Although at the one hand a lower NIM will limit banks' profitability, on the other hand it is expected to lead to a larger customer base as borrowing costs become less expensive. This is at least the assumption of the OJK. Although in theory this assumption is correct, in practice it remains unclear whether banks' customer base can indeed be enlarged as Indonesia is still characterized by a high degree of financial illiteracy, especially outside the cities. Moreover, with curtailed profitability investors will most likely be concerned about lower dividend payouts. As a result foreign investors recorded a net sell of IDR 912 billion (approx. USD $68 million) on Friday.

What is clear is that the market doubts that a larger customer base (due to more affordable lending rates) can offset the negative impact of banks' lower NIM. Not only the state-controlled banks but also the 100 percent private banks suffered losses on Friday. The overall Jakarta Composite Index fell 1.70 percent to 4,697.56 points. Bank Negara Indonesia (BNI) was hit hardest, seeing its shares plunge 6.42 percent.

Meanwhile, shares of Bank Mandiri fell 4.37 percent. Budi Gunadi Sadikin, General Director of Bank Mandiri, said his bank would be less affected by the new regulation compared to other state-controlled banks as Bank Mandiri's NIM is currently around 5 percent. This is one of the lowest NIM ratios among state-controlled banks in Indonesia. The average NIM for these banks is between 7 - 8 percent. The average NIM for all commercial banks in Indonesia is 5.39 percent, still among the highest in Asia.

Profile Indonesia & Regional Peers:

Risk Free Rate   7.25%  1.50%   3.25%    4.00%
Inflation   3.35% -0.90%   2.70%    1.50%
Credit Interest Rate  12.86%  7.10%   6.85%    6.86%
Net Interest Margin   5.39%  2.60%   2.35%    3.35%

Source: Bisnis Indonesia

Bank Rakyat Indonesia (BRI) reportedly has the highest NIM (at 8.13 percent) among state-controlled banks. The bank's shares plunged 4.58 percent on Friday.

One day earlier (18/02), Indonesia's central bank had already cut its benchmark interest rate (BI rate) by 25 basis points to 7.0 percent at its February Board of Governor's policy meeting. Meanwhile, it also cut the reserve-requirement ratio for rupiah deposits at commercial banks by 100 basis points to 6.5 percent. These moves also encourage a lower NIM.