Indonesian banks warned of an imminent funding cost pressure

Banks may be more nervous to fund credit growth.

According to Maybank Kim Eng, Indonesian banks enjoyed lower CoF in 2012.

This was largely driven by: a) low deposit guarantee rate as Bank Indonesia kept the benchmark rate at a historical low, b) Indonesia’s reclassification as ‘investment grade’ resulting in lower funding cost as interest on Indonesian government bonds reduced,

c) banks reducing liquidity, partly driven by the central bank’s requirement to maintain LDR to between 78% and 100%. Led by BCA and Mandiri, several banks with lower LDRs reduced interest rates to avoid taking time deposits.

Here's more from Maybank Kim Eng:

However, the condition is changing with the central bank curbing its accommodative monetary policy in June in anticipation of high inflation. Just within two months, Bank Indonesia has raised both FASBI and BI rates by a total 75bp to 4.75% and 6.5%.

These central bank measures were immediately followed by a 25bp increase in deposit guarantee rate to 5.75% currently.

These rates hike prompted banks to recollect deposits. Being ahead of the competition, BCA increased their time deposit (TD) rate by 150bp in May, and another 75bp hike to 5.75% this July.

Other banks are expected to maintain premium rates over that offered by BCA. For some, this could mean a higher proportion of TD being priced at the current maximum of 7%.

While market seems to be questioning BCA’s aggressive move, we think its renewed focus on increasing TD should not be a surprise as deposit growth has been lagging credit growth for some time.

With the system LDR significantly higher at 91%, banks may become more nervous in their efforts to fund credit growth that we estimated to reach 19% this year.