Banking - Risk of banking credit default remains high

Banking - Risk of banking credit default remains high Amid the slowing growth of credit disbursement, it seems that banks are still cautious about the lurking risk of credit default. This is because the credit risk of banks, as reflected in the Loan at Risk (LaR) ratio, is currently on the rise. Data from the Financial Services Authority (OJK) as of February 2026 shows that the banking Loan-to-Deposit Ratio (LDR) is at 9.24%. This figure is higher compared to the periods of December 2025 and January 2026, which were at 8.77% and 9.01%, respectively. The rising LaR ratio amid slowing credit disbursement triggers three primary shifts in the industry. Firstly, the potential of stress balance sheet. Banks are entering a defensive cycle. Actions is needed and thus banks seem will aggressively increasing provision for impairment losses (CKPN). A more dangerous is now banks could enter a credit crunch warning and are becoming extremely selective, leading to a flight to quality. Last but not least, banks margin could compress and earnings growth likely to move from flattish to small single digit. (Source : Kontan) Comment : The banking industry in 2026 is currently liquid but overly cautious, in our view. On the other hand, we believe that the solid loan to total asset and structural domestic banking will remain intact. A phase of low-interest rate cycle coupled with steady strong non-II and various strategy from well-managed cost to credit cost figure that could remain at low level will become as the cushion and earnings catalysts. A sharp drop on banking stock due to steady pressure from the continuing domestic and global uncertainty has made valuation looks more attractive compared to the previous crisis era. That said, at current level of an average -2SD, price of the banking stocks looks is considerably as a healthy entry point. Maintain Overweight for the sector with stock pecking order BMRI > BBCA and BRIS.