Bank Negara Indonesia: Ambitious 2028 ROE Target Driven by Funding and Profitability Improvements
UOB Kay Hian
October 10, 2024
Bank Negara Indonesia (BBNI) is on a transformation journey, aiming to achieve a significant return on equity (ROE) target of 20% by 2028. The bank’s strategic focus on improving its funding structure, reducing costs, and maintaining strong asset quality is setting the foundation for this ambitious growth. Despite challenges in loan growth and macroeconomic headwinds, BBNI’s well-structured approach positions it for long-term success in Indonesia’s dynamic banking sector.
20% ROE Target by 2028
BBNI has outlined an ambitious plan to boost its ROE to 20% by 2028, a notable increase from the 14.6% recorded in the first half of 2024. The bank’s management attributes this growth to expected improvements in its net interest margin (NIM) and cost-to-income ratio (CIR). By 2028, BBNI expects its NIM to rise to 4.8-4.9%, driven by an improved funding environment, better economic conditions, and the strengthening of its CASA (Current Account and Savings Account) franchise.
BBNI’s management also anticipates that its asset quality will remain stable, with a projected credit cost of 1%. This forecast aligns with the bank’s goal of reducing its non-performing loan (NPL) ratio to 1.0-1.5% by 2028, down from the current 2.0% level.
NIM Improvement and Funding Efficiency
In 2024, BBNI expects to see improvement in its NIM, mainly driven by a reduction in its cost of funds (CoF). As of August 2024, BBNI’s NIM stood at 4.4%, higher than previous months, signaling the positive effects of rate cuts and efficient liquidity management. The bank’s liabilities are highly sensitive to interest rate changes, which gives it a competitive edge during periods of monetary policy easing. Only 27% of BBNI’s loans are directly adjusted to the benchmark rate, while time deposits (TD) and some current accounts (CA) make up 68.9% of its total deposits.
BBNI expects this trend to continue in the second half of 2024, supported by macroprudential incentives from Bank Indonesia. These policies have allowed BBNI to lower its reserve requirement ratio (RRR) by 3.1%, which provides the bank with additional room to optimize its balance sheet and increase its loan-to-deposit ratio.
Loan Growth and Recovery Outlook
Although loan growth decelerated to 9.0% in August 2024, BBNI remains optimistic about achieving its full-year loan growth target of 10-12%. Historically, BBNI tends to book stronger loan growth in the fourth quarter, and this year is expected to follow the same trend. The bank’s primary growth driver continues to be corporate loans, while the recovery in SME loans is anticipated to pick up in 2025.
BBNI’s corporate loan segment is benefiting from strong demand, but liquidity constraints are limiting the bank’s ability to grow this segment more aggressively. While the restructuring of its SME segment has created short-term challenges, BBNI expects a recovery in this segment in 2025, contributing to overall loan growth.
Strategic Focus on CASA and Cost Management
BBNI is focused on strengthening its CASA franchise to improve its funding structure and reduce CoF. Savings account growth accelerated to 7.3% year-on-year in August 2024, compared to 5.2% in July 2024. This was driven, in part, by the successful launch of the bank’s mobile app, Wondr, which has been downloaded by 2.2 million users since its introduction in July 2024.
As BBNI continues to build on its digital transformation, it plans to launch a new cash management app by the end of 2024. These digital initiatives are expected to further enhance the bank’s CASA franchise and reduce its reliance on more expensive time deposits.
In terms of cost management, BBNI’s cost-to-income ratio (CIR) remains higher than its peers, standing at 43.7% in the first half of 2024. However, the bank expects this ratio to gradually decline to below 40% by 2028, driven by NIM expansion and greater cost efficiency. The largest portion of BBNI’s investment costs has already been made, meaning the bank anticipates lower capital expenditures in the years ahead, allowing it to focus on improving profitability.
Asset Quality and Risk Management
BBNI’s asset quality has shown significant improvement in recent years, following a series of loan restructurings. The bank’s NPL ratio fell to 2.0% in June 2024, down from 2.5% in June 2023. This improvement has been accompanied by a stable credit cost of 1.0%, which the bank expects to maintain through the end of 2024.
The bank continues to experience some challenges in the small business segment, with NPL and special mention loan (SML) ratios increasing year-on-year. However, BBNI’s strong coverage ratio and conservative risk management approach are expected to mitigate any potential deterioration in asset quality.
Conclusion
Bank Negara Indonesia’s strategic focus on improving its funding structure, expanding its CASA franchise, and maintaining strong asset quality positions it well to achieve its long-term goals. With an ambitious 20% ROE target by 2028, supported by rising NIM, improving CIR, and a recovering loan growth outlook, BBNI is poised to deliver sustainable growth in Indonesia’s competitive banking landscape. Investors should consider BBNI as a solid long-term investment, particularly as the bank continues to optimize its operations and expand its digital offerings.
UOB Kay Hian
October 10, 2024
