Indonesian banks' funding costs expected to rise as government requires higher interests

Minimum deposit rates increased from 70% to 87% of the BI’s reference rates.

Indonesia’s Ministry of Finance (MoF)’s move to raise the deposit rates for government funds placed at banks is likely to push up funding costs.

Among the four SOE banks under Maybank Kim Eng's coverage, Bank Tabungan Negara (BBTN) is expected to face the biggest pressure as it has the highest concentration of government funds. That said, Bank Negara Indonesia (BBNI) remains our favourite as its stronger deposit base allows the bank to maintain a low cost of funding (CoF).

Here's more from Maybank Kim Eng:

The MoF, through Regulation No.53/PK.05/2017, has raised the minimum deposit rates for government funds held in banks to 87% of the BI’s reference rates from 70% previously.

At the same time, the MoF also removed the interest-rate cap on government funds, which previously stood at 100% of BI’s reference rate. The new policy has been effective since 18 April 2017.

With the interest-rate cap removed, the government can now enjoy market rates for deposits, which could go as high as 100bps + BI’s reference rate. This means pressure on banks’ funding cost.

Among the four SOE banks, BBTN has the highest exposure to government deposits, even after excluding the subsidized mortgage fund. As of 1Q17, the amount covered 10% of BBTN’s total deposits.

Due to a weaker deposit base, BBTN has to offer maximum rates for these funds. Based on our estimates, this could translate into nearly a 10bps increase in the CoF, implying 3ppt downside to earnings.

We prefer BBNI for its strong deposit base and its LDR of 89%, which should minimise earnings risk from this policy change. By 1Q17, the portion of government funds in BBNI’s book was relatively high at 7% vs 4% for BMRI.

However, BBNI managed to keep the interest rates ~100bps lower than what is offered by Bank Mandiri (BMRI). As for BBRI, while it currently has no exposure to government deposits, we remain cautious on the potential risk to CoF as the bank’s LDR reached 93% in 1Q17, indicating tight liquidity conditions.