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

Good afternoon, ladies and gentlemen. Welcome to CIMB Niaga conference call. My name is Saut Saragih, and I am your moderator for this session. Our agenda today, February 21, 2022, is to disclose bank's full year of 2021 financial results. As usual, the presentation material for this session was released half an hour ago, and it is available to be downloaded from our website. Our financial results will be presented by Ibu Lani Darmawan, 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 hour, which will begin with a presentation by our CEO, continued by our CFO and followed by a brief Q&A session. [Operator Instructions] Once the presentation is completed, we will open your line and also your video so that you can ask your questions directly. You can access the chat room lines any time, but we will only open your line and video to ask questions only after the presentation is completed. Ladies and gentlemen, today, we are pleased to introduce Ibu Lani Darmawan as President Director; Pak Lee Kai Kwong, CFO, Finance and SPAPM Director; Pak Rusly Johannes as Business Banking Director; Pak John Simon as Treasury and Capital Market Director; Pak Pandji Djajanegara, Sharia Banking Director; Pak Henky Sulistyo as Chief Risk Officer; as well as Ibu Fransiska Oei as Legal and Compliance Director and ESG coordinator, 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 during -- 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 form the basis of any contract or commitment whatsoever. Now without further ado, I would like to turn this presentation over to Ibu Lani for her remarks. Ibu Lani, the time is yours.

Thank you. Thank you, Saut. So good afternoon, everybody. Thank you for joining our session today for our full year report of 2021 financial performance. So I hope all of us are healthy and well, and let's also hope that this number of COVID-19 cases will decrease very soon. And for those of you who celebrate Chinese New Year, [Foreign Language]. I hope I pronounced it correctly. Okay. So without further ado, I think I'll just kick start the presentations. So let's turn to Page 3. Okay. So we have been very consistent in our aspirations, our positions in the market as well as our presence. So we aspire to be the bank of choice for Indonesian businesses as well as consumers with our presence in 98 cities in Indonesia and supported by 427 branches, including 38 of them are digital [ branches ]. So currently, we are the second largest privately-owned bank and the largest Sharia business unit in Indonesia. And we serve 7 million customers consisting -- customers from consumer SME, which we call EBB or Emerging Business Banking, commercial and also corporate segments. And we posted 10.7% ROE and IDR 4.2 trillion of net profit income for full year 2020 -- 2021 last year. So let's go to Page 5. Now here, we can see the quite encouraging trend actually on mobility despite the recent surge of COVID-19 cases in Indonesia. So high vaccination rates surely, I think, it contributed to the resiliency as well as the mobility. And so it also increases the customer confidence index as we can see from the graph here in the recent months. And hence, it also drives the GDP growth, which is -- majority is actually driven by domestic consumptions. Well, of course, in expected result as a growth is an increasing trend of inflation rate, which is -- might continue this year. So we can go to next page. Now you have seen this quite several times, actually. So I'd like to state again about 5 pillar strategy that we have, and we think that this remains relevant, and we will execute accordingly. So the pillars are #1 is playing to our strengths. So we will continue to grow consumer EBB segment as well as our Treasury business. We have also calibrated corporate as we all considered growth last year as well on corporate loans and expect to grow segment as well this year, while, of course, we'll remain vigilant on asset quality. So concurrently, we will continue to refine commercial segment. The second one is our mantra on CASA franchises, CASA. So again, we will continue creating and driving initiatives such as creating new features in our digital channels, optimizing data, using analytics to provide leads for our team to continue to build our CASA, including MOCA our main operating accounts for nonretail as well as leveraging the new technologies to, of course, improve our processes. We're also revamping our KPI and many more initiatives that we have to increase our CASA, including the CASA ratio. The third pillar is actually the discipline in cost management. I think we are very good in this area. And we will continue our efforts to find any other more optimizations and opportunities and also driven by sustainable cost management. Number four is preservation of capital and balanced risk culture. We ensure that we're all capitalized, very, very well capitalized and run our business prudently. We leverage the analytics technology to manage the risk, supported by our up-to-date risk infrastructures. Number five, the last but not least, to leverage information technology. We'll continue to use technology and digital to improve our processes. This will drive our customer experience better in terms of NPS as well as efficiency. The next page. Now on our loan portfolio, we have grown consumer EBB as targeted and corporate segments as well, which we have contributed last year compared to the previous year. Again, mortgage and auto loans as expected contributed to most of the growth coming from consumer banking. In terms of liabilities, we also increased our CASA ratio and consistently maintained CASA ratio above 60%. And in terms of efficiency, our cost-to-income ratio, CIR, we are in mid-40s last year in 2021. It's also another improvement that we have, if we are looking back to 2020 in our high 40s. So we have been very disciplined in cost management with fund also coming from digitalizations. Now the next page, I'd like to highlight some of those initiatives that we have in our EBB or SME segment as a foundation for us SME to grow further. So we have increased penetration of main operating account, which we call MOCA to 30% this year. Last year it was 26%. And we have improved the processes as well for turnaround time related to customer experience, productivity of front lines, including our enablers, asset quality as well while building partnerships. Some -- one of them is actually with fintech players in a market [indiscernible] so far is going well. And we are happy to share that our internal application used by EBB RM as well as consumer banking RMs, which we call OCTO Smart actually has won Digital Banking Initiative of the year for Indonesia last year coming from Asian Banking & Finance, and we are very proud of it. On the next page. Again, the impact coming from digital. So transactions number as well as value have increased continuously. If you remember last year as well, year 2020 to 2021, keep increasing significantly in OCTO Mobile, with number of transaction increased 138% while transaction value also increasing 46%, that one coming from our mobile banking OCTO Mobile. While Internet banking or OCTO Clicks at the same time the same happenings as well, has also increased nicely compared to 2020. So financially, we also monetized the digitalization investment that we have on digital, so revenues coming from digital is also increased year-on-year. It is about 36%. Transaction contribution, as you can see from the bubble chart on the right side, it also contributes quite significantly actually in term of -- for each of those products. For example, credit card installment 95% already digital. Even TD opening is above 90%, even mutual funds is already 76% in effect. So in the next slide. Again now this will be the game changer in sales that we tested last year. This is an application base, which we call OCTO Friends. It's a mobile application, which we designed internally in CIMB Niaga. It is designed to acquire new customers through referrals, whether it's coming from staff of CIMB Niaga, customers or even non-customers. So we launched this internally as a test in August 2021 last year. And since then, we have registered around 10,000 members of OCTO Friends and received about 5,000 applications -- by the way, we started with mortgage first, 1 product, okay. So we have 5,000 leads in applications. So in Q4 last year, leads from OCTO Friends contributed about 19% of our mortgage booking last year. So again, I think we see that digital acquisitions and digital process will become an important acquisition channel going forward for us. So if we go to the next page, again, another innovation that we have OCTO Card. So this is an initiative as a complement of our credit card. So practically, it's a straight through process. People can apply, get the credit cards -- get the credit card numbers. No need to wait for the plastic and straightaway make the transactions online. So again -- and the other part is actually OCTO Loan. This is nearly almost like a typical fintech type of loan, noncollateralized, straight through process. So we tested that and we started that already. Now on the next page. Ladies and gentlemen, so all of our digital and digital supported initiatives that is actually proven to elevate the trust and confidence from our customers, and it is reflected from the NPS scores that keep increasing, not only on NPS bank-wide, as we see here, it's coming up to 28% actually ending 2021, but we can also see by each of those products, consumer banking increasing, business banking increasing, EBB or SME increasing, also transaction banking. So I think we will continue to drive this, our digital and digital supported initiatives to further deliver the value to our customers is very important. So let's go next to the financials highlight. Okay. So I think with what we have done last year, we share here that we have generated ROE of 10.7%, which has surpassed the pre-pandemic level on the back of almost 110% net income growth and CASA ratio remained strong with 61.3%. So this will protect our NIM. And we maintained our cost relatively flat year-on-year, and our cost-to-income ratio is very nice with 45.9%. I think we are one of the most efficient banks in the market, and we have strong liquidity and strong capital with our LDR closing 2021 to 74.4% and CAR 22.7%. On asset quality, we have improved our NPL ratio to 3.5%, while LLC loan loss coverage increased to 212.1%. And I think we are happy with these results as a proof of success in consistently executing the right strategy, as I shared previously. Now with that, I will hand over the presentation to Pak KK, our CFO, to share our financial results. Pak KK? [Foreign Language]

[Foreign Language] Thank you. And a very good afternoon, ladies and gentlemen. Let's move to Page 16. I hereby present to you CIMB Niaga's financial performance of financial year 2021, on this balance sheet for us. We closed the fourth quarter pretty strongly with total assets gaining 5.2% quarter-on-quarter and for the year, up 10.6%. Loans growth gained traction in the fourth quarter advancing 2.6%. A large part of our interest-earning assets were in cash and short-term deposits, which increased by 48% quarter-on-quarter, driven largely by the continuous strong liquidity inflow. Cash total deposits were up 5.9% in the quarter while translating into a 16.3% gain year-on-year. So for the year, we saw strong growth not only in CASA, but also in our term deposits. Our equity closed at the IDR 43.4 trillion level, higher by 2% or 5.7% compared to the previous year -- our previous quarter and from a year ago. Let's go to the next page on the P&L, our P&L. Interest income contracted 3.6% quarter-on-quarter that stemmed from lower yields from loans and bonds. Compared to 2020, interest income was down 8.9%. As a very good counter balance, we started really pricing our deposit down and continue optimizing our deposit cost, bringing interest expense down 1.5% further by 1 point ...

Pak KK, I think you are on mute. KK?

I think somehow he's frozen, it think the connection.

Yes, you're back.

Okay. Sorry, it was an unstable connection. So maybe I'll start again with this one. Yes. So on the P&L, interest income contracted 3.6% quarter-on-quarter, mainly coming from lower yields from our loans and the bonds. And this compared from a year ago is down 8.9%, but we had a very good counterbalance in which we started pricing our deposits down, continued optimizing our deposit cost, bringing down an additional 1.5% for the quarter and for the year, down almost 30%. Overall, NII was still up despite the decline of 4.5% in the fourth quarter. As for [ NOI, NOI ] grew close to 10% for the quarter and 15.2% year-on-year with most of the increases coming from wealth management fees, bonds trading and sales and then a much more improved bad debt recovery. Income as a consequence, yes, even though with a weaker NII in the fourth quarter, operating income was up for the year, 7.4%. On operating efficiency, our operating expense will be carried on with our cost optimization measures to keep our expenses flat, extracting more savings from our establishment cost and also general admin cost because we needed to fund all this additional cost in our IT investment and also heightening personnel costs. On provisions, credit-wise, we believe that the worst that was brought about by the pandemic may be behind us already or likely behind us. However, we continue or we carry on with a prudent provisioning, ensuring that our loan loss coverage on both our NPL and impaired loans remain strong. Loan loss provisions increased 12.5% for the quarter. And for the year, it was down 22.8%. So with stronger income, a very flattish operating expense and lower provisions, Ibu Lani mentioned, PBT, PAT, we were up 81.1% and 109% year-on-year, respectively. Next page on some key ratios. So in addition to the higher PBT and PAT, there are many financial indicators that we feel encouraged about with our franchise, right? ROA, ROE, fee income ratio, CASA ratio, they all showed marked improvements. As we can see from here, there are still challenges, but we need to address the falling NIMs. The fourth quarter has been encouraging. We saw loans growing up slightly by 2.6%. So we will try to build our NIMs from the additional funding that we have grown our loans. The other is really ensuring that our NPL and impairment ratios do not get too elevated. At this juncture, we are pretty much in check at 3.5% and 6.7% level for NPL impairment. At the same time, we are quite comfortable with our provision coverage for NPL impaired loans, they stood at 212% and 108.6%, respectively at this juncture. Maybe just a quick glance of the quarterly earnings in the next page. So income, PPOP, PBT, ROE showed slightly weaker performance compared to the third quarter, but they were much higher across the board compared to the fourth quarter last year. Let's look at NIMs on the next page. Now this is where I mentioned a little bit of the challenges that we have. NIMs were down 2 basis points. We were able to protect the NIM in the first 2, 3 quarters of the year. However, in the third quarter -- in the fourth quarter, NIMs were down by 37 basis points, largely attributed to loan yields contraction, partly caused by some reversal of interest accruals for the [indiscernible] loans. And also, we started building a lot of cash, right? So the yields from these interest earning assets are much lower compared to loans. So that's impacted our NIM. Whereas next page, on the noninterest income, we rebounded by increasing 10% in the fourth quarter, led very much by good strong showing in FX sales as well as trading, as well as derivatives as well. We also have stronger results from wealth management fees and card-related fees. For the year, we saw growth of 15.2%, and it's coming across from most of these fee lines. Next page, on operating efficiency, right? The cost-to-income ratio improved to 45.9%. A lot of the savings really came from lower cost -- lower premises cost, outsourcing cost and non-IT repair and maintenance cost. Personnel cost started to move up a little in the second half of this year, together with IT cost. Our cost management mantra remains the same is to carry on with our cost optimization initiatives, consistently keeping a steady state of just over IDR 2 trillion of total expenses per quarter. We are just about that level right now or consistently over the last year -- the last 5 quarters. Next on customer deposit, very, very showing for customer deposit with [ CAR ] up 35 basis points -- 35%, sorry, and [ SAR ] up 7%, driving total deposit growth by 16.3% and increasing CASA ratio to 61.3%. Next, on loans. Ibu Lani mentioned this a little earlier. Consumer bank has shown consistency throughout the year and remain the main engine for growth with mortgage up 9.1% and auto finance up 29%. In Business Banking it's a story of 2 halves, the corporate banking and EBB shaking off a weak first half with a strong fourth quarter showing to close the year up 7% and 5.4%, respectively, compared to 2020. Next, on asset quality. Here you can see that from June to December, right, in the second half, NPL started creeping up. This was a result of us discontinuing all the consumer banking, COVID R&R, repayment assistance program. We also did the same for most of the EBB COVID R&R loans. So recognizing that some of these loans will eventually become delinquent to NPL, we also proactively made additional provision overlays ensuring there is sufficient coverage for these loans which covers the loan at risk. So coverage for loan at risk are large, including active COVID R&R, so at about 45.6%. Total COVID R&R loans continued to decrease in the fourth quarter, not only represents 4.7% of our total loans. Next. We are very comfortable with our liquidity and capital position. LCR and NSFR are both well above regulatory requirements. Our internal liquidity measures for 7 days, 30 days are also well over our internal limits. Total capital adequacy ratio was at 22.7%. And on Tier 1, capital adequacy was at 21.6%. Maybe before I close, a very quick update on Sharia. Sharia banking had a very stellar year, I would say, with financing growing about 16% and deposit gaining 39%. As of December, we maintained our #1 unit usage Sharia position in the country, measured in the total asset size. Also, one of the inflection point was that Sharia Banking division is now able to self-fund its financing activities, that it's liquidity position becomes much stronger. Sharia PBT increased or raised by 30 -- almost 35% year-on-year. So that's a quick update of the financials. I'll hand this session back to Ibu Lani for her final remarks. Thank you.

Thank you, Pak KK. So I think before we go to question and answer, just let me share with you several points on this slide as a summary. So we have generated encouraging results last year with double-digit ROE despite the COVID situations and challenges that we still have. And the second is as for 2022, we are optimistic that the economy will grow and business activities will continue to recover across the industry, even though we kept our vigilance about all the growth as well. So we expect better performance in 2022, mostly driven by loans and operating income growth as well as continue to be disciplined in cost management. And additions to asset quality improvement will remain our focus as well, as well as to optimize the [indiscernible] percentage. And we will also continue to execute our all 5 pillar strategies, including our digital transformation programs across all the business segments as well as the enablers. So ladies and gentlemen, with that I will end my presentation. So thank you for your attention, and we'll take the Q&A. Thank you.

Thank you, Ibu Lani. Thank you, Pak KK. Ladies and gentlemen, we will open our line for a question-and-answer session now. We do have 3 actually analysts to ask questions here. We'll start with Ben, Ben Shane Lim from Macquarie. Our host will open the line and video for you shortly. Can we please open the line for Ben to the host. Ben, you are online right now. [Operator Instructions]

Just a second. All right. Can you hear me?

Yes, quite clearly, Yes.

My first question is around the NIMs. You mentioned that there was some reversal of interest accrual. So just trying to figure out how much of the NIMs that we see the weakness is recurring? How much of that is one-off. Could you give us a bit of a breakdown on that front?

Okay. I'll take that. Yes. So in the fourth quarter and some in the third quarter, we started to -- or I would say we discontinued some of these are repayment assistance, right? So we had just allowed these loans to flow into NPL. And when it flows in NPL, whatever that was accrued during the accrual period before NPL, it needs to be reversed. So that accounted for -- that mainly came from retail as well as the EBB banking side. So the total NIM impact from this ranges between 25 to 30 basis points. Right. But on a steady state, I would say the NIMs would be in the region about 4.6% to 4.8%, and that was quite consistent throughout the first half of the year leading to the third quarter. So the big impact actually came in, in the fourth quarter. All right. At the same time, also, you will see that our cash holding increased significantly in the fourth quarter because so much additional liquidity came in. We did not refuse deposits. We continued taking deposits. The deposits came in at a cost that we think we can continue to use it in the future to fund our businesses. So a lot of these additional funding came in and was put into cash and very short-term government securities. Hence, that's driven the NIM a little lower as well.

Okay. That's clear. And should we expect any more significant reversal of interest accrual in the coming quarters?

There will be some more in the first quarter of 2022. We believe all of this will be flushed out already when we come to the second quarter of '22 because we really stopped almost all of these repayment assistance for the consumer bank and EBB in the fourth quarter. So this is just the remnants flowing through into the first quarter of this year. As you can see from our presentation materials also, the COVID restructured loans only represents 4.7% of our total loans right now. And you look at the 2 segments, which we have actually stopped repayment assistance is the consumer and the EBB segment. They represent a very small percentage of the total, if you look at the bottom right. Yes.

Okay. That's helpful. And I just suppose you can guide us a ballpark quantum on how much that accrual reversal will be in the first quarter.

That will depend. See, I can't tell how much of that can be cured at this juncture. So I'll be just guessing a number, right? So I would think that the reversals in the first quarter will be less than the fourth quarter of last year. So the NIM should be improving in the first quarter of 2022.

Okay. That's fair. And then if you look at the core NIMs, the pressure coming from shopping off from some of the higher-yield loans to consumer, for example. Just looking at core, taking out all these reversals, what's the NIM direction for this year?

So we closed the year on an average of 4.86%. We do expect NIMs to contract in 2022 by maybe another 20 basis points overall. So if you look at what NIMs here, our guidance for year is 20 basis points from what it was in 2021.

Okay. All right. Okay. And just on loans growth, you went to a lot more to the consumer book. Could you give just a specific self target where you aim to grow mortgages and higher purchase? It seems like quite aggressive. And just wondering whether you have any issues with underwriting quality for that book.

Yes, I'll take that, KK. Thanks for all the questions, Ben. So I think we are very positive still there because navigating the business for the past 3 years, it is also quite challenging. But as you can see, the growth is still very positive and -- as well as the asset quality is still very well managed. And with the -- while cautiously that we are also very optimistic in 2022, we believe that mortgage will still play a big role in terms of asset growth for consumer banking as well as in auto loan. So we are targeting consumer as a whole, still double digit, especially on mortgage and auto unsecured loans, and we expect credit cards and unsecured loans will also help us to grow. We can see the positive trend by Q4 last year as well. And the second line is actually EBB or SME that we also target a double-digit growth this year. We also believe that corporate banking will get a positive traction this year, while the one which is still flattish we target -- flattish is actually on commercial banking. So practically almost all except commercial banking that we are still -- I think this year we take a turnaround on stage.

Thank you, Ben. The next question is going to be coming from Suria Dharma from Samuel Sekuritas. [Operator Instructions]

Can you hear me now?

Yes, we can hear you clearly.

I have 2 questions. The first one is about the current account. The current account growth is, I think, is very high in 2021. How do you manage the current account to grow 35.1% in full year '21? What is your strategy? And the second one -- my second question is about the guidance for the loan growth this year. Where will this loan growth come from? Ibu Lani said it probably is from the consumer. Consumer, if I look at the number, especially the mortgage is now higher than the commercial loan. But with the Fed rate in possibility increase this year, what will be the impact for the mortgage?

Okay, I'll take this, Pak Suria. So I think CAR growth, you're right. We are quite ambitious in growing the current account. But I think we showed that type of growth last year as well, and the 35% is actually mostly coming from operating accounts. We believe that we still have a lot of room and opportunities to tap the even current customers that we have in non-retail, coming from SME or EBB commercials and also corporate banking since we have a very good relationship, even better relationship and we have proven it last year. So I think 35% will still be making sense for us. And as per loan, I explained earlier and where it will come from, mortgage. But Fed rate increase and et cetera, and I think at the end of the day, it depends on how that we can really manage the cost of fund within CIMB Niaga, which so far for the past couple of years, 3 years, our cost of fund is very well managed, and it is also coming down. But again, I understand your questions related to the competitiveness in the market. But I think mortgage is proven by the surveys that we have on [indiscernible], it is not only about rates, but it's also about processes, about the turnaround time, customer experience, which that will be one of our strengths in the market for mortgage. Does that answer the question, Pak Suria?

Got it.

If I can add Pak Suria on the current account growth, I think it's more on disciplined execution, right? And we have proven that our CASA ratio continues to grow and hover over 60% throughout the year. I think we've seen this current account growth across all segments in non-retail. And as what Ibu Lani say, it takes our discipline in terms of focusing on operating account, right, current account because that will be in line with our main goal is to reduce our cost of funds and tapping to this operating accounts. So it's very consistent, very disciplined and well executed by the team last year, and we hope this to continue in 2022.

You have another question Pak Suria.

Yes.

Do you have any other question or that would be all from you?

All for me. Thank you.

Thank you very much, Pak Suria. Okay, the next question is going to be coming from Robert Kong from Citi. We will open your line shortly. [Operator Instructions]

Am I audible now?

Yes. Yes, we can hear you clearly.

Okay. Thank you. I have a few questions, if that's okay. So the first one is just going back to the NIM. So I understand that for 2022, there's a little bit more of the accrual reversal, and there is also a little bit of pressure because you've got too much cash. If you normalized your NIM, take those 2 out, what is the actual NIM guidance for this year? I want to understand what the underlying NIM looks like when you take out these -- I mean the cash will be used up eventually, the accruals will also be done after first quarter. So what is the underlying NIM really for this year, the NIM guidance?

Yes. So I've shown in the slide here. So the underlying NIM should be in the region of about 4.75% level, but we do expect there will be a lag in which we will be deploying the cash into loans or finding higher yielding assets to invest in. So that may be a period of time where we will continue to build our NIMs up before things normalizes. I also mentioned earlier that some of these interest reversal will continue to happen in the first quarter, mostly in January and February. I think we will perhaps flush most of them out already by March, and I think that it will normalize again in April. So that is where we will start building our NIMs again. So normalized will be about, I would say, 4.75% -- 4.70%, 4.75%, but if we take the impact of this lag in deploying the cash and also some of this impact from the interest, [indiscernible] interest reversal, probably coming down to the lower end of maybe 4.60%.

Okay. And just to be clear then, you still have -- even on 4.75%, you're guiding for NIM pressure for 2022. To what extent is that coming from, just straight out loan yield pressure?

I don't think there's much loan yield pressure anymore because a lot of the repricing would have already happened in -- maybe towards the end of last year because the yields have come down already. Expectations now really is for maybe interest rate to maybe move up maybe in the later part of this year, so the yields, we have a chance of moving up in the later part of the year. But one of the other impacts that -- one of the other impacts that may hit us is that additional statutory reserves. That will have to be factored in also because in the month of March, June and September, statutory reserve will raised by another 3% in a step-up manner. So that will probably have another maybe IDR 50 billion to IDR 70 billion impact on our NII.

Okay. And that was -- the follow-up question I was going to ask you was, what assumptions are you making for rate hikes? And what is the simple sensitivity, 25 basis points higher BI rates to your numbers?

Okay. So we have an internal economist view. Our economist has a view that it will stay perhaps where it is, at least for the first half of this year. But for the second half of the year, the view may differ, right? So we are sticking to maybe flat to what it is now until the second half and then maybe between 0 to 50 in the second half of the year. What does it mean to our NII? We have a pretty balanced book right now. Actually, amount of floating and fixed rate [indiscernible] loans and deposits is quite well balanced. So based on our existing balance sheet, any 25 basis point shift in -- upward shift in interest rate will probably give us almost a neutral impact at this juncture. So ultimately, our aim is to really optimize the balance sheet to gain from any interest rate movement. By this juncture, I think we are fairly neutral on any interest rate hikes.

Okay. Moving on to the cost side, you've done an absolutely phenomenal job of keeping the quarterly cost at IDR 2 trillion a quarter for a very long time. But based on meetings that we've had with other banks, it feels like this is the year where cost pressures are going to really kick in. You talked about technology spend, I think staff costs as well. So is this a year where we should be factoring in a meaningful operating cost growth, like 5%, let's say?

I wish we have that luxury to add that 5% to overall cost. But I think we have done a pretty good job like what you said, right? It's not something that we started just last year. It's something that we started back in 2018, 2019. So we are really reaping what we sow from before. So a lot of this establishment cost mainly coming from rental, repair and maintenance, outsourcing and admin cost, things like just turning lights off on time, right, things like that. it's all paying dividend for us. We do have a very, very strong cost discipline. We have also managed the split working and split offices very well since the pandemic. It has taught us a thing or two. We have actually gave up close to 6,000 square meters of office premises. That's a whole chunk of savings that we have started to realize in 2021. And we are also looking at other premises as well. So branches, we started to reduce our network, downsizing some and then closing in some areas that not only for -- but we not only get savings on premises, we also get savings from smaller number of headcount that is no longer needed in those premises. So overall, we have managed to save -- for what we saved we are able to manage to invest in people, especially digital talent as well as funding our much higher, I think, IT cost. So we do feel that we still have some more to extract from all this cost-saving initiative, so I think we are still very comfortable right now at just over the IDR 2 trillion level per quarter.

Okay. So relatively stable cost this year?

Yes.

On the credit cost guidance, it's lower from last year, but not significantly lower. So can I ask, is that because you're still -- you've still got more relief loans to clean up? Or is it because currently, the cases are quite high, so you're just being conservative? And what is the -- in the new normal, what would be the normalized credit costs for this bank, maybe not this year, but let's say, next year? What would be the normalized credit cost?

Pak Henky, do you want to take this?

Yes, I will take this. Okay. Thanks, Rob, for the question. Yes. So yes, this year, we are taking a bit more conservative still on this cost of credit. As you might be aware that apart from how we're managing the [ decreased ] effect, but this pandemic is -- I still -- I mean there is still some unpredictability and also OJK relaxation on this and on the next year, March 2023. So that's for this year. With regards to your second part of your question, what would be maybe the ideal stage of cost of credit. It's very 1 million question, but somewhere in low 2% or I mean just slightly below 2 percentage, that's I think for the next couple of years would be a good cost of credit, given the Indonesian situation, the competition and also especially the commercial credit or middle market side that they still entail a high risk segment.

Okay. Well, one small housekeeping question. The IDR 42 million number between the reported and the adjusted profit, what is that? I think it's under operating cost.

Is it an exceptional item we're looking at?

Yes, exceptional item. I'm sorry, that's, yes.

Those are [ writing off ] software and hardware, the [ commission ] software and hardware.

Okay. And then I guess for my final question, just to say, congrats Ibu Lani on your new role. What is your biggest worry in your new job, do you think?

Thank you, Robert, for that. Yes, I think overall, as we always reported that digital transactions is actually increasing, but we also keep ourselves vigilant and what worry me the most is actually how for us, for industry as well, to tackle the cybercrime and the data security, the [indiscernible] security. And of course, I think still a cost of credit that we need to manage well even this year and the next couple of years. As we know that the impact of COVID is not yet over, so I think we still need to keep our vigilance for all of that. And the other part is actually the people development because we need a different type of talent to the banks right now.

Thank you, Robert. The next question is going to be coming from Boby Chandra from Mandiri Sekuritas. [Operator Instructions]

Congrats, Ibu Lani, for your new role. So just 3 quick questions from me. So the first one is, could you share your ROE number per business segment? And the second one is you achieved around 11% ROE in 2021, so higher than your upper end guidance in 2021. So do you have any aspirations to achieve higher ROE in the medium term? And could you share the number? And the last one is what's your thoughts on your liquidity condition and guidance on LDR going forward?

Okay. Maybe just to answer -- quick answer to your first question. We do not actually measure ROE by segment. We just measure ROE bank-wide. How we measure business segment is using the risk-adjusted return on capital. So each of these segments would have a risk-adjusted return on capital. So that's a short answer to your first question. Maybe for the second question, Ibu Lani?

Yes. On ROE achievement, 2021 and what will be the guideline for 2022. So well, yes, I think we're doing last year as well and guidance for next year should be better. There's always the request coming from the shareholders. But I think we are quite optimistic about that. So guidance on ROE will be around 11% to -- 11% to almost 12%. Yes.

Sure. And about the third question? What's your thoughts on liquidity conditions and LDR guidance?

Yes. Maybe Pak John, want to answer on LDR and liquidity conditions in the market?

Okay. Sure, Pak Boby. I think liquidity will remain ample as can be seen by BI trying to also increase the reserve requirement, right? So if you ask me, I wouldn't worry about the liquidity. I worry about -- although I share the optimism, but I'm cautiously optimistic with regard on the growth of our assets. But what we've done last year is we are also able to balance the somewhat challenging loan growth with the growth of our bond portfolio, right? So just to share a bit of my thought, although everybody is saying that the Fed fund rate will go up and will go up significantly, what we've been hearing from Central Bank and I kind of agree, maybe locally with the challenging economic condition growth, I don't think the room is there for Central Bank to be as aggressive with regard to increasing the interest rate, right? So maybe it would help on the asset growth, the loan growth. right? If anything, we also will supplement on the -- to the bond side, right? So I wouldn't worry about the liquidity. If anything, liquidity is something that regulators specifically Band of Indonesia is very much important. So far, they have been doing a great job with regard to making sure the liquidity is ample and stable. I hope that answers your question.

Thank you, Boby. The next question will be coming from Shan from Principal Asset Management. [Operator Instructions]

Can you hear me?

Yes, we can hear you clearly.

I have a couple of questions. Firstly, can you share more color, what is the mix of your loan book by floating and fixed rate? And how much you foresee the mix will be changing going forward given the policy rate could be on the rising trend in coming 1, 2 years? That's the first question.

Yes. So I think in terms of the mixed loan book, majority actually is on floating. I think it's more than 70%, 75% over actually is on floating. Those on mix, particularly is actually on credit cards, unsecured loans as well as mortgage -- some of the mortgage book. But majority, I think 80% over is actually from floating.

Would you be changing this mix going forward in the next 1, 2 years?

I don't really think so far for the time being. It depends on the development. And if we can really afford in terms of the certainty of interest rate as well because again, we need to calculate the rates on return.

Understood. And secondly, can you give more color or how do we think about setting our LDR target for the year?

LDR, I think we aspire to lowering it down -- to operate down. Currently we're hovering around 74%, 75%. So if we can reach to 80% to 85%, let's see what happens because that's as well a part of our effort to have a more efficient balance sheet.

So 80%, 85% by end of the year?

Yes. I think about 80% to [indiscernible].

We should try to get there, yes.

Okay. Another question I have is, can you share your thoughts on dividend payout for this coming year?

Yes. Pak KK, you want to take that?

Yes, what's the question?

Dividend payout.

Dividend payout, yes, dividend payout will be up to 60% of the bank's PAT.

I see. [ There probably be ] more upside in the coming years. What is the thinking behind this? Is this something like to improve the ROE?

When we look at our peers and also the payout by the different banks, right, in this market, and it's, I think, quite rare for any bank, even the state-owned bank to pay above 60%. And given that we are mostly owned by CIMB Group, right? So I think a 60% payout is something that I think would satisfy all parties I'd say.

Okay. That's great. And lastly, you have done a great job on the digital transformation. So can I hear your view, your strategy on maybe getting more partners with the major digital ecosystem?

Yes. Let me answer that. It's definitely a part of the growth of our digital transactions, including the revenue that actually is coming from the corporations with some of the ecosystem players as well as the penetration to some ecosystem players, including the Sharia area, which grows quite significantly. So that is -- you're right. So that is one of the -- our key objective in terms of monetizing our digital investment so far. Yes, it's that particularly ecosystem player penetration is coming to the top one of our objective to monetize the digital investment that we have.

Maybe on a more specific question, do you think about securing some partnerships with those players such as Shopee or Tokopedia?

Yes. Currently, even Shopee, especially Tokopedia is one of our key clients. Currently, they do several solutions coming from us as well as partnering with some of the fintechs, and it's increasing as well. So practically, we learn from them as well as supporting them to grow as well.

Next questions will be coming from Danny Goh from Credit Suisse. [Operator Instructions]

I hope you can hear me. Am I audible?

Yes, clearly, clearly.

Okay. Congrats, Ibu Lani on your new job. Just a couple of quick questions. I think most of the questions I have, have actually already been asked, but just a few quick ones. On noninterest income, are you able to elaborate a little bit on what's driving fee and commission growth? I mean, that's growing pretty fast. And just wondering whether how sustainable is that? And also, I guess the other question on noninterest income is, I saw that loan recoveries has actually been quite strong. So I would like to understand a little bit better where the recovery is coming from and which segments are you seeing more recoveries?

Yes, I'll take that. Number one is actually is coming from the affluent segment, the wealth management products ribbon that we have to engage customers more especially on the affluent segment has been done very well, executed well as well. So if you can see the growth is actually significantly high. And we expect that to continue further. And -- as well as loan recovery, yes, it is, including treasury, in fact, Pak John's area. Pak John, do you want to add more on that as well?

Okay. On the FX and [ derivative ] and for [ marketable ] securities, I guess, 20 -- for the past few years, the volatility and the availability of liquidity has helped us. So 2020 and also 2021 has been quite good for us. Going forward, in 2022, I guess FX and derivative, we will try to continue to do our best. But maybe the more difficult would be on the marketable security gain, right? Because the interest rate although we -- I guess, the jury is still out there with regard to Indonesian interest rate hike, but we do not see it going any lower, right? So as you know, if we are into bond and with interest rate costs most likely not going lower and possibly may inch up, that would be more challenging going forward, right, for the NOI part. But we will continue to do what we need to do because I guess we -- depending on the liquidity and overall condition, we are still able to withstand the banking book kind of portfolio that we need to sustain because of our CAR is still quite sufficient as and when -- if we need to take into account the interest rate volatility going forward.

Maybe just to add on, on the last point on loan -- bad debt recovery or loan recovery is really a function of how much we write off, right, on the recovery side. So I think going to 2022 or maybe 2023, the optimism of better recovery is better as the economy improves. So yes, 2020, 2021 -- 2020 was a pretty bad year for to do any recovery. In 2021, things did improve. I think we should be optimistic also going to 2022 that we would get higher recoveries from the bad debts that we have.

Okay. Got it. Can I also ask a question on the credit cost guidance as well? What sort of NPL expectation has been baked into that guidance?

Okay, you want to show that guidance?

Yes. So yes, thanks, Danny. So the guidance will be around 3.8% this year, and that's, as we mentioned earlier, that will be a part of -- I mean, the contribution is part of how we want to manage the cliff effect. So we want to manage it early and not waiting until March 2023 when [indiscernible] relaxation ended.

Okay. Got it. And just a final question on costs. And I don't know whether this is an unfair question, but your cost-to-income ratio keeps improving. And I was just wondering whether there is a level where you're kind of thinking of where you can get to based on the infrastructure that you've put in. How low can the cost-to-income ratio go?

Okay. I'll take that. Yes, the ambition is to go close to 40%, right, in the next 3 years. In 2024, 2025, we should be about 40%. Now it's a function of 2 things. One is income, right? The cost side, I think we can manage well. Really, for us is ensuring that we got income growth, 7% cost growth, 3% [indiscernible], 4% every year, that would pick us to about 40%.

The next question will be coming from Della Agatha from Syailendra Capital. [Operator Instructions]

Actually, I have written questions. Just only have one question regarding to internal sensitivity for the NIM for every 1% increase in loan growth, loan yield and also cost of funds.

Let me try to maybe rephrase the question. Talking about internal sensitivity of our loans growth?

Let me read out the question, Pak KK. I would like to know is there any internal sensitivity for NIM for every 1% increase in loan growth, loan yield and COF. Thank you.

I can't quantify that on the top of my head. But I think that I mentioned earlier that when interest rate goes up, our book is pretty balanced to take the interest rate hikes. In fact, we are trying to build more, let's say, floating rate loans that Ibu Lani mentioned, right. Driving more floating rate loans so that we can extract the uplift from these floating rate loans, because we do believe that our deposit base, especially if you look at the growth of current account at 35% and savings account touching almost IDR 60 billion, IDR 70 billion -- trillion. We have a core balance in there that is between 50% to 70% has been sensitive to rate change. So even with the rate hike, we believe we can -- we are able to maintain our interest expense or cost of deposits. So any uplift that we get from the floating rate loans will help us in deriving or getting more NII. Even though if you look at our mortgage book right now, mortgage is actually a fixed to floating kind of product where you have 3-year fix and then thereafter floating is actually behaving like a floating rate product because any interest rate hikes, we do adjustments on the effective interest rates. So in that sense, our interest rate hike, we will try to continue building more floating rate assets or floating rate loans. So I hope that answers your question. It's not really quantifying how much is the sensitivity at this juncture.

The next question -- actually, the last question is going to come from -- are going to be coming from Peter Kong from CLSA. Peter. [Operator Instructions]

My question is just one simple follow up. I think in the earlier part of the presentation, it was made to understand that especially the commercial segment, there is still some recalibration to go through. And I was just wondering what are some of the milestones specifically that as investors we can look forward to in this portfolio to sort of quantify where you would like to be for this year? Maybe just to hear some thoughts on that so that we can follow on that progress.

Yes. I think [indiscernible] can add to it as well. So we have been recalibrating the business for -- since last years actually. So I think that the progress has been very good. Even though in terms of loan growth, it's still negative, but it is as expected. So I think with some of the initiatives and transformations that we have in terms of processes and credit risk and et cetera, I think we're ready for the turnaround for commercial, even though we are still targeting not a loan growth this year. But again, I think for looking at the percentage of loans of commercial banking with CIMB Niaga, commercial will still be very important for us. So again, I think Pak [indiscernible] you want to add on commercial?

I hope we are talking about the same commercial because sometimes people look at EBB or SME also part of commercial. That area continues to grow. I think that's why we say that to the market that we're learning from the past on the mixed segment, the commercial segment our pit fall in the past has been if you lend too big of a big-ticket item to these companies because these are the most vulnerable in terms of economic shock. So what we're trying to do is that instead of doing big ticket is to do smaller ticket size to about 200 billion, 250 billion max per name. So you can imagine rates changing from 1 trillion or 750 to 250, we had to do many more loans. Yes, we do a lot more loans. That's the reason why because smaller ticket size means that the group be measured [indiscernible]. But I think within the commercial side, there's 2 segments within. There's a smaller commercial side, and there's a bigger commercial. The smaller one that's similar to SME or EBB, that's the one that we want to grow because that's where more based on fully secured or almost secure collateral-based real estate. So this is the area that we are focusing to grow in the next few years. The one that we are sizing down is the one that will be the lesser collateral security.

Thank you, Peter. So I think due to limited amount of time that we have today, we will end the Q&A session with that. Before we end the session, I would like to thank all of the directors here who have been answering the questions. Ibu Lani, before we end the session, probably you have some remarks before we end the session.

Yes. Thank you. Thank you, Saut. Again, ladies and gentlemen, thank you so much for attending the session today and for all your support for -- since last year and the years before. Again, I think as a summary, we look at 2022 cautiously very optimistic, and we expect better financial performance as well in 2022. In addition, asset quality improvement will remain one of our focus as well to expect a good return as we discussed today on ROE expectations, et cetera. Again, thank you so much for the discussions today and attending this session, and have a very good day and have a very good quarter for all of you as well. Thank you.

Thank you, Ibu Lani, everybody. Ladies and gentlemen, with that, we end our session. Stay healthy. Stay safe, and have a great day today.

Thank you.

Thank you.