PT Bank CIMB Niaga Tbk (BNGA) Earnings Call Transcript & Summary

[Audio Gap] It's available to be download from our website. Our first half 2021 financial results will be represented by Pak Tigor Siahaan, CEO of CIMB Niaga; Pak Lee Kai Kwong, CFO of CIMB Niaga and also other directors and senior management of the bank. The total time for this call is about 1.5 hour and we will begin with the presentation. [Technical Difficulty] by our CEO continued by our CFO. [Operator Instructions] Ladies and gentlemen and all participants, today, we are pleased to introduce Pak Tigor M. Siahaan, our President Director; Pak Lee Kai Kwong or Pak KK, our CFO, Finance & SPAPM Director; Ibu Vera Handajani, our Credit and Risk Management Director; Ibu Lani Darmawan, our Consumer Banking Director; Pak John Simon, our Treasury and Capital Market Director; Pandji Djajanegara, our Sharia Banking Director; Rusly Johannes, our Chief Corporate Banking and Transaction Banking, along with other executive members of the bank. Ladies and gentlemen, before we proceed, I'd like to draw your attention to the disclaimer that some statements made during this call may be forward-looking in nature and actual results could differ from projections. This presentation is not intended to form the basis of any investment decision with respect to CIMB Niaga, neither this presentation shall go on the basis of any contract or commitment whatsoever. Now without further ado, I would like to turn this presentation over to Pak Tigor for his remarks. Pak Tigor, the time is yours.

Thank you, Saut. Thank you very much everyone for joining us this morning. We're going to discuss our first half results for this year, and I hope everyone is in good health. And I hope that everyone is in a safe position with your families. Let's go straight to the agenda. This is the agenda for this morning. We'll talk about the macro industry and the digitalization, there's a lot of questions on this, and I think it's worth it to spend a few minutes on this, and we'll talk about the first half. And before we go into the Q&A, we'll have some final remarks. So if we go to the next slide, please. This is just a snapshot on where we are. Just as a reminder, we are in 94 cities with 428 locations, including 37 digital lounges, got 7 million customers, out of which 2.6 million is mobile customers. We posted a 11.4% ROE in this period and IDR 2.2 trillion of net income in the first half of 2021. Let's go to the next slide very quickly. We see pretty encouraging trends in the first quarter and second quarter of 2021, the consumption investments. However, as you all know, the recent surge in COVID-19 over the past couple of months has made us remain very vigilant throughout this period even though we hope that things will get better eventually. There is an indication of acceleration of vaccination rate, although we still have a long way to get to the herd immunity, but it seems like the government, along with a lot of private sectors, including banks and CIMB Niaga were trying to help out and do our parts and trying to get us there in terms of vaccination rates and so forth. The government or BI maintained 7 days repo rate at 3.5%. And rupiah is fairly stable despite the volatile environment in recent period. If we go to the next page, we see a little bit of the banking industry results here, a little bit of a positive growth up to June, but still soft on the loan side, while the deposits still growing at double digit, hence, providing liquidity to the industry. Asset quality has worsened slightly. Also, if you look at the NPL, it is less compared to last year. While the LDR remains a bit over 80% showing the liquidity environment in this period. If we go to the next page, these are few of the points on our first half highlights. Our ROE is 11.4% as the net income grew close to 25%. Our 62% CASA ratio contributed to profitability and it supported the NIM level of about 5.08%. We maintained our cost-to-income ratio in the mid-40s as we maintained our OpEx relatively flat on a year-on-year basis. LDR at below 80%, 78% while CAR ratio is strong at 22%. On the asset quality side, we've improved our NPL to 3.2%, while the loan loss coverage has really beefed up to 223%. These encouraging results are proof of our consistent execution in this strategy that we've had for a few years now, especially in the COVID that we can see in the next slides. You can see this is the 5-pillar strategy. You've probably seen this in many of our presentations, how we're rebalancing our portfolio to make sure that we're playing to our strengths. And the second pillar, CASA, as you can see, it continues to grow to about 62% and disciplined cost management, we are maintaining at mid-40s level and we think and we hope to maintain it around this level. Capital and balance sheet management has set a strong position and the leveraging of the information technology is our fifth pillar. If we can go to the next page, some of the -- even though overall loans is sought, but we've grown our key segments and businesses as we presented in the top left of the chart, our mortgage, auto loans and EBB business have grown with a CAGR of about 9%, 6.5% and 4.2%, respectively, since 2018. And as I mentioned before on Pillar 2, our CASA ratio is strong, is higher than the industry average. We've also reached mid-40s level under our cost-to-income ratio and has a steady improvement since few years ago. The next slide, we talk about leveraging our technology. Maybe if we can go next. This is our building blocks of our digital strategy. As we all know that we've been pushing our digital strategy through our OCTO Mobile, OCTO Clicks, Digital lounges and Bizchannel, but this is a unique proposition because we have a not only in digital strength, but also in the traditional channels that continues to be strong all throughout Indonesia. This omnichannel pronged strategy, I think is working out well, especially in today's environment. We also believe that in this digital era, we can't progress without the collaboration of the ecosystem players. Thus, the API open banking strategy is very critical to our success in this pillar. Data and analytics are also extremely important and not only provides better offerings in our customers, but also it provides very sharp risk management, audit and efficient tools for our internal purposes to serve our customers as well. And this is only possible with a strong IT infrastructure that we continue to invest and thus, that we're continuing to invest in the future with cloud-based technology, cybersecurity, that's really best-in-class. And also hiring a lot of the high-caliber talents to implement lot of the tech infrastructure that we are rolling out continuously. If we can go to the next slide, please. To serve our customers and collaborate with our partners, we continue to build new features as I mentioned, even we continue to hire these people, developers, IT specialists, data analysts and so forth to make sure that we will continue to have these capabilities in-house. So we built all these new features every 4 to 6 weeks to our customers to make sure they continue to see fresh new offerings continuously from our automobile and other digital channels. You can see in the top right and left chart some of the features that our digital solutions provide and to cooperate with our partners. As I mentioned before, we continue to build the APIs. In the bottom left chart, you can see some of the partners that we are partnering with. Maybe we go to the next slide. Maybe this was touched upon slightly in the past, but I think this is very important. We not only continue our digital channels to our customers, but we build internal applications to support increased productivity of our staff. In this example, we have the OCTO Smart and OCTO RM Bench which are internal apps used by our staff to allow to perform their jobs much, much more effectively. There are features ranging from account planning, lead and activity management, tools and origination and monitoring tools to make sure they can not only from the sales side, but also from the risk management side we're equipping our sales and risk management as well as our other staff with the right tools with data analytics and so forth. So we're delighted to also share with you this OCTO Smart. It's fully developed in-house, has won award as the Digital Banking Initiative of the Year from Asian Banking & Finance. If we go to the next slide. The number of transactions, this is sort of proof that a lot of our digital penetration is bearing fruit. Number of transactions through mobile has increased 102%, while number of financial transactions has increased by about 86%. On the bottom left, you can see that 96% of the financial transactions were done outside of the branch. On the bottom right, you can also see the contribution of digital transactions as, for example, as a credit card installment is 90% and TD openings mostly are done digitally through mobile. And if you can see the FX mutual fund and bond transactions are 68%, 62% and 25%, respectively, to our digital channels. So there's a lot of things that are bearing fruit in our digital proposition. With that, I'll hand over the presentation to Pak KK to share our financial results in more detail. Pak KK?

All right. Thank you for Pak Tigor and a very good morning, ladies and gentlemen. I will present the financial performance of CMB Niaga in the first quarter and also first half -- second quarter, I mean, of 2021 as well as the first half financials. I'll start with the balance sheet. Our total assets grew 6% year-on-year, attributed largely to the 18% growth in bond investments while loans receivables stayed flat. On the liability side, deposits grew as well as rebounded after a relatively slow first quarter increasing 9% with current accounts and time deposits delivering double-digit growth. Next page please. On the consolidated P&L, actually, there's much to be positive about across all the key financial lines. The yield of interest-earning assets contracted lowering the interest income by 2.5%, but this was nicely counterbalanced by the continued cheapening of our funding cost, which saw our interest expense down 8% quarter-on-quarter and more dramatically, we have successfully cut our cost of deposit over the course of the year by 32%, while continuing to grow deposits. So this has worked out pretty well for us even though the NII performance on a quarter-on-quarter basis remained flat, but this has an increase of 5.4% year-on-year. On fee income, Q2 was weaker by 8.5%, mainly attributed to lower treasury and related income. But compared to the same period last year, fee income came in higher by commendable 18.4%, totaling 8.7% total operating revenue. On discipline, our discipline in expenses has allowed us to keep cost base more predictable. We kept quarter-on-quarter expenses flat or just above 1% year-on-year. Consequently, this has led to a 6.5% positive and saw PPOP increasing 15.6%. On credit risk, much of our focus in the first half of 2020 was to ensure that our provisions stay sufficient and keeping a forward-looking view on potential delinquencies and impairments in the coming quarters. We added close to $900 billion to provisions and continue shoring up our loan loss coverage. Quarter-on-quarter provision was lower by 28%, though year-on-year, is still higher by 5%. PBT ended stronger by 18.4% quarter-on-quarter and 25.2% year-on-year, respectively. Next page, please. So looking at the first half, very encouraged to see many green arrows here in this slide. ROA, ROE gaining to 1.6% and 11.4%, respectively. NIM compressed slightly, but continued to stay above that 5% mark with a draw of 6.5%, right, as mentioned earlier, we brought cost-to-income ratio, I trust, I think to a historic low in CIMB Niaga to 44.6%. CASA growth stayed on track, keeping CASA ratio above the 62% level. Strong deposit inflows in the second quarter also brought LDR to about 78% even as we continue to cheapen our cost of funding. Quarter-on-quarter, NPL saw a reduction of 60 basis points. The credit costs are coming in with a much improved 24%. But given the uncertainties surrounding another way for maybe COVID-19 infection, we continue to stay cautious ensuring sufficient coverage on our NPL now increased to about 223%. Next Page. Earnings trend look good, very encouraging, with income up 9.1% compared to the first quarter last year and PBT compared -- sorry, second quarter last year. And compared to second quarter last year, PBT also improved 83%. ROE for the quarter reached the 12% mark, reaching 12.3%. Next page. NIM and NII, they're both higher attributed very much to a lower cost of deposits. It was down 124 basis points year-on-year, offsetting a negative impact on the declining loan yields, which contracted 109 basis points. So that attributed to actually the loans improving in spite of asset growth was much weaker loan -- loan growth was much weaker. Next page on fee income. Breakdown of fee income increased by 18.4%. The lift actually coming from all the key lines, right, from general fee and commissions as well FX, gains from bonds and also loan recovery. Next page on expenses. Yes, there is slight uptick in expense, largely also due to our continued capital expenditure investments in IT, but we are sitting quite comfortably with the cost-to-income ratio at 45%. Next page. On the balance sheet yes, deposits. Our CASA strategy continues to bear fruits. It's 1 of our 5 pillars, growing 7.4% in the quarter and 9.4% year-on-year. With loans, we continue to play to our strength, growing the balance sheet of our consumer and EBB franchise, both showing positive growth year-on-year as well as quarter-on-quarter. Corporate and commercial banking remained flattish quarter-on-quarter, while it's down by 14% year-on-year. Next Page. Asset quality. Yes. I mentioned asset quality earlier, LLC, NPL and provisions are much improved. Let's draw our attention to loan at risk. We are sharing 2 sets of numbers here. One is the ever COVID restructured loans in our loan at risk number, a number that we report to our regulator and also a separate number, which shows the current COVID-19 restructured loans in our loan at risk number. So if you can see from the chart, 18.2% is the currently active loan at risk that we have right now because some of the loans that we have booked earlier under COVID-19 restructuring has either repaid or moved out of this COVID scheme already. Overall, the total loans that are under active COVID restructuring as of June of 2021, stood at IDR 12.2 trillion or 7% of our total loans portfolio. Okay. Next page, please. Imagining the strength of our franchise, looking at the health of our liquidity as well as capital, both showing -- both looking much stronger compared to a year ago. Next page. Also, the expense on Sharia. Earnings from Sharia banking unit continued to improve, up 34.4%. At the same time, also one of the main area of focus in Sharia was actually to bring the cost of deposits down. We have actually managed to bring it down by 2%. Actually, it's not shown in this table here, while also at the same time, continue to grow deposit by 15%. Next page, I believe this is it. Okay. I'll just hand this over back to Pak Tigor for his final remarks before the Q&A.

Okay. Thanks, Pak KK. Just so quickly before we move on to Q&A. So overall, very encouraging first half financial results, first quarter as well as the second quarter financial results. However, we are cognizant of the fact that there is a COVID surge in Indonesia. As a result, the government has mandated a, what's called, [indiscernible] in the rural which is -- it's not really a lockdown, but it's a semi sort of lockdown, which will have impact some businesses going forward. And we also remain extremely focused on the employee health as CIMB Niaga obviously is not immune from some of the safety proportions that's going on, right. However, going forward, we continue to execute our 5-Pillar strategy in line with our Forward23+ programs and we see a lot of results that we put in since our digital transformation a few years ago. And we think we're going to have to continue to put this forward despite the volatility in the situation. So overall, we remain cautiously optimistic, very strong first half performance, but we'd like to make sure that we remain vigilant on the current situation for the remainder of the year. With that, I will hand it over to the host for Q&A.

Thank you, Pak Tigor. So ladies and gentlemen and all participants, the line is now open for you to ask questions. The first question is going to be coming from Robert Kong from Citi. Robert, your line will be open soon. You can ask the questions directly. Robert, your line is open now.

Can you hear me now?

Yes, yes.

Sorry, apologies. Obviously, technology is not one of my strengths. Okay. So first of all, thank you so much for the presentation. I very much appreciate it, especially the digital update. I thought that was excellent. Thank you for that. I think I'll do three questions, if I could. Could you just go back to the explanation on the active LAR because that's a new disclosure we haven't seen before. And I'm assuming it's the -- it's our analysis of this active LAR that has allowed you to lower the quarter-on-quarter provision substantially. So perhaps just a little bit more understanding because clearly, you're reporting to the regulator 14% under the COVID LAR, but you're saying that your real active LAR is 7%. So I just need to make the connection, if I can, between how that's allowed you to have much lower provisions this quarter?

Yes. Thanks, Robert. Maybe I'll take this a little bit and hand over to our CRO. So basically, the previous sort of publications has always been on the [indiscernible] R&R, which means as long as they're in even though after 3 months, 6 months or whatever, they're out of the COVID restructure is still counted as a COVID. However, we wanted to make sure that we are showing what's relevant in our portfolio that is still an actively restructured mode. Those guys that may be coming in after 3 months, 6 months and they don't need it anymore, and that will just go back to our current platform that's taken out of the active sort of thing. But maybe Ibu Vera, you could elaborate a little bit more.

Yes. So thanks for asking that question. But Tigor is right. So this represents a, of course, the NPL, the special mentioned the [indiscernible] R&R and also COVID R&R. But in the past, we always showed the LAR. So anyone that has been ever asked for COVID R&R, whether they are still in or they have already been out, they are still tagged as COVID R&R clients. And that's the way in many instances we report that as well to the regulator. In fact, the regulator is quite open if we believe that the particular counterparty can sustain moving already out for some time, then they can be taken out. So what we want to show here is actually the one that's still actively under this COVID R&R stimulus. If they have already been resuming the repayment, even some of them already paying whatever that they actually deferred last time, we picked that out from our recording here. And of course, some of them, we have already recognized that. We have -- it has flown into special mention or NPL or even retain off, so we have also taken the hit in that particular regard. So we have already taken out those that we are already exceeding completely because they are actually bad or they are actually resumed to normal activity.

So just to be very clear here, this -- because this is -- effectively, we can say this active lives or real problems rather than what you've been reporting to the regulator, and therefore, the lower provisions that we see in this quarter is actually sustainable. Or is there something else that we're missing?

I would say that -- yes, just quickly, I mean, I think as we can see in the first quarter and second quarter, I think there's improvement, definitely. And we think that trend was actually happening. However, we want to give a caveat but given the lockdown scenario or semi-lockdown scenario, the government doesn't really like the lockdown sort of word [indiscernible] in the rural. And there will be some impact to the businesses. So we are continuously looking at this and what's the impact to our portfolio, which is going to have more of ahead in terms of provisions or is it going to be very steady in terms of the flow, we're yet to see. The first half was very encouraging, but we are yet to see how this is going to impact the second half.

And I think to add Pak Tigor, we still have LAR and we continue to have a look and produce some of these accounts and get more provision if there is a need, given the potential microeconomic indicated adjustment or also to raise the time where the government allowance for the stimulus next year misses. So I think what we are trying to do here is actually to continue to build and to the degree, if there has to be recognized some of that via provision or accelerating the flow into recognition of NPL or special mention or write off if there is.

Okay. So sorry, just one more bit, I'm laboring this point a little bit. But because of the semi-lockdown and the conditions still not great, do you foresee that you may have to build more preemptive provisions. And if that is the case, where is the risk? Is it more the granular risk of consumers or SMEs? Or is there some bigger maybe corporate type exposures that may be close to the edge? So I'm just trying to think what the concerns would be going forward.

Yes, I would -- just quickly, I think on the corporate side, I think we kind of have a good feel already since the beginning of the pandemic going forward. A lot of them have very alternative sources funding, a lot of them are publicly listed and so forth. So I think we have a pretty good handle on some of the big larger corporates. On the commercial side, I think there could be some movement. We've been seeing more of a hit on the Commercial segment in the portfolio. So hopefully, it's not going to have much more adverse impact, but we are going to see. On the SME side, I still feel fairly decent on it. It's fully secured. It's -- the performance has been very decent. Obviously, I can't tell if this is going to be exactly the same, but I feel pretty good at the security of this SME portfolio. So I think the commercial side of the things could -- this is something that we're going to be watching very, very closely.

Yes, the consumer as well. So we are careful in monitoring both the commercial as well as the consumer, particularly the unsecured portion that we have. Commercial, as Pak Tigor has already explained and also the fact that some of that does actually include, again, tourism and hotels. So we want to be careful in monitoring this and continue to build provision if there is a need. That said, particularly on the hotel, our exposure is actually strongly secured by a very strong collateral. On the SME space, our coverage is actually quite solid. It's mostly more than -- if not all, more than 100%, 110%, 120%, and this is on the relatively liquid small properties.

Maybe I can go to my second question on the digital and maybe we can refer to Slide 12. This will sound like a little bit of a cheeky question, so I apologize in advance. So there's another bank out there which claims to be the new digital bank and the market capital of that bank has become enormous, as you know. What I find interesting is that a lot of that upside that the market is attributing to that bank is related to its relationships, particularly with a key partner that you also have called GoTo and so that's obviously generating interest. But where I'm confused, I guess, is that I think GoTo is being very smart. They're not exclusive to anyone. They're quite happy to have everybody on their platform. So relative to Niaga, what I want to ask is of these partners that you've listed here, can you share some color as to what the success rates are as in hove you generated a lot of new-to-bank customers? Which particular products that you've shown on this slide are doing well because of these new platforms? So I just want to understand how these partners are actually already contributing to the success of the bank? That's kind of the question.

Okay. Thanks Robert. Maybe I'll start and maybe Ibu Vera can elaborate a little bit. Some of these partners have different sort of propositions for the offerings. For example, we have a partner that we're working with as a travel concierge in our automobile which means that they don't need to go to a platform to buy tickets and hotels and so forth. They just continue to stay in our platform, in our OCTO Mobile, and you can choose places, you can choose the hotel, you can choose [Technical Difficulty] you can pay, you can have installments right there in our app. That's with our travel partner. And I know traveling is probably the last thing on people's mind, but I think it's an opportunity to make sure that we have the platform right when things do recover, then we're ready to reap those kind of benefits. And some of the partners like the payment platforms like OVO or DANA or GoPay, we provide a lot of top-ups, we provide a lot of linkages to make sure it flows right with their daily use cases and daily needs. And maybe on Grab, for example, all of the Grab drivers when they started out -- a lot of them actually are under bank. They started with their account with [indiscernible]. So all these guys, when they start getting paid with their incentives and so forth -- actually, Gojek also started that since the beginning, since 5, 6, 7 years ago to our rec fund and they get their incentives and everything to their rec fund. So various different approaches to various partners to make sure that the use cases for banking is actually multiplied, having multiple of these partners. Maybe, Ibu Lani, you want to add. Ibu Lani is our Consumer Banking Director.

Thank you, Pak Tigor. Thank you for the questions as well, Robert. So practically, they are -- in terms of B2B, our business customers. Yes, so practically, some of the biggest contributions to us is actually on the settlement portfolio because we are one of their biggest settlement banks currently. So it contributes to our cost as well. And then for us, this is a good cooperation as a solution and a part of features and benefits that we provide to our both customers. So their customers as well as our customers in CIMB Niaga. So more or less, this also contributes to our growth in terms of customers as well as fee income. Because one of the -- for example, one of the most popular since we are actually "sharing" a platform with them is actually the top-up for GoPay, Grab, DANA, OVO, et cetera, which our customers can do top-up very easily. Two steps from their digital OCTO Mobile applications and the top-up is there. And in terms of acceptance, we are also cooperating with them. So the users of those wallets and our wallet as well, if direct one or our QR through OCTO Mobile Digital, yes, we can share a platform currently using EDC or non-EDC. So practically, this is the operation, which is benefiting both. And I think for us, this is also some -- from some of them, this is a basis for us for loans. As you see, majority of the transactions in those platforms, for example, in marketplace is done with credit cards as well as directly to our through our debit card through our VPN, virtual debit card numbers. Just as a platform for us for installment on credit cards. So that's why in some of the pages, we explained that more than -- already more than 80% of credit card installment is actually done in OCTO Mobile. So it is complementing cooperations with them.

Okay. So I can see the obvious benefit on the liquidity front. That's something that is obviously very positive, and I hope it's sustainable. What I'm less clear on is the revenue generation, particularly -- again, not to name the other bank, but they are suggesting that there's a very huge opportunity on high-yield lending, particularly something like a pay-later loan. So they obviously consider that a very high-margin business, 9%, 10%. So I guess what I'm saying is that the market has given a lot of -- in their market price, you can see a lot of credit for that. But what I'm asking is, why doesn't Niaga and other incumbent banks do exactly the same because this is surely something you can compete on?

Yes. Actually, the pay-later for noncredit card is a pipeline already, but currently, the one that we have in front of us which is quite popular is actually the conversions of those transactions the customer made in the platform in the marketplace into installment in credit card. This is quite effective. And one of the biggest impact for us collaborating with them is actually in terms of customer experience, the CX because -- well, we can't deny that even in Indonesia, in this current situation, the popularity of ordering food and then taking -- sending the Gojek or Grab to pick up some merchandise and et cetera, is becoming very popular. So we are riding on it.

Yes. Just to add, Robert, I know what you mean on the unsecured lending side. If you look at our portfolio on consumer as well as the EBITDA SME side, mostly as secured. If you look at our consumer side, mostly in the secured side mortgage, which is growing fairly nicely 78% in the auto portfolio, which is growing very nicely as well. On the unsecured side, we are trading carefully. We are looking at the situations. We've been -- we do have a personal loan portfolio as well. And we're looking at this very carefully and looking -- obviously using the data and the analytics to make sure that we are not going to hit a wall when we start lending aggressively on the unsecured segment. So I think, yes, we will start looking at it, but we will tread carefully as we have a strategy in the Forward23+ to make sure that the mortgage, auto and the secured business is growing very nicely that provides nice return on risk capital.

Yes. And additionally, Robert, related to your questions about the revenue coming from digital, it's actually trending up quite nicely year-on-year, the growth is above 50%, mostly coming from the fee that we collected from the top-up, for example, for [indiscernible] top-up and then purchase, including transactions, mutual funds, bonds, including FX as well, which is coming from majority made in our automobile service.

My final question is a very short one. If I'm correct, your previous ROE guidance is 7% to 9%. I wonder if you care to update that guidance?

Since it's updated. Well, if you asked me before this sort of government sort of semi-lockdown, I would have been lot more bullish. But right now, probably the guidance about 9% to 11%, we think that there is a possibility that things will not be as right as we had seen it going. But at the same time, we're watching this very carefully on how this will turn out in the next few weeks. So right now, I think around 9% to 11% would be more of a focus to sort of [Technical Difficulty] And last thing, Robert, you got to teach me in how to make sure our valuation remains like some of the receive digital banks there.

The next question is going to be coming from Ben Shane Lim from Macquarie.

Can you hear me?

Yes, we can hear you.

I'll just jump straight to the questions. My first question is would you mind following up on the loans at risk, active versus not active as I just wanted to get a sense of the direction of travel, if there was a better base to compare against for the first quarter? Do you have active loans at risk for the first quarter?

Abu Vera, if you can?

Yes, we do. Yes, if you can move to your next question, I can get back to you soon. Just open that.

And then I just wanted to get a sense of your preemptive provisions. Have you started consuming those significantly? And how much is outstanding right now?

How much outstanding of our existing provisions?

Yes the preemptive provisions. Yes.

The overlays, yes, I believe for me?

Yes, right.

Yes. So from the start of -- when we first started taking overlays until where we are today, I believe that the total overlays may be in excess of IDR 500 billion so far. And as and when some of these accounts to become delinquent or go into default, we do consume part of what we have put in our overlays. So that's why you can see that in the first to second quarter. The first quarter, we're running at about IDR 1.2 trillion. In the second quarter, you can see that it's much lower compared to -- about 28% lower. So it's partially due to also the overlays that we have taken in the prior year as well as in the first quarter of this year. I don't know the exact number right now on how much of those overlays, right, that we have taken and how much we have consumed from there because it's always a moving number. There's more that's going to come in and then some that is flowing out. We will be consuming those that we have already taken earlier.

So let me answer on the first question, which is actually what is the loan at risk active in the first Q. In fact, it's actually shown in the slide. Just now it's around -- it's almost at the same level with the current one. There are things that are actually, of course, are out, but also we have -- we may have something that is coming in this. So it's relatively flattish in Q-on-Q.

So it actually was about auto IDR 12.2 billion (sic) [ trillion ] in the first quarter. Is that right?

Supposed to be the case. I'm looking at the ratio, actually. The ratio is relatively stable.

So it's 7%, right? That's the number I should be looking at. Right?

The total loan at risk is actually 18.6%. So it's relatively stable from the previous month.

Okay. But let's just try to compare the active portion quarter-on-quarter. That's the direction of...

Yes. So the active is actually quite stable from March 2021 to June 2021. When we are talking about 18.6% it's actually hovering around almost the same level in the previous quarter.

Sorry, Ben, just to make sure that we understand this. Some of the active ones, obviously, some gets out of the restructuring altogether. Some of them actually falls to the lower buckets, right? So the way I would look at it, the LAR, loans at risk covers in a more holistic manner. So if you look at the active cases in isolation, it does give some guidance, but we need to know how much actually flows out, how much actually flow worse. So if you look at the loans at risk as a whole, that sort of gives you a plan of the total quality of the assets.

Because the so-called active can either -- they are out completely or they are flow into worsening. So that's why looking at loan at rate, it will represent the right approach because if you just focus on the so-called active, it can flow out or it can flow into the worsening bucket whereas LAR cover everything.

Okay. That's fair. But I mean, the summary is your active LAR is flattish quarter-on-quarter. There's no sharp improvement, right, that's sort of the trajectory?

There is an improvement from December to this year.

My last question is just around your cost of funds. How much of that is simply down to mix? And how sticky or sustainable you think this is going to be going forward?

KK, do you want to take that?

Yes. So I think we have shown some resiliency. So it's quarter-on-quarter, even in fact, beyond year-on-year. Now we are showing good growth in CASA, right? And our digital strategy, the investment that we put what Lani and Pak Tigor mentioned also, right? There's so many participation in different ecosystem players right now in the form of payment. So we are very confident that our CASA strategy or CASA front are sustainable. On the time deposit side, right, we have priced out quite significantly. In the past, we do have little bit of an issue on the Sharia side when the funding to deposit or the financing to deposit ratio was in excess of 120%. Today it's 90%. So -- and at the same time, also we managed to bring down that cost by about 2%. So the flows that has been coming has been good. I mean, we continue to be able to cheapen the cost of deposits. We continue to look at our deposits and compare it to the industry numbers. And I just looked at the April and May number for the total deposit costs across the industry. In April and May it was the first time I have noticed that CIMB Niaga's cost of deposit is actually lower than the industry cost of deposits. That I believe was 2.2% as of May. June number, we don't have it yet. So yes, back to your question. I think it's sustainable. I think we have the ability to continue to drive deposits, both on the CASA front as well as the time deposits at very reasonable pricing.

Should we expect better sequential improvement on the cost of funds?

We have to see how our loans growth is actually right. So yes -- so our loans got to be flattish. You can see from our numbers here, 78% loans to deposit ratio, a lot of our liquidity channel towards marketable securities, mainly government bonds, right, that have shown tremendous growth year-on-year of about 80%. Yes. So I think for us, it's more to manage the efficiency, manage our NII to optimize it, right? We want to earn deposits, but we want to pay the right price for the right mix.

The next question is going to be coming from Gaurav Khandelwal from JPMorgan. We're going to open the line shortly. You can ask you questions directly.

So I have two questions. First one is, could you talk about the one-offs, which has been mentioned, I think, IDR 40 billion. So just curious to know what that number is. And second is regarding the quarter-on-quarter decline in NPLs. So could you just elaborate a bit more on where it came from? And has there been any upgrades or write-offs? So some color on that, please?

KK, you want to take that? Yes.

Okay, I'll take the first one. Yes. So on the one-off, right, exceptional item, totally IDR 41 billion. I can characterize into 2 separate items, one is the write-off of intangible assets. IT software is about IDR 20 billion that we took. These are IT software that we have some set. We don't use them anymore. And the second one is another IDR 20 billion -- about IDR 21 billion. That is on fixed assets, onetime fixed asset. These are actually those damaged or impact fixed assets that we have around the bank, right? Some of them mostly actually are computers, PCs. Because over the last, I think, 18 months since the start of pandemic, they have been replaced. With working from home, we have replaced almost 6,000 pieces with laptops. Okay. So that's one. On the NPL ratio, yes, NPL ratio has improved 16 basis points, mainly attributed of one write-off from account that we sold right? So we have a recovery income, as you can see on the fee income line and the loan guidance, so.

Next question is going to be coming from [indiscernible] We will open your line shortly.

Well done, really good performance. So just had a couple of big picture questions actually. So it looks like you've done quite a lot of work on the corporate book. You've reduced the stress. The size of the book hasn't really grown. And if I do my own measurement, it does seem that your risk exposure has come down a little. Do you think this is more a function of corporates getting healthier? Or is it that you've just been able to exit some accounts and other banks have taken them on? Sort of a big picture question, but that was my first one, if I can.

Yes. I think maybe a couple of things, right? One, we've been little bit more disciplined in going after the corporate couple of years ago. So for COVID, we've really put in the right risk return on this capital and so forth, the right ratings and the right approach and the right origination. So I think most of the -- not all, but most of the portfolio that we have on the corporate side have been relatively healthy, relatively liquid, relatively able to have different sources of funding other than banking, whether it's a bonds market, equity market and so forth. It doesn't say that we're completely...

So it sounds like it's more the product of the strategy you may have been [indiscernible] maybe a couple of years ago, and you're really seeing the benefits of that now. Is that a fair conclusion?

That would be a fair sort of assessment. I hope I don't speak too soon because this is very volatile, right, what's going on out there because my shadow always looks at me and say, there's always a risk on everything, right? So -- but I would like to think that our strategy is sort of working out so far.

Okay. And my second question was more on the digital side. There was -- obviously, it's really topical right now. And it looks like the performance of OCTO is actually really strong based on your presentation, so well down there as well. I guess my question is twofold. There's a bit of a debate, I guess, about the ability to charge fees, friction fees, payment fees, et cetera. What's CIMB Niaga's view? Do you think that those fees stay? Or do you think that for competition reasons or regulatory reasons at a time we actually see those eroded? That was my next question. I have one more if I can?

Yes. I mean, over time, obviously, there's going to be a lot more competition. It's going to be a lot more pressure on fees to come down, and we are seeing it. However, I think there's a couple of things that we're trying to do. We're trying to make sure that with a very competitive fees and the right UI and UX offering, we're able to pull people not only because there's lower fees or competitive fees, but also it will actually give our CASA offering a good one. So a lot of times what we do is we want to make sure that use cases continue to be very, very active. And we want to make sure that whatever transactions that's going to be done through our bank is multiplied, hopefully exponentially. And thus, the CASA was really significant. And we've seen this in many, many times that -- if you have a one product offering versus 3 product offerings versus 8 product offerings, the CASA actually grows exponentially. So I think it will remain competitive. But we are -- actually, as Ibu Lani mentioned, we are seeing traction. So we are getting more of those kind of fees. By imagining, going forward, that will become more and more competitive.

Yes. And just on the -- so there'll be competition and also you mentioned use cases has been crucial. Some of the digital banks, I think, want to embed themselves as a payment instrument directly in some of these platforms. And I think over time, I mean, wallets is a bit [indiscernible] right, you got to top-up and then you got to pay and you wonder if over time, they have been necessary. Could you embed OCTO as a payment instrument in some of these platforms? Is that possible? Or how do you sort of see this growing?

We are actually already. So some of these platforms, whether in -- like Tokopedia or [indiscernible] so forth. So we're one of the top banks that people pay through our OCTO offerings. Maybe Ibu Lani want to elaborate a little bit more on our sort of how we embed ourselves and our partners?

Yes. Just related to the fee in your question earlier. I think based on the fact and the [indiscernible] base that we have with the customers, actually, UI/UX and customer experience very much more important for them. In fact, for every single transaction, for example, very low ticket size like pop-up for telco and et cetera, the charges is IDR 1,500. So how much is that, I think AUD 0.15 right? So it's rather cheap actually, but the UI/UX is more important. So they can top-up, for example, only by 2 or 3 steps and that's it, a smooth processing, et cetera. And the second, currently, internal fee, we sort of have a kind like consensus in the market because it seems that nobody want to lose in that part. So practically, there is no competitions in terms of fee. But you're right, it might be somebody who want to go in and make everything free. But again, I think we have been building that continuously on the UI/UX, yes. And then operation with the platform. So I think we do it seamless right now. There is competition here because some of the marketplace like [Technical Difficulty], they also offer pay-later and et cetera, but there is sort of one more step on applications for them to apply for those instant loan. But if they're using CIMB Niaga whether it's [Technical Difficulty], it is instant. So they can go to the digital platform and convert all those transactions into install -- fixed installments, it could be 3 months, 6 months, 12 months, 2 years, 3 years, et cetera.

The next question is going to be coming from Selvie Jusman from Morgan Stanley. Your line is now open. You can ask your question directly.

I just wanted to ask a little bit more on the digital banking front because I think earlier, it was also mentioned about the embedding in the system. So in the sense like I think in terms of like [indiscernible] integrating in the [indiscernible] platform, they don't charge from the top-up -- in the topping-up wallet, which is I think you answered that question. And I think your answer earlier was that the user experience that OCTO offers will be more seamless as compared to what other platforms offer, instead like a [indiscernible] and therefore, you are okay without like [Technical Difficulty].

First of all, we do offering to not just one payment, but to all, right? So whether it's GoPay, OVO, DANA or others, we are actually offering all our partners similar features. And so far, what we've known is our UI/UX have been extremely well received. Obviously, we have to continuously improve. But so far, yes, it's been very much well received. And as Ibu Lani mentioned, the traction is actually showing and the fees from those things have actually increased from time to time.

Sorry, Pak Tigor mentioned about the different CASA product, which is my next question. In terms of the lot of products, digital banks and I think a lot more like [indiscernible] are starting to buy banks. And I think one of the areas that we are trying to target is the deposit franchise. And I guess Niaga has been able to see like a large pickup in CASA over the like past one year or so. And I think partly it's also driven by the transaction side. So are you seeing this as a threat? And you mentioned earlier, you offer like in terms of your CASA product offering on the app. But what would be -- how -- what is your view on it as well as in terms of like competitive pricing? What kind of pricing are you looking for this kind of deposit products on [Technical Difficulty]

Yes. So I mean, when you look at the CASA journey -- actually, it's only in the past year, we've been consistently going through our CASA journey over the past 4, 5 years. If you recall, 4, 5 years ago, it was about 40-something percent. We moved it up to about 50%, 55%, 60%, now it's about 62% in terms of the CASA ratio. And it's both, if you look at the growth, it's actually both in the CA [indiscernible] as well as the SA, which is the savings account, which is [indiscernible]. So in the CA is actually not only on the consumer side but it's all across in the corporate, commercial, SME, value chain, all the transaction banking for the -- for our nonindividuals who are actually very prudent as well. So we're doing a lot of execution not only on the digital front but our value chain and how do we make sure that this channel is actually penetrating our segments seamlessly, and that's also very good. In the SA side, [indiscernible], same thing, right? So not only is it -- on the high end but also on the low end, where the mobile penetration have been lower. So we're pushing that strategy to make sure that there's a lot more traction there. So if you look at our CASA, it's not purely on one side, but it's what I call total football. So it's got to be from the goalie all the way to the strikers really playing that parts to make sure that CASA is continuously going up. So I think this total football strategy is much more sustainable. It's not a one-trick pony type of strategy on the CASA, but actually really end-to-end and having the right platforms going forward.

And maybe one last question on the loan growth because loan growth has been pretty, like, soft and I think across the retail segment in a big way, and especially with like [indiscernible], what is your like expectation for the full year? Do you expect like -- and in just in terms of the overall business activity for the rest of the year?

Yes. I think it's still going to be challenging. Our loan growth as of May, as an industry, have been so negative, but we just saw the latest industry numbers from BI, I think, showed just some soft touch on the positive side. But even then, I think it's still not a solid positive yet. So -- and given [indiscernible], there is a possibility that, that low number will continue to be soft throughout the year. So what we're doing about it, we are -- obviously, we don't want to push too hard when the industry is still in a volatile situation, but we pick and choose our battles. So as you can see in our mortgage portfolio, we're actually still growing very healthily and the right segments and the right products despite the situation in the first half, right? The auto loans, similar thing, we're seeing that as well. So -- and we're trying to pick up our strategy, not only from the loan side but on the fee income. If we see that there is good traction on the fee income, whether it's a bank insurance side or on the sales side. So we see these tractions, hopefully continuing despite some volatility because of the [indiscernible]. But overall loans growth, I think it will remain soft.

The next question is going to be coming from Danny Goh from Credit Suisse.

I have three questions. I think I'll just ask them all at once. My first question is relatively quick and straightforward one. I noticed that you've been fairly successful in scaling back your ATM as well as your branch network in the first quarter. I was wondering whether there was a further renovation in the second quarter? That is my first question. My second question is basically [Technical Difficulty] the forward-looking provisions. I'm wondering what sort of assumptions have been embedded in those forward-looking provisions in terms of percentage of flow-through from restructured loans into NPLs? And how is that -- how does that compare with the experience so far? And my third question, which I don't know whether it's an unfair question, but just wondering whether you've actually done some calculations around how the P&L and ROE looks for the digital side of the business. I guess you did ask the question of how you get your valuations but one of the digital banks are trading at perhaps that is something that [Technical Difficulty].

Yes. We have not really calculated that way just because our digital side, the way we see it, is very much as an omnichannel type of strategy. So the guys have the access to the digital, they do have access to our other channels as well. The guys that have the access to our distribution and the digital side, they also have the access to the distribution and products on the nondigital side as well. But maybe that's a good idea that we will take a look at to see what kind of results if this was a final thing on digest side. And maybe I can give the -- Ibu Lani has been working on this -- on the ATMs and digital launch and our footprint strategy and how will we make it much more efficient. Maybe Ibu Lani can take that question and then the [Technical Difficulty] provision assumption [Technical Difficulty] the assumptions going forward?

Tigor, thank you for the question, Danny. Related to EDM, especially the [indiscernible] branches since 2017 and more than 150 branches. And EDM starting almost 2 years ago, we are also reducing numbers significantly. But all our actual number and customer service that we did align a long way with the development of digital channels. So OCTO Mobile has been revamped for -- since 3 years ago. And every month, we are releasing almost 1 or 2 months, we are releasing new UI/UX as well as new features and benefits. So it becomes quite popular within the customers. So again, it seems that we will be reducing number of ATMs at the next -- in the future as well on one basis. Branches, we still plan to reduce but not really that many. So we are thinking up to about 300 branches that we have. But of course, this is very agile, I should say, because we are also monitoring a number of transactions wrote to the branch. And then we are reviewing and assessing and doing some service to the customers. And we also actively doing the deflect programs, deflect program from ATM as well as from the branch to move those transactions into digital, especially on OCTO Mobile and OCTO Clicks, especially for retail as well as the SME, EBB customers. So yes, especially ATM will be reduced, I think, quite significantly because -- especially with pandemic situations, customer adoptions on digital is actually much, much faster.

So on ATM, I remember that you scaled it back by 11% in the first quarter. How -- where did that stand at the end of June?

Yes, I think we will be reducing another about 500 to 600 ATM by the end of the year and then branches, until next year, we will be closing down about 27 and 28 branches more. So until next year, yes.

I will take your question number 2, which is actually why Q2 provision appeared to be lower than the Q1. In fact, it is a matter of situation where we were still very concerned at a time. So we followed a number of provision at a point in anticipation of the situation. So one is actually, there is an MEB adjustment, that's quite significant. Number two, we take a hit on some of our stimulus like, for example, I mentioned earlier, the consumer that unsecured. And it's quite chunky in the first Q and also some of our commercial banking account, and we also took a write-off on one account. So in Q2, it's actually more a normal situation that we see. We have already taken a big chunk. So in that particular quarter, it appears to be decreasing, but because Q1 is actually quite a significant portion has been taken. I take it further, you will ask what is the outlook of Q3 and Q4 in that particular regard? Well, as Pak Tigor said, that if there is no lockdown, we hope things can be quite sustained. And of course, we will still base it based on our framework. We cannot just like take the provision as we wish to take. We have to also be very careful that it can be justified by our regulator as well as the auditor. So in Q3, we are carefully assessing that may be a need for us to be slightly more than Q2 given the potential lockdown and anticipation that NEV may be adjusted as well. We'll see how the situation evolves as well? Things is very fluid on this kind of thing.

In the interest of time, we will take the last questions from Boby Kristanto Chandra, Mandiri Sekuritas.

Can you hear me?

Yes, we can hear you.

Just a follow-up questions on the funding side. So actually, I really want to know the driver of the strong of your CASA growth. Like, any new products being introduced during the first half this year? And also, you mentioned earlier that [indiscernible] is quite sustainable. But can you provide us more color on how sustainable the trend is? And also on the TD side, time deposit, also, can you give us more color on the strong quarter-on-quarter growth? Lastly, do you have any opinion for digital banks that are offering like 4% to 7% staffing rate? Do you see this as a threat for your business?

Okay. Thanks, Boby. I think the last question first in terms of the high interest rates from other banks. I think consumers are quite smart in terms of where they bucket their savings and everything right now. So as we lower our cost of funds, we actually don't see funds flow going out, right? So I think they have bucketed their appetite to different sort of segments of banks. And we fortunately, we have a strong brand, strong offerings from UI/UX from use cases to make sure that people continue to put their CASA with us, transactions with us, despite the much lower cost of fund. Our time deposit is -- it did grow for a quarter, but I think the level of interest that we're paying is very different. As you can see, the total overall cost of funds is actually -- is going south. So it is almost like a plug since our CASA growth continues to be strong, but we want to make sure that we maintain a strong overall deposit position as well. Now with regards to CASA funding, how sustainable it is, I think we've mentioned that before that we've actually significantly brought this down. But the juice, if you will, is probably not going to be as big as it was in the past 12 to 18 months, right, just because if you can see our total cost of funds about 2.2%, so the level of juice that you're able to produce even if you lower it, it's probably going to be much less than before. Even though we hope to push strong growth continues to be in the next 2 quarters until the remainder of the year. Now with your questions with regard to CASA, is there any -- what's the magic wand to get this CASA going? Actually, as I mentioned before, I mean, it's just really hard work from all angles, from all aspects of banking, not only just one product that attracts CASA but really all across. Our digital offering, as I mentioned, we continuously -- every 4 to 6 weeks as the new feature, right? And this really drives the use cases, it really drives the transactions, and I think that continues to drive up the CASA. Our value retain offering from across the platform, whether corporate, commercial and EBB is actually giving a lot of transactions through our portfolio. Our enhanced push on the base channel with our corporate or nonindividual customers and the improvement there continuously improve the transaction level as well, and that really drives up the CASA growth as well. So I think, again, as I mentioned, it's total football, not only just from one product but from right across the whole bank as well as different product development that we offer. So I'll give you another example. By giving ability for customers to easily purchase mutual funds or bonds to our OCTO mobile or even the best rate that we offer through our OCTO mobile, it really drives the CASA in the bank, right? So it's not necessarily -- it's a CASA product per se but as I mentioned, as you buy multiple products from the bank, the CASA balance is actually exponential. Because you think it's easy. You can just buy FX, you don't even think about the rate because it's going to be the best rate. You can buy mutual funds here, you can transfer for fee. You can actually buy bonds. So it becomes a transaction sort of account for many, many of our customers. I hope that answers your questions.

Okay. So we have -- actually, Pak Tigor, if you have still time, I think Robert Kong has one last question, if you don't mind.

Sure. Yes.

Yes, we'll open the line for Robert.

Actually, it was not a question. I wanted to get back to you, you said about how to value as a digital bank. I just did the math. So there are 2 ways to do it. Number one, if you look at some of the big Internet players in the region, your Tencent and all these guys, the simplest metric when you view is 10x your gross revenues. So if I just take your first half gross revenues, obviously double it to annualize it and then multiply that by 10, that would give you a market cap of IDR 252 trillion, which is obviously about 10x your current market cap. The second metric that is used or is being used is putting a dollar value on your digital customers. So you have about 2.6 million digital users. And I think the going rate, depending on who you speak to, is about a USD 2,000 valuation. So you convert that into rupiya, that would value about IDR 72 trillion. But if I used to complete 7 million customer base, that would value at almost IDR 200 trillion. So those are the metrics. I just wanted to get back to you on that.

Thank you, Robert. How do I convince analysts to use those kind of metrics?

Well, if you do what Danny said and separate the value of your digital banks, I think that would be definitely a one way, we go to some of the parts, new bank versus old banks.

So Pak Tigor and Pak Lee Kai and other directors, we have concluded our questions. I don't know if you have a final conclusion remarks but, Tigor, before we end the session.

Thank you, Saut. Thank you, everyone, for attending this morning very likely and very thoughtful questions. As I mentioned, the first half was fairly positive. There's a lot of encouraging trends. Second half, given what's going on with [indiscernible] I think we have to be more cautiously optimistic though. So the word is still optimistic, but also cautious because things are fluid. But regardless of the situation, I think we are continuously improving our platform, going ahead on our transformation, continuing our cost focus throughout, continue to invest in our IT and digital side. So we hope that when this is completely over, we're really ready to really take a leap going forward. And so far, all the transformation efforts that we've been putting into this bank, is actually bearing fruit. So I'm really encouraged by the results. And we hope in the second half, it will be, despite what's going on, it's something that we look forward to. With that, again, thank you, everyone, and hope to see you again next quarter.

Thank you.

Thank you, everybody.

Thank you, everyone.

With that, we end the session. Stay healthy, stay safe.