Indonesian banks' profit growth could suffer for up to two years

Blame it on low interest rates in the financial sector.

According to UOB KayHian, the Indonesian banking sector may need to accept the reality of lower ROEs and valuations. Low interest rates in the financial sector could affect profit growth for 1-2 years and potentially ROEs as well. Higher loan growth, better cost efficiency, and potentially lower NPL levels could come in as upsides following the adjustments.

"Despite the potentially lower ROEs, we view banks and investors will start to accept the fact that Indonesian banks’ ROEs and valuations should come down from the current high levels."

The analyst adds that investors are then likely to focus on loan growth, non-interest income, and operational efficiency which would drive profit growth. Overall, the lower lending rate environment could make the Indonesian banks more comparable to other Asean banks in the Phillipines, Thailand and Malaysia over the long term.