Banking - High default risk, bank credit flow to MSMEs remain weak

Banking - High default risk, bank credit flow to MSMEs remain weak The disbursement of bank credit to the MSME sector continues to face challenges, primarily due to concerns over rising bad loan ratios. The NPL ratio for MSMEs increased to 4% in September 2024, up from 3.88% in the same period the previous year. Consequently, the growth in credit disbursement to MSMEs slowed to 5.04% yoy in September 2024, compared to 8.34% yoy in September 2023. (Source : Kontan) Comment : While there is a risk of further stagnation in MSME credit growth, the new government's focus on supporting the sector, including continued banking support, could potentially improve asset quality. Additionally, the potential end of the high-interest rate environment and stable demand for financing from the corporate and consumer segments are expected to contribute to the overall growth of the banking sector in 2025. We maintain our overweight stance on the banking sector, with BBCA IJ and BMRI IJ as our top picks. For the Islamic banking segment, we favor BRIS IJ.