Indonesian banks' cost pressures to persist in 2020

They will likely shift to higher cost funding in anticipation of loan demand growth.

Indonesian banks’ cost pressures are expected to remain in 2020 as the loan-to-deposit ratio (LDR) remains high whilst the current account savings account (CASA) growth slows, reports Maybank Kim Eng.

Local banks are expected to continue shifting towards higher cost funding in the near-term to facilitate the anticipated improvement in loan demand, said Maybank analyst Rahmi Marina.

Most banks are also forecasted to shift slowly towards TD and wholesale funding as happened in 2019, adds Marina.

The ROE compression that hit the banking sector, coupled with lingering liquidity issues in the system pushed funding costs higher in FY2019. This is despite the 100bps benchmark rate cuts made last year.

Also weighing on banks is the weak total deposit growth, which stood at 6.7% YoY as of 11M 2019, which kept the LDR ratio high at 93%.

Overall, Marina estimates loan growth to reach 9.2% YoY for FY20E, up from 7.1% YoY as of 11M 2019. The potential pick up is likely to come from working capital and investment loans which combined covers more than 72% of the banking system’s total loan portfolio.