Banking - Banks increase provisions for potential credit quality decline

Banking - Banks increase provisions for potential credit quality decline Just at the beginning of the year, several banks have taken steps to raise reserve costs. This means that there are several situations that require banks to create buffers to prevent a deterioration in credit quality in the future. If we look at the ratio of non-performing loans in banking, the Financial Services Authority (OJK) recorded the gross NPL of banks at 2.18% as of January 2025. The figure increased from the previous month, where the banking sector's gross NPL was at 2.08%. A similar condition is observed in the Loan at Risk ratio, which also experienced a monthly increase. From the position in December 2024 at the level of 9.28% to 9.72% in January 2025. On the other hand, the decline in credit quality is in line with the projections of bankers as reflected in the OJK Banking Business Orientation Survey (SBPO) for the first quarter of 2025. In the survey, the Banking Business Index (IBP) experienced a slight decline. As a reference, the respondents' IBP for NPL is at level 55 for the first quarter of 2025. Meanwhile, in the survey from the previous quarter, the index for NPL was at level 65. Nevertheless, the majority of respondents still believe that banking risks in Q1/2025 remain stable and under control. Where, the risks are quite manageable, along with the belief that credit risk and market risk remain under control. (Source: Kontan) Comment : Indonesian banks' increased provisioning reflects prudent risk management amid economic uncertainty. Despite rising NPL and LAR ratios, proactive measures and OJK oversight ensure sector stability. We expect continued front-loaded provisioning, but remain confident risks are manageable. Q1 2025 credit costs will be crucial for assessing risk and earnings. Maintaining an "Overweight" stance, we favor BRIS in Islamic banking, and BBCA and BMRI in conventional banking.