• Banking sector’s overall 3Q24 net profit was relatively in line with ours and cons, totalling IDR 53.6tn (+8.7% QoQ and +10.9% YoY), driven mainly by BMRI’s earnings growth of +11.7% YoY. The banks demonstrated solid 3Q24 loan growth of +2.4% QoQ/+13.7% YoY, while their CoF improved on QoQ basis thanks to reduced competition from SRBI and better liquidity from RRR incentives, allowing NIM to improve slightly (+3bps QoQ). However, aggregate provision expense rose +7.8% QoQ as BBRI booked relatively high CoC of 3.4%, exceeding its FY24 guidance of 3.0%.
• Looking ahead, we anticipate liquidity to improve further in 4Q24 due to potential rate cuts and lower statutory reserve requirements from BI. Enhanced liquidity could continue to reduce CoF, thereby improving NIM. Moreover, the positive trend in asset quality among larger banks is expected to persist, ensuring stable earnings into 4Q24.
• We project banking sector’s share prices to remain under pressure in the short term following the announcement of MSME debt forgiveness program targeting the agriculture, plantations, livestock, and fisheries sectors. In our view, the program will not have immediate financial impact, as the banks have already booked 100% coverage for the forgiven loans and removed them from the balance sheet. Nevertheless, if the banks are not cautious, their asset quality may see some impact in the long term, as the debtors will be eligible to reapply for new loans. We continue to prioritize banks with high CASA ratio and high asset quality, as they are better positioned to maintain low CoC in the current environment. Therefore, our top picks for the banking sector are BMRI (BUY, IDR 8,500) and BBCA (BUY, IDR 12,500).