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

[Audio Gap] PT Bank CIMB Niaga Tbk Second Quarter 2022 Earnings Conference Call. My name is [ Agus Sudjianto ], I will be moderating the session. Before we get started, I would like to remind you that today's presentation, which is available for download on our website, may contain forward-looking statements, which are based on our management current expectations and are subject to risks and uncertainties. Actual results may differ materially due to a variety of factors. On the call with me this afternoon is Ibu Lani Darmawan, our President, Director and Chief Executive Officer; we have also Pak Lee Kai Kwong, our Strategy, Finance, SPAPM Director and Chief Financial Officer; Pak John Simon, our Treasury and Capital Markets Director; Pak Pandji Djajanegara, our Sharia Banking Director; Pak Rusly Johannes, our Business Banking Director; Pak Henky Sulistyo, our Risk Management Director and Chief Risk Officer; and Pak Noviady Wahyudi, we call him Pak Dede, our Consumer Banking Director. As usual, we will begin today's session with a presentation from our CEO, Ibu Lani Darmawan, who will start with some remarks about our company's progress and results. And then our CFO, Pak Lee Kai, will provide a more detailed review of our financial performance during the quarter. [Operator Instructions] Now ladies and gentlemen, without further ado, I would like to turn the call over to Ibu Lani for her remarks. Ibu Lani, the time is yours.

Thank you, [ Togo ]. So good afternoon, ladies and gentlemen. Thank you for joining our session today. So I hope you're all well and healthy. As of today, we will be presenting our first half 2022 results. So to kick start the presentation, let's turn to Page 3. All right. So I'd like to share a brief update information about CIMB Niaga. We aspire to be the bank of choice for Indonesian businesses and consumers with our presence in 98 cities, supported by 422 branches, including 37 digital lounges and 34 Sharia branches. At present, we serve around 7 million customers from various segments, including consumer, SME -- which we call EBB -- corporate, and also commercial. So as a renowned leader in digital banking, our digital banking users continue to expand with 2.7 million mobile banking users and 1.7 million Internet users. So around 97% of our transactions are done through branchless banking channels. And currently, we are the second largest privately-owned bank and the largest Sharia business unit in the industry in Indonesia. So let's go to the next page. So this is some update on the macroeconomy. So we can see that our domestic economic recovery remains strong despite the challenging global economic environment. Our economic growth momentum is expected to continue on the back of increasing domestic consumption and strong investment realizations as well as stronger export performance. So several early indicators in June 2022, such as we can see here the consumer confidence, retail sales and the manufacturing Purchasing Managers' Index, or PMI, confirm that the domestic economic recovery process remains positive. So despite rising global and domestic headline inflations, our core inflation remained under control at 2.6% year-on-year, in line with rate policy consistency by Bank Indonesia to anchor inflation expectations. So moving forward, we expect the domestic economy recovery to be able to endure on increasing mobility, growing financing, as well as recovering business activities. On the next page, please. On the banking industry, as we can see that the industry continued to grow. The asset and liabilities are quite healthy, in line with the improving economic and also business activities in the market. So overall, banking liquidity remains ample to support future loan growth. And meanwhile, industry asset quality remains manageable. Banking industry continued to reduce interest rates as risk perception continue to improve. And Bank Indonesia continue to undertake accommodative policy mix to support growth momentum and also to safeguard the economic stability. So let's turn to the next page. So this is important for us to remain persistent and consistent in executing our long-term business strategy in order to achieve our aspirations to be the bank of choice for Indonesian businesses and consumers, and also accomplish our goal, delivering sustainable financial return for our shareholders. So this, our 5 key pillar strategy will just remain relevant, and we are executing it accordingly. And the pillars are, number one is playing to our strengths. So we will continue to scale and accelerate growth in our key segments, which is consumer and EBB, as well as our treasury businesses. And we are now growing our corporate segment as well after a very successful recalibration and expect to continue growing while we remain vigilant on asset quality. And concurrently, we continue the transformation on our commercial segment business portfolio. Number two is CASA, CASA, CASA. We will continue to create and also driving initiatives such as new features in our digital channels, optimizing data and analytics to provide leads for our sales bank and front liners, increasing MOCA, our main operating account penetrations, furthermore, leveraging our new technologies to improve our processes. We are also revamping our KPI and many more initiatives to increase our CASA and also CASA ratio for the benefit of efficient cost of fund. Number three is the discipline in cost management. We continue our effort in finding cost optimization opportunities, coordinated and driven by sustainable cost management unit. Number four, preservations of capital and balanced risk culture. We ensure that we are all well capitalized and run on our business prudently. So we leverage analytics and technology to manage risk supported by some risk infrastructures. Last but not least, number five, is leveraging our information technology. So we will continue to use technology and digital capability to improve our processes and differentiate our offerings to our customers for further improved customer experience, which we track through NPS. Next page, we go to financials. So ladies and gentlemen, we are happy to record semi-annual PBT of IDR 3.3 trillion and quarterly PBT of IDR 1.7 trillion. So this is the highest EBIT ever, with an increase of 16.2% year-on-year on the back of strong loan growth, increased fee income, excellent cost control and also lower credit provisions and improved asset quality. And as a result, as we can see here, our profitability measure like ROE also improved significantly, increasing and reaching 12.8% in H1 2022. We go to the next page. So in here, I'd like to share progress of one of our strategic pillars, which is play to our strength. Our focus segment, which is consumer, posted a robust loan growth of 13.8% year-on-year on the back of strong growth in mortgages, 8.5%, and auto loans 51.7%. And also happy to report that even credit card year-on-year recording positive growth of about 6.6%. Our other key segment, which is EBB or SME, recorded a healthy growth of 7.8%. And going forward, we will continue our efforts to scale and accelerate growth in this area of EBB segment by offering high-quality service, speedy, simple and also the accelerated growth on customer experience by utilizing digitalization and offering competitive pricing to our customers. With the success of our CASA ratio and good cost of fund, we are able to do it. So in addition, we will continue expanding portfolio contribution from term loan or investment loan in order to have a more balanced portfolio risk profile. Our corporate segment, which has been successfully recalibrated, posted a solid growth of 15.5% year-on-year. So we will continue to grow our corporate business by sourcing the growth from quality sectors such as top-tier corporates, multinational companies and state-owned companies, as well as cross-selling with treasury and market products and services to our customers. And for our Commercial segment, we are executing our transformation initiatives by focusing more on lower commercial segment, which is medium enterprise, which offers better risk-adjusted return as well as maximizing our footprint, branches coverage. The next page. CASA, CASA, CASA, is our second strategic pillar that has been and will always be our priority. As you can see here, as a result of our CASA strategy execution, we have a well-balanced CASA composition between consumer, 46%; and business banking, 54%, with overall CASA ratio hit 65.7%, which is actually also the highest ever. And moving forward, our efforts for improved CASA will continue. So for our consumer segment, we will be focusing to improve omnichannel banking through digital as well as nondigital and also customer loyalty or NPS, and also to enhance the branch productivity, and meanwhile for business banking segment, the penetration of Main Operating Account or MOCA and cross-selling and upselling among our key initiatives. Now digitalizing and integrating processes end-to-end and front to back with our business -- in our business banking segment will play a very critical role in executing our CASA strategy. And this is very well executed, and it gives a very positive impact to us, as you can see here, in terms of efficiency in reduction of cost of fund from time to time, year-on-year as well as quarter-to-quarter. We go to the next page. Now our effective and discipline in our cost management effort continues and also resulting in a consistent positive JAWS as well as sustainable improvement in our cost-to-income ratio or CIR. Meanwhile, our productivity indicators such as measured by revenue per branch, revenue per employee have also been improving. So going forward, we will continue optimizing our investment in the area of efficiency and productivity using the latest digital technology and capability, for example, RPA or robotic, digital workflow et cetera. Next page. Now CIMB Niaga has been developing digital banking solution to get the customers, changing it from time to time over years. So during the first half of the year, we recorded a rapid growth in our number of financial transactions in the area of digital, 130.5% increase in OCTO Mobile and 57.3% in our business channel for nonretail. Correspondingly, customer adoptions in our digital channel is also expanding. So here, you can also see -- so we can also share the contribution of transaction per acquisition done through digital channels relative to total banking, total bank-wide transactions or acquisition during H1. Around 96% of our credit card installment was processed via our digital channel, mostly OCTO Mobile; time deposit opening, 91%; mutual fund placement, 81%; and saving account opening, 32%. And mortgage acquisitions was also 21%, coming through this digital channel in H1. So all figures increased substantially compared to the same period last year. Customer digital adoption plays a very critical role in our efficiency improvement. For instance, cost per transaction through our various branches banking channel, including digital channel has been decreasing substantially, and this contributes directly to our improved CIR. We go to the next page. So I think this is the summary and highlights, ladies and gentlemen. So we are happy to share with you that in the first half of 2022, we posted a very healthy growth in our loans and revenues. On the funding side, our CASA growth remained solid with record CASA ratio, which will drive to more competitive and efficient funding costs. Cost efficiency indicators are consistently improving as a result of a discipline in cost control and cost optimization strategy. We return liquidity position and also a very strong capital buffer, which provide a sufficient room for future growth. So finally, we continue maintaining a prudent provisioning and also a strong coverage level. With that, I now hand over the presentation to our CFO, Pak Lee Kai, to share further on our financial results. So Pak Lee Kai, your floor. Thank you.

Thank you, Ibu Lani. Good evening, ladies and gentlemen. I will share further details of our first half 2022 financial performance. As usual, I'll start with the balance sheet. Total assets grew 7.6% and 1.2% year-on-year and quarter-on-quarter, respectively, on the back of a much improved loans growth. As alluded by Ibu Lani, loans grew by 9.4% year-on-year and for the quarter, increased commendably at 3.8%. Investment in bonds, however, contracted 6.9% and 8.3%, respectively, for the year and in the quarter as we took cues from the impending interest rate hikes and begin started crystallizing profits in the earlier part of this year. In Q2, we also saw a decrease in cash and short-term liquid assets as we were able to deploy more successfully some of these liquidity -- excess liquidity that we saw in the first quarter into loans and financing. So total deposits grew 6.4% year-on-year, largely attributed to CASA growth, further solidifying our success in our strategy to grow and sustain low-cost funding. At the same time, also in the last quarter, we paid out 60% dividend ratio for our second year running, right, totaling IDR 2.4 trillion. That brought our total equity down slightly to about IDR 43 trillion mark. Next, Page 17. So with the loans growth and better liquidity optimization, we saw interest rate improving -- interest income improving by 2.3% quarter-on-quarter. So in the same period as well, we saw interest expense coming down even a little bit further in spite of rate hikes in the U.S. as well as expectation of our rupiah interest rate cuts coming in the second quarter and now going to the third quarter. So noninterest income softened by 8.5% as a result of a weaker trading income. I'll share a little bit more on the NoII on Page 21. Expenses were up a little higher at 1.2%, but we are still at a comfortable level where we want to be, growing less than 4% for this year. Credit provisioning improved by 15.7% for the quarter as we see gradual improvement in credit quality in the second quarter. That brought about a PBT improvement of 12.1% for the quarter and 16.2% year-on-year. Page 18, next. So a majority of our key financial ratios look healthy. We are particularly pleased with the ROE at 13.7% for the quarter, at 12.8% for the first half of the year. Cost-to-income ratio at 43.4%, breaking the 65 -- sorry, and CASA ratio at 65% mark. Loan-to-deposit ratio becoming a little bit more optimized now, above 80% already, making better use of our liquidity. On the credit side, we also saw cost of credit coming down to 1.7% during the quarter. However, in spite of lowering the credit provisioning, we still maintain prudent provisioning, keeping our loan loss coverage on NPL and impairment both at the 215% and 115% level, respectively. Next page. Income trend looks encouraging as well, matching the performance in the first quarter and 7.3% higher than a year ago. Coupled with the disciplined cost management, we saw a pre-provisioning operating profit increased 10.9% compared to the same quarter last year. And this is at the highest level in the last 5 quarters. PBT shares a similar story line, up 13.3% from a year ago, again, highest in the last 5 quarters. ROE, again, testing at the 14% level in the second quarter. Next page, on the income. This is purely coincidental. NII in the first half of last year is exactly the same as this year. This is in spite of the loan yields coming down by 13 basis points for the quarter, right? But our cost of deposit was also down 5 basis points. However, we saw a welcome improvement in NIMs by 17 basis points for the quarter as the drag from the lower yielding assets began to shrink. Next page, Page 21, yes. For the year, NOI grew at 22.3%, a big part of the growth coming from our treasury desk and in FX and derivatives and also improvement in bad debt recovery. You'll see that also for the quarter, the trading gains and FX derivatives has contracted quite significantly. But the drop was nicely made up by the growth in other fee incomes and commissions as well as a strong recovery in the second quarter. For the second quarter, running fee income ratio was above the 30% level. Next page, please. Overall, operating expense were up 3.8% year-on-year, mainly due to higher tech costs and also attributing to personnel costs. For the quarter, we began to see a little bit of reduction in our tech costs and largely bigger reduction in other establishment costs. So cost-to-income ratio is at one of our historic low levels at 43.4% for the quarter. Next, on deposits. Deposit was 6.4% year-on-year, but it's actually lower compared to the last quarter by 2.2%. But we want to focus more on CASA, like what Ibu Lani say, CASA, CASA, CASA. CASA grew 12.1% year-on-year and for the quarter, added another 1.1%. So we truly believe in our ability to build a sustainable CASA franchise, not only in retail, but also in the non-retail segment by deepening our relationship with our customers who use our digital platform as well as users as their main operating account. Next, on loans. Loans, like I mentioned, grew 9.5% year-on-year, but more impressively, 3.8% for the quarter, right? Consumer banking, corporate banking, SME or what we call EBB here, all showing good, strong traction. And commercial banking reversed, I think, more than 2 years of loan contraction since the pandemic started by achieving a slightly positive growth for the quarter. Next, Page 25, NPL. NPL came down by 10 basis points for the quarter, again, helping maybe reduce a little bit of our provisions, bringing cost of credit down by -- down to about 1.7% level. Loan at risk remained stable at about 11.4% level. And if you add the loans that are still under COVID moratorium or repayment assistance, the number actually came down from the previous quarter, now down to 14.4%. I'll spend a little bit more time on this chart because I'm often asked why are there 2 sets of numbers? If you look at the June numbers, that's at ACTIVE, and then there's another number. The term ACTIVE here refers to the loans that are currently still under moratorium or repayment assistance, whereas the other set of numbers, as you see in June, include all loans that are active as well as loans that have once taken COVID repayment decision, but has now reverted to a regular repayment or move out of a regular repayment already. So hence, looking at the charts, maybe the simple explanation, looking at the chart at the bottom right, the total loans that are under moratorium or repayment assistance, currently stand at IDR 5.98 trillion or IDR 6 trillion, which represents 3.2% of our portfolio. But IDR 19.03 trillion of our loan portfolio that has a onetime taken or currently still taken repayment assistance is in the different table, right? So very simply, if you take IDR 19.03 trillion, less the IDR 5.98 trillion, the number will represent the amount of loans that are now no longer covered under moratorium or repayment assistance. So hopefully that clarifies. Next page, please. A quick snapshot of our liquidity position. Very clearly, both LCR and SFR are comfortably above the regulatory requirement. Loan-to-deposit ratio is slowly inching up month-on-month, providing us better NIM efficiency. Yes, as mentioned, capital was at 21.1%. RWA consumption is higher because we did grow loans by about IDR 14 trillion year-on-year. On to my last slide, just a slide on our revised guidance. Based on the performance in the first half, we thought we can upgrade several of our guidance or outlook for 2022. Loans growth at 9.4% at this juncture, we want to upgrade it to a stipulated range, but maybe on upgrades about lower end of this range, maybe up to 10%. Maybe we are seeing the improvements already. We hope to improve that maybe again towards the higher range -- higher part of this range by the end of the year. But the things that we are watching out for is really the competition for deposits right now with the impending interest -- rupiah interest rate hikes that may be expected in the third and fourth quarter. And also barring any surprises, cost of credit, they come in at lower end of 2.2% range. Cost/income ratio, I believe we are comfortably below the 45% mark and ROE will be revised to about 11% to 13% level. Thank you, ladies and gentlemen. I'll pass the session back to Ibu Lani for her final remarks and take questions thereafter.

Yes. Well, thank you, Pak Lee Kai. Ladies and gentlemen, before we go to the Q&A session, let me just share with you several remarks on our results. We continue to deliver a good set of results, surpassing our initial guidance with improved performance in most areas from revenues to operating expenses. And we expect to continue to grow momentum driven by acceleration of loan growth in our key focus segment, especially in consumer and EBB, with turnaround in commercial segment. So our asset quality is improving. At the same time, prudent and conservative positions on asset quality, capital. Funding and liquidity will be maintained. On the digital side, we will continue leveraging our digital capabilities to enhance the customer experience and also drive long-term growth and efficiency. And looking ahead, we are confident of achieving our key performance goal for this year, 2022, as we continue to advance our solid pace in some key strategic areas. So ladies and gentlemen, with that, we end up the presentation. Thank you for your attention. And [ Togo ], I think we can take the Q&A now. Thank you.

Thank you, Ibu Lani and Pak Lee Kai, for the presentation. Now it's the time for Q&A session. [Operator Instructions] So ladies and gentlemen, let us open the Q&A session. We already have one question here. Your first question is from Silvony Gathrie with Fitch Ratings.

I have a couple of questions. The first one is on active restructured loans. Now it has come down to 3.2% in June. How much of these loans that will later be downgraded and written off? And if yes, has this been fully provisioned? And on cost-to-income ratio target of below 45%, can you explain whether you expect this to be supported more by higher income or lower expenses and from what account? And also on the loan recovery on noninterest income, it is quite high in the second quarter. I'm just wondering from which segment that this is coming from and what will be the outlook for loan recovery look like for this year? And the last question is on declining asset yield. Would you share with us which segment showing the largest decline in asset yield? That will be all of my questions.

Okay. Maybe I'll just answer one by one, right? So Silvony, thank you for the questions. Active restructures is about 3.2%. Yes, it is provided. And how many percent will go back, we are monitoring it currently. But one of the most important part is that it's all fully provided. And during -- in terms of the monitoring, it has been more than 1.5 years. So yes, I think overall, as long it's all fully covered, that we are putting our full effort to work together with the customers and clients as well to get the best outcome that we can. Pak Henky, you want to add on that one?

Yes, just maybe a bit. Yes, it is correct that we have all provided to the unsecured portion, all of it. And of course, the answer will not be all of them fall to NPL, but we will keep monitoring it. And it's also segment-by-segment, especially on those that we have less collateralized, like in commercial banking.

So number two on CIR below 45%, where will that coming from? So I think from all fronts. Definitely, we are expecting higher in term of revenue as business is still growing, loan is growing, and the income is also growing. But the other part is also coming from expenses. We don't really expect a reduction on expenses because, again, we don't want to shed muscles, but the fact, right? So it's coming from both. On expenses, it's not definitely merely on cut costs, that efficiency and increase on productivity. So yes, coming from all, revenue as well as expenses. On asset yield, can you repeat that again on #3 questions?

Yes. So on asset -- declining asset yield, I was wondering from which segment that showed the largest decline in asset yield?

Okay. Overall, it's actually coming from almost all parts of business segment, because again, there are different composition before COVID and during COVID. We put more filter in terms of our loan increment, our new loans coming into our book. So particularly, during COVID, the high NIM lending is less. So we are growing -- majority coming from practically lower NIM lending, but in terms of risk is much more manageable.

Thank you, Gathrie, for the question and also Ibu Lani for answering the question. The next question is from [ Ruth Yesikasmia ] with Mirae Asset Sekuritas. Actually, [ Ruth ] is also already typing the question in the chat box. Maybe I will read the question, Ibu Lani. So the question is, I would like to ask what are the strategies of CIMB Niaga to improve the interest income and loan in second half of 2022?

Okay. Ibu [ Ruth ], so thank you for the questions. Again, it's coming from several initiatives. Number one is definitely just like what I explained earlier is actually the loan growth. So far has been very promising. So as well, we also revised our guidelines in terms of the loan growth. Previously, last quarter, we said it will be around 4% to 6%, but I think we should be able to reach between 7% to 10%. That's also one of our source of NII, and more efficient in terms of the cost of fund for our funding, our liquidity, and that's number one. And number two question is coming from? Can you say the second question again? Hold on, let me read.

I think that's all the question. What are the strategies for CIMB Niaga to improve the interest income and loan in second half?

Yes. So practically, first is actually on the loan growth, which we'll refine into more aggressive, looking at the situation and also the running rate. And the second is actually, we continue to manage the efficient cost of fund through our CASA strategy.

Thank you, Ibu Lani, for answering the question. Maybe we can move on to the next question. Our next question is from Danny Goh from Credit Suisse.

Can you hear me?

Yes, Danny.

Congrats on a great set of results. It's really strong. A couple of questions from me. I think on the asset quality side, just wondering in terms of the loans that have exited from the restructuring programs, what are you sort of noticing in terms of the missed payments among those loans?

Missed payment among those loans?

Yes, as in delinquency rates. As in default rates, once they exit those restructured schemes?

Okay. So again, currently, only 3.2% of the portfolio is still within the portfolio of COVID restructuring. Consumer practically has 0. So majority actually is coming from non-retail. So I think the game is whether they make it or they don't make it. But those who are out of profit, they go back into normal. The way that we monitor their performance is actually particularly back to normal.

Okay. Got it. And I noticed that your credit cost has fallen quite sharply during the second quarter to 1.7%. I mean how sustainable is that 1.7% figure? And is that the kind of number that you would be targeting longer term? Because I remember the long-term credit cost guidance was a little bit higher than that.

Yes. Actually, we are quite confident on that one, looking at the trend and the opportunity that we get on loan growth particularly, is one thing. And then we are monitoring the new loan growth outside of the profit restructuring portfolio, very healthy across the segment, Consumer growing very healthy. And outside of COVID also very good and opportunity still large. Most of -- as you can see, the year-on-year and equaling Q-on-Q growth is also very positive. So yes, so the impact on COC, we are quite confident that it will be better than the guidelines that we gave you last quarter. We have one in our homework, which is actually commercial. But on a Q-on-Q basis, we see the tractions as well.

Yes. I think if I can add, Danny, is that -- we are also preparing if there is any headwinds now ahead with potential rising inflation and where the dollar-rupiah are going to go. But we are actively managing this together with our risk team, running several sensitivity analysis on both areas. So yes, I think at the COC now, currently it's tamed, but we are -- let's not kid ourselves, right, what's coming upfront and so we are also vigilant towards what potentially happen in the second half or next year.

Yes. As you can see, the guidelines on COC, we don't really aggressively putting it down significantly. So it's still between 2.22%.

Okay. And is that why your loan at-risk coverage has gone up to 52%, and I guess, is the intention to keep it at above 50%?

Henky, you want to take it?

Yes. Yes. So yes, actually, we monitor more on the -- I mean, loan at-risk we also monitor, but in terms of coverage, we monitor them on the gross impact average. So we basically would like to maintain our gross impact ratio more than -- coverage more than 100%.

Okay. Got it. Just 2 more questions. In terms of net interest margin guidance, what have you sort of -- well, firstly, I think what are your expectations in terms of rate adjustments this year that you factored into your guidance? And secondly, also curious as to the compression that we've seen in terms of net interest margin year-on-year. To what extent is that driven by portfolio mix changes?

Okay. So there are several parts impacting our NIM year-on-year, which is actually lower. One is actually the impact of the COVID itself. So it's refreshed contra NII, which impacting the NIM in overall. The second is actually the compositions of the loan, which we go more into the secured loan, which we all know in terms of yield is actually much lower. So I think it's -- the majority is coming from the different compositions of loan. Now the second question is actually on the...

The number of rate hikes that you've baked in?

Henky, you want to take that?

Yes, sure. Yes. So expectation, internal economics expected to rate hikes, maybe towards the later part of the third quarter and maybe another one in the fourth quarter, so 25%, 25%. A majority of our portfolio right now, where we are growing is really in the fixed rate side. So -- but we have a pretty balanced portfolio. So the NIM improvements will come mainly on how we deploy our excess liquidity to loans, right? At one time, we have more than IDR 40 trillion of short-dated cash and short-dated investment. Now we are beginning to use some of these liquidity into loans. So loans itself will help us increase the NIM already. So the rate hike may help, but the rate hike also comes with an increase in the deposit cost. So it kind of nullifies one another, but really most of the NIM increase will be coming from loan growth. So we are expecting loans growth to continue to be strong, 9.4% now, maybe coming closer to the high single-digit number also by end of the year. So that will be the catalyst for increase in NIM.

Okay. And would -- like 4.75%, which is your top end of the range that you've guided, sort of the level that you see exit NIM out of -- towards the end of the year?

Actually, it may be better because I saw that the June number, the June number is a little closer to the 4.7%. So the only thing that maybe we are a bit cautioned of is the cost of deposits may kind of derail this a little bit. So we have to manage the cost of deposits and ensuring that we can transmit the increase in rates to the loans. So we do not know yet how sensitive, right, going forward our borrowers are with the rate hikes and when we start repricing their loans. So that's why we do not want to put too aggressive of a guidance for the year-end.

Okay. Got it. And just a final question. I was interested to see that your cost of transactions has actually come off. I'm not sure whether you are able to share this information, but just wondering whether you do monitor the cost to serve digital customers versus traditional customers? And is there a huge difference between the cost-to-income ratio for digital versus traditional?

Yes, I'll take that. So yes, that's one of the ultimate goals that we invest on digital as well, Danny. NPS, our customer experience is #1. But of course, this will also impact because the digitalization is not only on customer front, but also on the back end in terms of process. So transaction cost is actually lower. We're also tracking this, much lower. So we make comparisons on transaction costs done by the branch, and then done by call center, and then by digital channels. It is very apparent that done by digital channel cost per transaction is much lower. So that's why this is directly impacting to our CIR. Also from customer experience front, NPS as well actually improving quite significantly. We track that.

Thank you, Danny. Thank you, Ibu Lani and Pak Lee Kai. We have next question is from Harsh Modi with JPMorgan.

A couple of questions, if I may. First is on your time deposits. Have you increased the rate at all?

Increase in deposit, well, we don't really focus on the time deposit right now, it's actually on CASA. So you're asking on the rate or...

Yes. Have you increased time deposit rates at all?

No.

Actually, we are cutting rates.

We are cutting the rate.

Okay. So you are still cutting rates?

Yes.

At what point in time or what will lead you to increase time deposit rates? And how do you -- how are you looking at the competition on that right now?

Yes. We monitor the one -- first is actually on liquidity. The second is actually on our ability and the accelerations on digital lab acquisition, which is actually much more efficient. If you're looking at acquisition by digital and -- so, for example, OCTO Savers cost of fund and et cetera, is actually much more smaller. And of course, we are also monitoring the market currently and our liquidity in overall.

Yes. Harsh, if I can add, of course, rupiah and dollar is different. We are cutting more on rupiah and dollar. Dollar, very selectively in terms of how we defend and how important is the customers to us. They are not purely deposit if they have lot more other business, part of operating account with us. So there's a lot of components, Harsh, before we decide whether we defend the dollar side. But rupiah, we continue to be more efficient in terms of getting those funds.

Yes. Possibly, we differentiate as well based on the relationship with the customer, especially for non-retail, just not mass market.

Yes. So even in July, you have not seen any increase in time deposit rates at least, and you do not see that any pressure on TD side, at least as of now?

Currently, the one that we increase is actually is more to U.S. dollars. So far, we haven't really seen the need for us to increase the rate for TD for rupiah.

For rupiah, okay. The second one on coverage ratio, how should we think about this both in terms of NPL as well as impaired coverage?

Henky, you want to take that?

Sorry, come again, Harsh?

So we have impaired coverage of 115% and NPL coverage of 215%. How do we think about these numbers going forward? Should it stay at these levels? Do you think that they'll go up or down by end of the year?

Okay. So maybe I'll answer from the impaired loan ratio coverage first, because this is where we have set our appetite on coverage. So as I mentioned earlier, we want this to be always above 100%. And then with regards to NPL coverage ratio, it actually depend also on how or when OJK will do the -- at least a lifting up on the relaxation of profit, right? Because it will mature March 2023, and there is still a lot of discussion as well at the moment. We heard they may extend, but maybe for selected industry or selected area. So -- but what we can say is we want our impact loan loss coverage ratio above 100%.

So you are availing of that OJK -- so basically, some part of your restructured loan is still Stage 1, is it?

No, no. It depends on where are they in terms of our framework. So actually, most of them are in the Stage 2 or Stage 3. And that's a more -- that's why I mean that reflect in our provisioning and our coverage ratio that is quite high.

Right. So I'm sorry, I'm a bit confused. So even if OJK does not extend the March '23 deadline, it should not have any impact on you, right, if most of your restructured loans are already in Stage 2?

The impact will be on the NPL number or NPL one, because as we all know, NPL is lagging compared to -- relative to the impaired ratio, right? And that is also hinged to the OJK regulation. So let's say, I mean, extreme scenario OJK basically lift everything up on the relaxation and basically want us -- want all the plans to be back to before COVID, basically applying 3 pillars, then the NPL ratio will go up. And the NPL amount will go up, and hence, our coverage against NPL will come down. And this is like before COVID, I mean basically, the NPL and impact will become narrow.

Yes, will almost become same. Yes. Okay. Got it. But yes, that should not impact your provision number and that should not impact your impaired coverage ratio as well?

Correct.

Great. Now the final question is on the treasury book. There were some large movements in rates, and hence, they were mark-to-market in second quarter. How is the book currently positioned? How much of that is in floating? And how much of your book is in fixed rate and hence, at risk of further mark-to-market losses if rates continue to move up, then if the bond yields continue to move up, both on the dollar and the rupiah side?

John, you want to take that?

Yes. Sorry, I just realized that I ran out of battery. I'll just plug in. Okay, Harsh, our bond books are all in fixed rate. There's no variable. So with the way it is now going forward, with the expectation of interest rate going forward, we have taken a lot of our -- we have reduced our position quite a bit in the first half. So we are relatively lighter now in anticipation of the rate hike going forward.

Okay. Sorry, John, if you could just explain that a bit. When you say you have reduced positions, as in have you reduced duration on the portfolio?

We have reduced duration and we have reduced the DV01 also.

Okay. All right. So that's the point. So if we do end up getting, let's say, another 100 basis point move for whatever reason, in next, let's say, 6 months, we should not see a large negative impact on your treasury portfolio? As in compared to what we saw in first half of the year, assuming same degree of move in second half, your outcome on mark-to-market will be much better?

I guess what -- if I may put it this way, in treasury, we have the trading book and we have the banking book, by the FVOCI, AFS and HTM book. HTM, obviously, there's no mark to market. For trading, well, we need to be nimble and we have been able to do so, so far. So regardless of whether which direction rate move, the trading is trading. Those are supposed to do what they're supposed to do. On the banking book side, that would hit -- that would impact not on the income statement, but on the balance sheet. The stress testing that we have done shows that we should be able to withstand sustaining the interest rate hike as per what we have in our scenario.

Right. And how about -- I'm also assuming you would be getting a lot of -- especially given your regional footprint across the group, you may be getting a lot of flows as well, especially hedging flows. Is that true? And are you also benefiting a lot from customer flows on the treasury book right now?

Yes, you're right. We are cooperating very closely with our regional office, some in -- from KL, mostly from Singapore, which we have been getting a decent amount of offshore flow, especially for the government bonds. So that actually help us with regard to the reduction of corporate side. The internal sales is the side that has picked up to replace the corporate side that has been lacking recently.

Got it. And if I may, just sorry, I have asked too many questions, but the last one. If we do end up getting rate hikes, what is your ability to pass on that rate hikes to your borrowers? And there are the 2 things here, which I'm concerned about. One is the sensitivity in terms of regulatory or government we are getting into elections in 18 months' time. So what is the sensitivity on that? And second, from the resilience of the cash flows of customers, are there certain parts of the book where you worry that if you pass on the rate hikes, it will end up creating some sort of asset quality or debt servicing issues? So just broadly, if we do get, let's say, 50 bps hike, how much of that can you really pass on to your customers?

Yes. Maybe I'll answer that as well. So yes, probably it depends on how much will be on the rate hike. The point is that in terms of liquidity, in terms of cost of funds, I think we are quite efficient. And again, it will be going back to the compositions of the loan. Probably NIM will be impacted again. And then your questions about how it will impact our NPL. And usually, we are quite nimble looking at the situations on what kind of a loan that we would like to bring into our book, right? Whether that will be impacting our NIM and et cetera? Probably. But again, one of the key for us is actually our cost of fund currently, which is actually -- that's quite efficient. And looking at the type of loans that we have, I think that should be okay. But you're right, that will be impacted to the NIM. And related to elections, nobody knows what happens, Harsh. Yes, I think...

No, no, sorry, just to clarify. So the question was, if rates go up, your cost of funds will probably go up a bit. But can you pass on that higher rates to your customers or probably not? Does your NIM go up on higher rates or flat or down?

So it depends on how much will be the rate hike.

Let's say, 50 basis points in second half of the year.

Yes, I think we should be able to do it. Some of our loan is actually under the high-yield loan, definitely, yes. But those within -- so for example, in terms of corporate, we need to be very much selective. Might not be all.

I think what -- if I may add with what the government is doing -- regulator, I mean. They are trying to reduce the excess liquidity by increasing the reserve requirement also by selling some government bond back to the market at the rate that is acceptable, yield that is acceptable. That should also alleviate the need for banks to have to scramble for loan that may be still choppy here and there going forward, right? So MBI, what they are doing, keeping the interest rate, the BI 7-day reverse repo at the current level, although we shall see later today with the 75 basis more expected from the Federal foundry going. That would really put BI at a very tight spot. That would mean the interest rate differential of only 100 basis, which is record low, right? So BI mainly to increase the BI 7-day reverse repo as it has also indicated by increasing the 1-month rate from 3% to 3.5% already. So when that happen, I believe all banks will do the same. They will have no choice but to increase the funding price. And to a large extent, I would think the cost should be able to be passed to customers. I would be of the opinion that we should be able to maintain the NIM.

Yes. I can add to John. I think we already passed on some of the dollar hike to some of our customers, obviously, and even though our cost of fund dollars may not necessarily reflect that. So I'm confident that from a business perspective, we'll be able to pass on these rate hikes unless the whole banking industry goes crazy because of competition, Harsh. But then you will see across the banking industry you will see some pressures.

We have a question from Ben Shane Lim with Macquarie.

Sorry if I missed some of this earlier, but I want to better understand that upgrade to your loan growth guidance. What is driving your change in appetite? It sounds like you're being a lot more aggressive, but at the same time, also the underwriting quality seems to be more focused on secured. So I'm just trying to figure out what's prompting that and whether there's some demand side drivers there that you're responding to?

Yes. I think -- as a base, we are positive about the progress in the market. And again, if you're looking at the market share, we are still having a lot of opportunity in that area. We have been building our structures and our capability in frontline services, products as well as sales. So we are actually capitalizing on those. And with the improvement of NPS, customer experience, we are also getting a lot of referrals from our customers, whether it's corporate and noncorporate. So practically, we are riding on the positive opportunity then practically.

Okay. Could you give some color on the corporate loan growth, what sectors is driving that? And is that sustainable? You probably have some view on the pipeline for corporate.

Okay. Lee, you want to take it?

Thanks, Ben. I think just a few things, right? Maybe you also know when we spoke to other Indonesian corporates and when we spoke to them, the optimism is there. And when I speak to them, I think some of them are saying that their EBITDA or their performance is really either back to pre-COVID level or some of them are exceeding pre-COVID level. So that really brings the optimism from our clients in terms of where they're going to go going forward. But what we've seen here is a combination of rate hikes coming in and also the higher commodity price in the first half, Ben, that really the more savvy corporate customers probably will take this opportunity to raise financing. As we can see, there's a robust rupiah bond issuance. There's a lot of them trying to go into market and secure their funding in the first half. And we've seen a lot of -- in our pipelines also that will be coming in, in the second half, right? So it is more because they are trying to secure the funding before the rate goes much higher in the future. Secondly is that because of higher commodity price, most of them, we see there's a higher working capital needs, Ben. So this could be -- will last throughout the year because I know the commodity price has come off, but all we have secured some of the drawdowns, I think post the end of this year. So we will see that we are optimistic. I think on the corporate side, the demand continues to be strong, at least for the Indonesia customers.

Okay. And would you just a bit of color on the sectors that are driving the growth, the demand here?

Yes. For at least for CIMB, on nonretail side is that we see growth in all sectors, to be honest, right? And the few sectors that we don't see growth is in this area that probably still weaker and is still recovering, and we are very, very selective in that sector, mainly like real estate and hospitality means, hotels, right? These are the portfolios that we didn't see growth. But otherwise, everything else is growing across the board. But we see a lot of growth in our books is on the manufacturing side, Ben. This is across all sectors in manufacturing, including FMCG. And we also see growth in obviously, Ibu Lani, in the multi-finance companies and BFI, because the consumers are more bullish. So we've seen there, we are supporting that growth. And also, we see significant growth also in the logistics side, Ben. So many sectors in essence.

Okay. And just to wrap it up, should I see this as you increasing your risk appetite being more aggressive in underwriting?

Well, we are being disciplined. I think we have lay out where our growth focus in the future. Obviously, we want to continue to grow in the SME sector. And then for the corporate sector, we are focusing on the top-tier multinational and some selective SOEs. So we are kind of still very prudent in terms of lending to the mid-corp side of the corporate.

And particularly, we are just sharpening our strategy in terms of the portfolio loan growth, but we don't really put -- we don't really change the risk appetite into, say, for example, getting more risk coming into the book, not yet.

Yes. So we haven't seen any suppresses in the corporate side in the past 1 year, so knock on wood.

Thank you. We still have one question from the chat box. This is for Ibu Lani, yes. I will read for you, Ibu Lani. The question is from [ Joseph Sinai with Tidal Price ]. It is about CASA, CASA, CASA. The question is, as you have mentioned, CASA got underpinned a lot of the success. How much of the improvement in CASA is because of things you have been doing in the last 12 months versus longer debt initiatives? To what extent can other banks look at what you are doing and be able to catch up over the next 12 to 18 months? That's the question.

Well, thanks for the question. It's a very good question. So I don't really think that CASA is actually a short-term game. CASA is actually a long-term game. This is the investment that we have been setting in CIMB Niaga for a couple of years, even before COVID. We invest on digitalization and then revamping our KPI mindset and et cetera. And so I think that's the fruit of those years of investment and as well as within the DNA of everybody in CIMB Niaga. But if we are quoting for the last 12 to 24 months, for example, there is the great growth in terms of operating account. As you know, during COVID, we are very vigilant, and we are filtering all in terms of the asset products. But our front line team is actually -- we are not getting -- we are not putting less efforts in terms of CASA, including for non-retail. So we are looking at the growth related to CASA, especially for CA, for operating accounts that we presented before, it's huge for the past 12 to 24 months.

Okay. Thank you, Ibu Lani, for answering the question. I think there's been no further questions. And before we end this call, I would like to turn again to Ibu Lani for your closing remarks.

Thank you. So ladies and gentlemen, again, I would like to thank you for today's session. So again, CIMB Niaga, we remain positive about our progress towards our target this year and also, again, but even prudent and cautious to monitor the situation in the country. So again, thank you so much, and stay healthy.

Okay. Thank you, Ibu Lani. Ladies and gentlemen, with that, we end our session for today. Thank you for joining the call. If you still have any questions, please reach out our Investor Relations teams at our e-mail, [email protected]. Again, thank you for joining the call. Stay safe. Have a good day. Thank you.