Banking - Elevated funding costs to persist, impacting banking profitability

Banking - Elevated funding costs to persist, impacting banking profitability The banking industry is poised to face continued pressure on profitability through the end of 2024 due to persistent high costs of funds (CoF). This trend is primarily driven by the benchmark interest rate, which remains anchored at 6%. Despite a recent 25-basis-point reduction in the benchmark interest rate (BI rate) by Bank Indonesia, from 6.25% to 6%, bankers report that this has had a negligible impact on the upward trajectory of interest expenses within the industry. Conversely, the prevailing high-interest environment presents an opportune moment for customers with substantial funds to negotiate favorable interest rates with banks. Data released by the Financial Services Authority (OJK) in September 2024 revealed significant year-over-year (yoy) increases in the cost of funds (CoF) for several KBMI banks. Bank KBMI 4 experienced the most substantial rise in CoF expenses, surging by 39.80% yoy. Closely following was Bank KBMI 2, with a 25% yoy increase. Bank KBMI 3 and Bank KBMI 1 also witnessed notable growth in CoF, at 23.70% and 9.30% yoy, respectively. (Source : Kontan). Comment : The rising cost of funds directly erodes banks' profitability margins. Bank should continue to optimizing funding mix: Balancing various funding sources to reduce reliance on expensive deposits. Implementing better cost to income should become as another catalyst and at the same time will reduce pressure from higher interest expenses to earnings. Additionally, CASA and dependency on TD segment corporate high tier client will become as two key which will play crucial role for banking borrowing cost. We also expect to see higher utilization of technology to improve operational efficiency and enhance customer experience. This will also support banks to have stronger transactional banking which will impact positively to Non-II growth and better earnings in 2025. Maintain our Overweight stance with BBCA and BMRI as our picks. For investors seeking exposure to Islamic banking, BRIS remains a compelling choice.