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We believe that the overhanging final policy for KUR products’ subsidized interest rate, which was instituted this year, was the primary cause of the low realization in the first half of 2023, and the reason why the government reduced its KUR allocation this year from IDR 450tn to IDR 297tn. This year, BBRI, the leader in KUR distribution, may experience the largest drop in KUR allocation. However, the recent development may have little effect on BBRI, as the bank has effectively disbursed more Kupedes products YTD, and it remained one of our top picks in the banking sector and should achieve double-digit loan growth in 2023F, aided by the Kupedes program, resulting in a higher NIM despite pressure from CoF.
Lower KUR allocation in 2023
Airlangga Hartanto, the Coordinating Minister for Economic Affairs, stated that by the end of 1H23, IDR 105.5tn worth of KUR had been distributed to 1.91mn debtors, representing only 23% of the initial target of IDR 450tn, much lower than the historical first half realization rate of 40-50%. We believe this is the reason why the government reduced its KUR allocation this year from IDR 450tn to IDR 297tn, less than FY22 realization of IDR 365.5tn. We believe that the overhanging final policy for different KUR products’ subsidized interest rate, which was instituted this year, was the primary cause of low realization in the first half of 2023. Just a friendly reminder, the government has made several fundamental changes to KUR in 2023, including the implementation of tiered interest rates and margins for KUR debtors. The criteria for KUR borrowers have been changed to include only those who have never had commercial loans. Regarding the renewal of Micro and Small KUR loans, a higher lending rate was implemented, and interest subsidies will be adjusted accordingly. The initial loan rate begins at 6% and increases to 7%, 8%, and 9% for the first, second, and third loan renewals, respectively. However, the subsidized interest rate under the new KUR 2023 policy has not yet been announced.
Aligns with BBRI’s strategy to accelerate Kupedes growth
As the leader in KUR distribution, BBRI may experience the largest drop in KUR allocation this year. However, the recent development may have little impact on BBRI, as the bank has effectively disbursed more Kupedes products YTD and has a growth target of 14-16% for Kupedes this year. Notably, despite stricter KUR borrower criteria and the introduction of a step-up lending rate, BBRI was still able to record 10% loan growth as of May-23, which was supported by the micro-segment (Kupedes product), while its KUR disbursement only reached IDR 43tn in 5M23 (-59% YoY). In the worst-case scenario, in which the government finalizes a lower subsidy rate for each category and does not increase the subsidy for super micro KUR (the rate has been decreased from 6% to 3%), BBRI would simply disburse less KUR and focus on other products with higher yields.
OVERWEIGHT on the sector, with BBNI and BBRI as our top picks
We reiterate our OVERWEIGHT rating on the sector, as we believe that the banks under our coverage can absorb the potential risks of higher NPLs and NIM could still improve in 2023F, especially for the big banks in the middle of an elevated interest rate environment, paving the way for an earnings growth of +12.4% in 2023F. Despite recent development, BBRI remained one of our main top picks in the banking sector and we expect the bank to book double-digit loan growth in 2023F, aided by the Kupedes program, which will result in a higher NIM despite some pressure from CoF. Downside risks: slower economic growth than anticipated, weaker NIM and loan growth than expected, and higher cost of credit.
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