Bad for Banks: IDR Weakness & Higher Rates

Rupiah depreciation + rising rates = lower aggregate earnings growth of 1.8% YoY. The Indonesian banking sector operating backdrop has deteriorated sharply since 1Q26. The local currency has slumped to its worst level at IDR 18,178/USD (8 June 2026), down ~9% Ytd, mainly pressured by our twin deficits (budget and B-o-P). To defend the currency, BI has reversed last year’s easing cycle, raising its policy rate twice thus far: 50bps (May BoG Meeting) and 25bps (unscheduled surprised hike on 9-June) to 5.50%. This higher-rate, weaker-currency environment is undoubtedly negative for banks for three main reasons: 1) potentially lifting CoF — particularly for names reliant on expensive time deposits — 2) keeping NIM under pressure as deposit repricing outpaces asset repricing, and 3) raising asset-quality risk as borrowing costs climb amid current soft purchasing power. Weaker IDR also feeds into imported inflation, reinforcing higher-for-longer rate stance, prolonging margin squeeze. That said, on the back of elevated funding costs, sustained NIM pressure, and higher provisions, we have decreased our FY26F aggregate YoY earnings growth for banks under our coverage to +1.8% from +4.6% previously.

Big-4 banks’ 4M26 results: still at elevated level with net profit growth of +8% YoY. Aggregate Big-4 net profit reached IDR 62.1tn in 4M26 (+8% YoY), hitting 37% of our revised full-year forecast, compared to 30% average for 4M in the past four years. In 4M26, combined NIM already compressed -18bps YoY to 5.1% as -46bps decline in asset yield outweighed -31bps improvement in CoF, while aggregate loans grew +14% YoY against deposits of +13% YoY, still lifting the Big 4 LDR to 89% — the highest in 11 months. Asset quality had remained resilient, with most of the earnings beats driven by lower credit costs. However, looking ahead we expect net profit growth to decelerate from +7.5% YoY in 4M26 to +1.8% by year end, dragged down mainly by lower NIM and higher CoC. In 4M26, BBCA and BBRI suffered from softer NII which we expect to persist ahead. At the pre-provision level, we expect aggregate PPOP to grow +5%, compared to +7% YoY in 4M26, driven by BMRI (+14% YoY) and BBNI (+12% YoY) on strong balance sheet expansion.

Cut sector rating to NEUTRAL; BMRI as top pick with highest upside (TP: IDR 6,000). In-line with our cut in earnings growth for the banks, we downgrade the sector rating to NEUTRAL. While we expect 4M26 results to be overstated relative to the rest of the year, valuations are currently undemanding, as most of our covered banks trade near or below -2 standard deviations on PBV. We therefore balance attractive valuations against the risk of further NIM compression and rising credit costs. Within the sector, BMRI remains our top pick (TP: IDR 6,000) and has the highest upside potential of 41%, underpinned by sector-leading earnings and PPOP growth (+19% / +14% YoY in 4M26), robust loan expansion (+18% YoY), and credit costs still running below management guidance, leaving room for more positive surprise. Its scale and CASA-supported funding base also position it relatively well to absorb elevated funding costs. Key upside risks to our call are stronger-than-expected economic growth, rupiah recovery, lower interest rate environment, and improving NIMs, loan growth, as well as credit costs; key downside risks are IDR depreciation, persistent rate hikes, weaker-than-expected NIMs, deteriorating assets quality, and persistent foreign outflows.