Banking - Reserve costs rise, banks anticipate risk of bad loans

Banking - Reserve costs rise, banks anticipate risk of bad loans Until the first seven months of 2025, banking profitability has not been free from the pressure of high provisioning costs. This step reflects that banks are becoming increasingly cautious in managing the potential rise in non-performing loan risk. Indeed, industrially, the gross non-performing loan (NPL) ratio for banks as of June 2025 is at 2.22%. This achievement is slightly better compared to the same period last year, which was at 2.26%. For example, Bank Tabungan Negara (BBTN) recorded a provision expense of IDR3.04 tn as of July 2025. However, compared to the same period the previous year, BTN's provision expense was only around IDR1.12 tn. A similar situation is also occurring at Bank Central Asia (BBCA). The largest private bank in Indonesia's provision costs reached IDR1.9 tn as of July 2025. Compared to July 2024, these provision costs increased by approximately 58.33%, the highest increase compared to the other 4 KBMI banks. Slightly different, Bank Mandiri (BMRI) was actually able to reduce its reserve costs as of July 2025. This bank with the golden ribbon logo recorded a 10.26% yoy decrease in reserve costs to IDR5 tn. (Source : Kontan). Comment : Indonesian banks are taking proactive measures to manage the potential risk of bad loans, even though the overall industry-wide non-performing loan (NPL) ratio remains low at 2.22% as of June 2025. This cautious approach is reflected in rising provisioning costs, which are funds banks set aside to cover potential losses from unpaid loans. As mentioned in our previous report, provisions is crucial for ‘25F earnings growth, while at the same time we expect to see sooner-than-expected interest expenses to support NIM to arrive at a better figure. Maintain OW for the sector with stock pick pecking order BBCA > BMRI > BRIS.