Further 50bp interest rate reduction may happen in Indonesia soon

Following a recent cut on interest rates.

It is believed that in Indonesia, the recent 25bp cut in interest rates will be followed by a further 50bp reduction in the coming months.

According to a research note from Nomura, while lower rates will squeeze the net interest margins (NIM) of BCA, Mandiri and BNI, it believes this would be more than offset of by the higher loan growth and lower credit cost.

In addition, Nomura believes the banks will benefit from Indonesia’s ambitious infrastructure programme.

Nomura estimates close to 67% of the USD500bn projected spending will be outside of the budget and the banks are in a strong position to finance this spending. It also estimates this could add 7 percentage points (pp) to loan growth and 11% to earnings.

Here's more from Nomura:

Changes in the direction of interest rates could drive earnings - While most of the ASEAN region is seeing an economic slowdown, we believe some of the ASEAN banking sectors have the potential to outperform because of the change in the direction of interest rates.

Specifically, we believe Singapore and Indonesia banks will benefit from the interest rates changes.

Banking sector theme - Easing of interest rates and multi year spending on infrastructure projects bode well for Indonesia's banks, as these should translate into higher growth. Historically, the banks have traded at premium valuations in periods of high growth.

Country macro comment - We believe the falling inflation is providing the authorities with an opportunity to ease interest rates.

Interest rates were recently cut by 25bp and we believe another 50bp reduction could come over the coming months. The risk to these projections is that in the face of potentially widening current account deficit and higher US rates it could lead them to reverse course later.