Smaller Indonesian banks' funding costs expected to increase

But the rise will be muted by the caps on time deposit rates.

Faster loan growth points to a tightening in banks' funding profile in this outlook, yet the resultant pressure will be modest as bank deposit will also be growing at a similar pace, supported by recovering corporate revenue growth, according to Moody's. The system's loan to deposit ratio (LDR) should stabilize at the 90% level, from 89% at end-March 2017. Historically, the latest up leg in LDR occurred between 2009-2013 when loans were averaging 20% growth, far above the 11-12% Moody's expect in this outlook.

Here's more from Moody's:

Yet with system loan growth on rebound, some banks could see their LDR approach the regulatory LDR limit of 92%. Deposit competition will rise especially among the mid-tier and smaller banks as their deposit base is less sticky than the largest four banks, reflected in the fact that most of the system's current and saving account (CASA) deposits are being held by the latter.

Hence the smaller to mid-tier banks are likely to experience an uptick in funding costs. However we do note that the rise in funding costs will be muted by the 7.5-7.75% caps on time deposit rates the Financial Services Authority imposed in March 2016. As an indication, interest rates on time deposits ( ≥ 12 months) averaged 7.1% in March 2017, still well below their previous peak of 8.8% in 2014.

Banks' balance sheets are liquid with government securities and other liquid assets comprising 27% of banking system assets at end- March 2017. All our rated banks comfortably meet minimum Liquidity Coverage Ratio (LCR) requirements.