20 Jan 2025 | News & Feature

Banking Outlook 2025: A challenging year ahead

  • The year 2025 begins with a challenging global outlook, characterized by a strong USD, political uncertainties, and weaker commodity prices, all of which are dampening liquidity and demand. Although the Fed’s QT is expected to conclude in 2025, its limited rate cut projections have kept US 10Y Treasury yields elevated, which in turn affects Indonesia's bond yields and restricts reductions in lending rates. The outlook for Indonesia's banking sector will largely depend on the effectiveness of government policies, BI’s management of the Rupiah, and the performance of the commodity sector amid ongoing domestic liquidity constraints.
  • Domestic economic growth in 2025 is projected to slow to 4.9% YoY, down slightly from 5.0% YoY in 2024, while nominal GDP may rise due to higher inflation. This inflation could potentially drive higher loan growth, but global liquidity constraints and tightening liquidity in the banking sector raise concerns about loan demand. The government’s fiscal deficit is expected to widen as spending increases, which could stimulate consumption and household savings. However, this may also crowd out private sector investment if it leads to higher bond issuance. For 2025, credit growth is likely to stagnate, with a risk of deceleration. Deposits may follow a similar trend, though an upside could arise from government-to-private sector transfers.
  • As of Dec-24, loan growth remained robust at 10.39% YoY, driven by investment loans (12.3% YoY), consumption loans (10.9% YoY), and working capital loans (10% YoY). While overall NPLs declined, they increased for MSME and consumer loans. Moving forward, banks are expected to adopt a more selective approach to lending amid tight liquidity, prioritizing industries with strong business performance, healthy margins, and growth potential. Banks will also adjust their portfolios to align with structural shifts, ensuring resilience to future shocks and continued relevance in a changing economic landscape.
  • Deposit growth rebounded to 6.7% YoY in Oct-24, driven by current and savings accounts, despite high interest rates and stagnant time deposits. The government has introduced and plans to implement regulations to boost deposits, particularly CA and SA. Challenges persist, including intense competition for CASA and a shift from TD to SBN. However, untapped populations and increased digital adoption, especially through QRIS, present opportunities for banks to grow their deposits.
  • Larger banks have driven deposit and loan growth, while smaller banks underperform and face rising NPLs due to MSME exposure. Despite high interest rates, banks have maintained profitability by diversifying income into securities like SBN. Lending remains strong, but tight liquidity and pricing wars pressure margins. Additionally, BI policies, including macroprudential and indirect measures, provide opportunities for banks to leverage these initiatives and enhance profitability.