Banking - Bank lending interest rate reductions remain held back by funding costs

Banking - Bank lending interest rate reductions remain held back by funding costs Bank Indonesia (BI) assesses that the Macroprudential Liquidity Incentive (MLI) Policy is increasingly effective in accelerating the transmission of the BI rate reduction to bank interest rates, particularly lending rates. BI noted that, as of the first week of January 2026, the total MLI incentives had reached IDR397.9 tn. BI Deputy Governor Aida S. Budiman explained that the MLI currently operates through two main channels. First, the lending channel, which is related to credit quantity. Second, the interest rate channel, which aims to accelerate the transmission of all BI monetary policies, including the BI rate reduction, to financial markets and banks. By December 2025, bank deposit rates were recorded to have decreased by 56 bps. Meanwhile, bank lending rates fell 39 bps, from 9.20% in early 2025 to 8.81% in December 2025. (Source : Kontan) Comment : The banking sector is in a transition phase. While the Macroprudential Liquidity Incentive (MLI) provides the "gas" (liquidity), the Cost of Funds and SBN competition act as the "brakes." Expect 2026 to be a year of intense competition for low-cost deposits and a gradual, albeit slow, alignment of lending rates toward the 8.5% level. Despite banks could continue facing a "margin squeeze", we might still witness a potential better NIM back by ‘25F low based effect and our expectation on softer benchmark rate transmission to funding cost will become more materialized. Maintain OW stance for banking sector. Picks: BBCA, BMRI and BRIS (syariah banking).