RETAIL BANKING | Staff Reporter, Indonesia

Here's why Indonesian banks' deposits are a red herring

Find out why the banks allowed their LDR to trend up.

After 2008, Maybank Kim Eng said flush liquidity in the system no longer allowed Indonesian banks to generate positive spreads by parking excess cash in the interbank market. This explains why the banks cut back on their deposit collection and allowed their loan-deposit ratios to trend up.

Here's more from Maybank Kim Eng:

Lately, the negative spread between interbank and fixed deposit rates has widened further. One-month moneymarket rates have declined to 100bps below 1-month average deposit rates.

OJK’s 94% maximum LDR requirement is not an immediate constraint to asset expansion.

Besides, the inclusion of MTN, floating-rate notes and bonds as funding sources along with traditional customer deposits for LFR calculation has helped to ease liquidity pressures in the banking system.

At a current LDR of 87%, banks should have sufficient liquidity to support our 10.8% loan-growth assumption for 2018E.

Encouraged by a better economic outlook, we believe banks will expand their loan books rather than reduce liquidity to prevent rapid NIM compression.

Indonesia remains an attractive banking market. When rates are rising, lending rates match deposit rates. On the downswing, lending rates lag and have less downside than cost of funds.

In the region, Indonesian banks not only have the best NIMs but are also best able to preserve them and use them as a buffer against higher NPLs.

Understanding this, the regulators have capped timedeposit rates since 2014. Not only does this prevent rate wars during tight liquidity, it also supports our argument that lending rates will remain low for longer. The cap can be changed.

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