H2 rate cuts likely to boost Indonesian banks’ earnings

A rate cut cycle often leads to banks’ earnings accelerating.

Indonesian banks are expected to benefit from expected rate cuts in the second half of 2024.

A rate cut cycle has a positive impact on Indonesian banks because their earnings tend to accelerate during and after rate cuts, noted UOB Kay Hian analyst Posmarito Pakpahan.

“Rate cuts could: lead to NIM expansion as funds are adjusted downwards faster than assets–although it also depends on liquidity environment; stimulate loan demand and provide a better funding environment for banks; [and] lower credit costs on economic expansion,” Pakpahan said in UOB Kay Hian’s latest report on Indonesian banking.

Investors are reportedly anticipating 1-2 rate cuts by the US Federal Reserve in H2, the report said. The first rate cut may come out as early as September 2024. Meanwhile, the Bank Indonesia (BI) is expected to hold its rate steady throughout the year, then enact monetary policy easing in 2025.

These conditions open the possibility for Indonesian banks to improve their net interest income margin (NIM) in H2, according to Pakpahan, referring to investors’ sentiments.

“Overall, on a [year-on-year] basis, we believe overall NIM will be relatively stable or decline, given that the high cost of funds will persist in H2 0224 due to high rates and the tight competition on the funding side,” Pakpahan said.

“However, on a [quarter-on-quarter] basis, NIM could be higher on the back of balance sheet optimisation, loan repricing, and banks’ balancing of deposit and loan growth,” Pakpahan added.