Boosting Banking Liquidity

Liquidity injection to SOE banks and potential share price support from Danantara. The Indonesian government’s IDR 200tn liquidity injection is aimed at stabilizing the banking system and improving credit distribution, with a particular focus on state-owned banks that are key players in channeling credit to the real economy. Funds will be sourced from the Ministry of Finance’s special account at Bank Indonesia and distributed across five SOE banks: BRI, Mandiri, and BNI (each IDR 55tn), BTN (IDR 25tn), and BSI (IDR 10tn), in an effort to lower Loan-to-Deposit Ratios (LDR) and ease funding constraints, providing these banks greater headroom to expand lending. Notably, the government has stipulated that these funds must support loans rather than bond purchases, reinforcing SOE banks’ commitment to stimulating productive credit growth. The degree of effectiveness, however, will depend on quality of loan deployment and sectoral distribution, particularly toward MSMEs and priority sectors. Separately, our conversation with Danantara also reveals potential future share price support, particularly given that the SOE banks’ share prices have come down by an average of 16.8% since 2024 (Figure 6).

Positive impact on cost of funds and lending capacity, but not without risks. The liquidity placement comes with 3.8% deposit rate (around 80% of BI’s 7-day reverse repo rate of 4.75% after the latest 25bps cut), making it slightly concessional. For SOE banks, this could reduce average term deposit costs by ~15bps, though overall cost of funds may rise ~3bps. The relief is most meaningful for banks relying heavily on expensive time deposits (i.e. BBNI, BBRI, and BBTN) since the liquidity placement will allow more efficient deposit repricing. Sector-wide, LDR is expected to improve ~420bps to 92.6% (on average), providing balance sheet space for loan growth. Still, the measure has limitations: the six-month tenor (extendable) and weak loan appetite from corporates and households may keep near-term credit expansions to remain muted. Moreover, if loan disbursement lags, banks may end up absorbing higher interest expenses from the deposit placement, which could pressure NIMs. Also, if banks are encouraged to push lending aggressively, especially to MSME segment where growth momentum has slowed, there could be considerable credit quality deterioration, raising risks of higher NPLs and margin compression over time.

Short-to-medium term catalysts have us upgrading to sector NEUTRAL. BI’s recent rate cut by 50bps in the past month and this liquidity relief acts as short-to-medium term catalysts for loan growth, particularly in corporate and SME segments where lower lending rates could unlock refinancing demand. However, structural headwinds from weak credit demand, cautious borrower sentiment and potential increased provisions ahead remain unresolved. Since the longer-term benefits depend heavily on fiscal programs that can drive investments and consumption, we only upgrade to NEUTRAL on the banking sector for now, particularly as positives from liquidity support are balanced by risks toward NIMs and assets quality. Within the sector, BBCA remains our top pick, supported by its low CoC of 0.5% (Sector: 1.6%), leading CASA franchise, and highest ROE of 25.2% (Sector: 18.4%).