Banking - CoF still a burden, banking sector struggles to lower loan yield

Banking - CoF still a burden, banking sector struggles to lower loan yield Even though Bank Indonesia has lowered the benchmark interest rate (BI Rate) several times, most recently to 4.75%, bank lending rates have not followed suit. The reason is that the cost of funds (CoF) for banks is still relatively high and tends to decrease only slightly. (Source : Kontan) Comment : Most Indonesian banks are currently experiencing a squeeze on their bet interest margins. As shown in early 2026, asset yields are dropping because of competitive pressure and government urging, but CoF is not dropping at the same pace. To compensate for thinner interest margins, banks are aggressively diversifying to fee-based income as well as efficiency drivers. Moreover, high lending rates discourage borrowing, particularly in the SME and consumer segments. This forces banks to be more conservative with their loan growth targets. We also view that since lending rates remain high for borrowers, the risk of bad loans increases. Banks must keep their CoC stable or slightly higher to cover potential losses, which acts as a further drag on the bottom line. In all, we believe that due to potential softer top line, key for vital catalyst aside from funding cost is manageable cost to income and provisioning. Maintain OW on the sector with stock pecking order BMRI > BBCA > BRIS.