1M25 Performances Cement Concerns on the Banks

Big 4 banks’ results: Bank-only net profit down -15.3% YoY

The Big 4 banks’ 1M25 net profits fell short of both our and consensus estimates, reaching only IDR 12.4tn (-15.3% YoY), mainly due to 58.3% YoY decline in BBRI’s net profit on the back of substantial IDR 5.6tn increase in provisions (+189% YoY). On the flip side, the other three banks managed to post positive growth helped by loan growth remaining strong with aggregate increase of 12.2% YoY, led by BMRI’s impressive 19.3% YoY expansion. However, the Big 4 banks’ NII only grew 1.6% YoY to IDR 25.3tn despite BMRI and BBCA having recorded solid NII growth of 11.4% YoY and 6.7% YoY, respectively. Meanwhile, BBRI’s NII declined 8% YoY, mainly due to high-base effect from last year’s Trans Java Toll repayment, which led to a one-off spike in 1M24 interest income to IDR 690bn. Combined NIM contracted 20bps YoY to 5.2%, reflecting ongoing yield pressure. Separately, aggregate provisions surged 115% YoY, primarily driven by BBRI’s efforts to account for 1Q25 higher NPLs, including IDR 3.5tn overlay. Nevertheless, BBRI’s management reaffirmed full-year guidance of 3-3.2% with credit costs expected to decline from their January peak.

Muted loan growth and margin pressure amid liquidity concerns in 2025F

Looking ahead, all banks under our coverage project slower 2025F loan growth, primarily due to weak purchasing power, stable or slightly below-expected NIM, and higher CoC. As liquidity remained as a primary concern, 2025F CoF may stay elevated, keeping NIM under pressure across most banks under our coverage, except for BBCA, which has indicated the possibility of raising lending rates, particularly in consumer segment. CoC may rise slightly as most banks under our coverage already operate at highly efficient credit cost levels.

Pressure on SOE banks’ share prices amid Danantara & village financing worries

We expect banks’ share prices to remain under pressure, driven by concerns surrounding the formation of Danantara and its adverse impact on SOE banks. The government's goal in consolidating assets under Danantara is to enhance efficiencies and streamline SOE management. However, many foreign investors are opting to underweight SOE-related shares following the formation of Danantara, adopting wait-and-see approach to better assess the potential effects of this controversial initiative deemed by the market. Another potential risk for SOE banks is the establishment of Koperasi Desa Merah Putih, covering 70,000-80,000 villages across Indonesia. The government has enlisted Himbara banks to provide upfront financing of IDR 3-5 billion per village, to be repaid over three to five years using annual village fund allocations. Investors worry that these loans, which could reach up to IDR 400tn (USD 24.5bn) would negatively affect the assets quality of SOE banks. These concerns reflect apprehension of possible political interference within the SOE banks’ operations. That said, ensuring strong governance, accountability and transparency for shareholders will be critical, in our view, for Danantara in gaining investor confidence going forward.

Cut to UNDERWEIGHT on the sector with BBCA as our top pick

We cut the sector’s rating from NEUTRAL to UNDERWEIGHT amid lack of positive catalysts and heightened concerns over the formation of Danantara, which has driven significant net foreign outflows, particularly in SOE banks. From a fundamental perspective, 2025 liquidity is expected to remain tight with NIM pressure persisting and CoC potentially rising slightly, as most banks under our coverage already operate at highly efficient credit cost levels. As a result, we project modest NP growth of 4.4% YoY for the Big Four banks, down from 7% previously, versus current consensus expectations of 5.3% on raised provisions. Despite their current valuations trading near -2 standard deviations PBV, we lower our TPs across banks in our coverage, incorporating higher risk premiums and relative valuations. Given current environment, we prefer private banks with strong CASAs and superior assets quality, as they are better positioned to maintain low CoC. Thus, our top pick is BBCA (TP: IDR 11,500), offering 25%+ upside potential despite our revised down TP from IDR 12,000 previously. Upside risks are higher-than-expected economic growth as well as potentially improving NIM, loan growth, and credit costs.