident amongst the largest four banks. BBCA and BMRI loan growth of 25% is in line with the industry but deposit growth of 14% is well below. BBRI, on the other hand, has below-sector loan growth of 21% and above-sector deposit growth of 23% (incremental LDR of 91%). BBNI is a laggard with loan growth of 17% and deposit growth of 8%. Both BBCA and BBNI have reduced their Time Deposits, supporting their NIMs. On an aggregate basis, these banks have incremental LDR of 111% (123% excluding BBRI).

 Easing pressure on Mid-size and smaller banks— Loan growth of Private National Banks (domestically owned banks) of 31% is well above industry levels. This growth is even higher, 32.5%, if we exclude BBCA, largest in this segment, with a share of 19% of loans and 26% of deposits. Incremental LDR though is comfortable 96%, albeit with lower contribution from CASA. BDMN’s incremental LDR (adj. for RR) is 153%, with funding coming from equity + debt. The high loan growth of relatively smaller banks (historic avg is 25%) does increase systematic risk.

 Monetary situation comfortable though there may be seasonal pressure on deposit rates — Deposit cost may rise in Q3 as government fiscal borrowing tends to be front-end loaded, but spending back-ended, pushing up LDR in mid-year. The overall monetary situation remains comfortable as M2 growth of 16% is lagging bank deposit growth of 20%. Incremental loans and a build-up in foreign exchange reserves together are 150% of incremental deposits, with the balance being drained out through sterilization.