Here's why Indonesian banks' NIMs could be stagnant

Funding cost pressure raised on smaller banks.

According to Maybank Kim Eng, lower credit growth in the near future has been pretty much expected on cooling domestic demand.

Here's more from Maybank Kim Eng:

This could lead to NIMs becoming stagnant in view of:

 Recent increase in BI rate has raised funding cost pressure especially on smaller banks as the system LDR (excluding BCA & Mandiri) already reached 91% by 1Q13. Most banks will find it difficult to fund sustainable 20% loan growth over the next few years without breaching the 100% LDR limit set by Bank Indonesia.

 While banks have traditionally passed on higher CoF to borrowers, they may struggle to do so in the current competitive environment. Bank Indonesia’s requirement to announce base lending rates has increased creditors price sensitivity.

Narrowing spread between consumption lending rates and JIBOR indicates that competition in the sector is getting tighter. The spread between JIBOR and lending rates on working capital loans and investment loans started flattening last quarter, but we believe it is too early to call it a trend.

 Hence, we prefer banks with high variable lending rates, which represent flexibility to re-price loans. Those growing their consumer lending should also benefit from the higher yields on new loans as a proportion of their existing loan base.