Indonesian banks face margin pressure and profitability squeeze

They should be able to maintain healthy capitalisation, said S&P.

Indonesian banks are expected to face margin pressure through the end of the first half period of 2027 due to policy rate hikes, said S&P Global Ratings.

Net interest margins (NIMs) could decline by 10 basis points (bps) to 20 bps over the next 12 to 18 months, said S&P analysts Nikita Anand, Ivan Tan, and Geeta Chugh in a sector review published in September 2026.

“In Indonesia, deposits are repriced faster than wholesale loans, which are negotiated on a case-by-case basis leading to margin compression whenever interest rates go up,” the analysts said.

The potential withdrawal of government liquidity could increase funding costs, the report warned.

State-owned banks face a profitability squeeze as a result of rapid expansion into lower-yielding loans and high interest rates.

State-owned banks’ loans grew 26% year-on-year as of 30 June, with the finance ministry injecting liquidity in them to help fund a village cooperative program.

In contrast, private banks’ loans grew 1%, due to the slowdown as well as higher funding costs.

In a separate report, UOB Kay Hian said that whilst government liquidity provides relief to state-owned banks, repeated liquidity injections also highlight funding pressures.

S&P expects Indonesian banks to deploy various strategies to offset margin pressure.

“These measures include driving higher growth in low-cost retail deposits, fee income, and focusing on quality loan growth to minimize credit costs,” the analysts said.

State-owned banks should maintain healthy capitalisation, with a Tier 1 capital ratio of 16% to 20%, they said.

“They also have solid earnings buffers to absorb any moderation in profitability. These factors will provide a cushion against unexpected losses,” it added.