Banking – To maintain market competition, banks do not easily increase loan yields

Banking – To maintain market competition, banks do not easily increase loan yields In times of high interest charges, it seems that banks cannot immediately increase the interest on their loans. Not without reason, banks still need to consider competition to maintain their credit market share. In its latest report, Bank Indonesia (BI) noted that the Prime Credit Interest Rate (SBDK) fell limitedly in May 2024 so that it returned to the March 2024 level. The prime lending rate in May 2024 decreased by 3 basis points (bps) to 8.81% after increasing by a large amount, the same as in the previous month. Meanwhile, the decline occurred relatively evenly across all bank groups, with the largest decline in BPD and Foreign Bank Branch Offices (KCBA) of 2 bps. Apart from that, the spread or difference between the reference interest rate (BI-Rate) and prime lending rate is getting thinner, indicating banking pricing efficiency. "The decline in prime lending rates is an indication of banking efforts to maintain the competitiveness of interest rates in the credit market amidst continued increases in the cost of funds," said a Bank Indonesia report on Wednesday. (Source : Kontan) Comment : Our expectation of a higher loan yield (see our ‘24F outlook released in November) was in line with the latest condition, whereas banks do not easily raise their loan yields. Our latest report also stated that we believe any loan yield adjustment is likely to be selective and expect it to not create any demand hiccup. Our bank model has assumed a higher cost of funds with a slight loan yield repricing. 1H24 will become the main key on loan yield and cost of fund adjustment sentiment for banks to decide whether they will adjust the stronger rate or not. Maintain our overweight stance in the banking sector with BBRI and BBNI as our picks.