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

Good afternoon, everyone. Welcome to PT Bank CIMB Niaga Tbk Full Year 2023 Earnings Conference Call. My name is Teguh Sunyoto from CIMB Niaga Investor Relations, and I will be moderating the session. Before we begin, I would like to remind everyone that today's presentation may include forward-looking statements that are based on current management estimate and are subject to risks and uncertainties. The actual results may differ significantly due to a variety of factors. I believe by this time you should have received the presentation material for the call, e-mailed by our Investor Relations team earlier. If not, you can access the material on our Investor Relations website, investor.cimbniaga.co.id. With me today, we have 5 members of our BOD. First of all, we have Ibu Lani Darmawan, our President, Director and CEO. We have Lee Kai Kwong, our Strategy, Finance and SPAPM Director. And then we have Pak John Simon, Treasury and Capital Markets Director; Bapak Rusly Johannes, our Business Banking Director; and last but not least, Bapak Henky Sulistyo, our Risk Management Director. And as is usual, we will begin today's session with a presentation from our CEO, who will share some updates on the company strategy, and followed by a more comprehensive review on the financial performance during the year by our CFO. During the Q&A session, all participants of this call will have the opportunity to ask questions directly to our management team. You can register to ask question at any time during the call by typing your name and your company name to the host in the chat box. And when the presentation concludes, we will open your line so that you can speak and ask questions directly to our management. Now without further ado, I will hand over the call to Ibu Lani for her presentation. Ibu Lani, the time is yours.

Thank you, Teguh. Good afternoon, everyone. Thank you for joining our call for earning 2023 CIMB Niaga. Since we are still in February, I think for all of us and all of you who celebrate Chinese New Year, Happy New Year. And we hope this Year of the Dragon will bring us happiness, good health, as well as prosperity. So, again, without further ado, I will start the presentations on the next slides. Teguh, can we go back to about CIMB Niaga? So, I think you're very familiar with these slides. I'm not going to go through it, but one that you can really see is actually the growth on our customers. So we have 7.6 million customers now, and slight change on our distribution cities, which we have larger in term of coverage. So if we go to straight to banking industry, I'm not going to go through the macro highlight because I'm sure that you know better as well. So the banking industry, a big note on the situations last year that loans grew larger -- higher compared to the deposit growth, which actually increased the market LDR. And cost of fund, if you see the cost of fund part, is rather getting more expensive while loan rate or yield was overall practically stagnant but some even lower than, yes, which creates a NIM compression further in the market. But the best and positive outcome last year is actually in asset quality. You can see here has improved with the NPL ratio in the market in industry reached 2.4%. So if we go directly to CIMB Niaga. Okay. So let me go through the updates on strategy. As you may be aware, for the past 5 years, we have been executing our Forward23+ strategic plan as the integral part of CIMB Group F23+. So this year, we will be -- it will be the final year for Forward23+. And let me refresh some of the things that we have done related to the 5 strategic priorities. Priority #1, playing to our strength, and we'll continue to accelerate the profitable and quality growth by reallocating our capital into the areas with the highest RAROC or return, such as on consumer, SME, quality corporate, as well as the high-return risk capital businesses, which we successfully increased the share of loan coming from retail up to about 45.4%. On the priority #2, expanding CASA franchise. We continue to focus on growing CASA, particularly CASA from retail segment. Regardless that, market growth on CASA is actually rather below -- rather in low percentage last year. So we'll continue to accelerate CASA growth by aggressively expanding our retail customer base by leveraging our digital capabilities, as well as the ecosystem partnerships that we have through our physical network and focusing our shares as well in the second tier cities. Our CASA ratio -- the result is that, our CASA ratio has grew to 63.9%. Priority #3 is discipline in cost management. Our bank has prioritized cost control and will continue to do so for a couple of years. So we foresee more cost optimization opportunities in the area -- in several area and the future improvement in our cost efficiencies as well. Leveraging, again, even on the operating side, leveraging our capabilities in digital and data analytics. And as you can see, our cost-to-income ratio improved year-on-year and remain 45 -- below 45%. Priority #4, preservations of capital and balanced risk culture. Consistent effort on capital preservations and risk culture has resulted in higher capital ratio and better risk indicator over the time. As you can see from the data as well that resulting a healthy CAR and further improve our asset quality where our COC hits 2% actually is a huge improvement in these areas of asset quality. And last but not least, priority #5, leveraging information technology. We will continue to leverage the technology and innovations to improve our customer experience and digitize our business model. The way we work where our digital capabilities is actually directly contributing to our ROE, which hits 15% last year. So, again, this is the final year of Forward23+. So we are currently working with our team to develop our long-term strategy to achieve our ambition for the next 5 to 6 years. I think our strategy is still very much relevant and applicable today, as indicated by the improvement in all the long-term performance key metrics shown in these slides. Let me share with you the journey versus 2019. So under Pillar 1 on the left side, the loan contribution from the high RAROC retail segment, including SMEs, rose by 6.4% to 45.4% compositions last year compared to 2019, which was 39%. So we are aiming for increased contributions beyond 50% within the next few years. Under Pillar #2, our CASA ratio expanded by 8.5% for the past 5 years. So last year, we ended up 63.9% versus only 55.3% back then in 2019. Under Pillar #3, cost-to-income ratio, CIR, declined steadily by 4.2%. So we hit below 45%, 44.8% last year compared to 49.1% back then in 2019. And under Pillar 4, our capital ratio has increased by 2.6%. We ended up with 24% last year versus 21.5% back then in 2019, despite we are also distributing 60% of our profit to shareholders in the form of dividend. Meanwhile, our asset quality, as indicated by NPL ratio nationally, has significantly improved even below -- even compared to below pre-COVID level and end up last year in 1.96% NPL compared to 2.8% back then in 2019. Now under the last pillar, Pillar #5, our effort and investment in technology and customer-focused innovations have resulted in an increase in digital transaction penetration from only 23.8% back then in 2019 to 70.2% in 2023. And also -- this also help us to grow our customer base, especially in retail, last year 2023 by year-on-year 25%. The next page. Now moving on to full year result highlights. I'm happy to report a record high net profit in 2023 of IDR 6.5 trillion, which was primarily driven by a mix of balance sheet growth, sustained improvement in asset quality, which is the best effort and well managed operating efficiency. Then in term of asset growth, our loan growth was slightly higher than our guidance last year. I think it's thanks to the healthy growth in our corporate segment as well, consumer, SME and quality corporate. Our strategy to accelerate customer acquisition through digital, as well as partnership also resulted in a very notable customer base growth, especially in retail. So we hit 25.2% customer base growth. This will serve as the basis and the engine for our future expansions of CASA. Now as we continue to focus on profitable and quality growth, our NPL has improved further to only 1.96% back in 2023, which is actually below pre-profit level from 3.6% in 2022. So our portfolio derisking strategy, as well as a prudence, risk and capital management approach, I think has bore fruit resulted in higher capital ratio of 24%, which is -- I think, it's in comfortable level, much higher than regulatory requirement and also above our target. And finally, we still have 1 year under Forward23+. We have accomplished some of our 2024 aspirations a year ahead of schedule. So our 2024 COC aspirations was 1.5% and we achieved 1% COC in 2023, and our 2024 ROE aspirations was 15% in 2024. And again, I think we achieved 15% in 2023. So if you go to the next page? So I think 2023 was a positive year for CIMB Niaga as we recorded the highest annual net profit ever, IDR 6.5 trillion, which is actually an increase of 28.4% versus IDR 5 trillion back in 2022. So we'll continue to deliver our commitment to create value for our shareholders with ROA of 2.6% and double-digit ROE of 15%. All of this will allow us to increase the distributions to our shareholders, while at the same time, our CAR, or capital adequacy ratio, remains healthy above our target. The next page. So our leadership in digital banking services have proven to be essentials and differentials in serving our customers. It is critical that customer engage more with our digital platform for better customer service, customers experience, as well as also good cost per transactions which contribute to our CIR. Now as you can see from the left-hand side of the slide that the number of digital financial transactions done by our customers through digital channel, whether from OCTO Mobile and OCTO Clicks, has grown almost 5x in the past 5 years. Subsequently, digital transaction value has also increased to almost triple in 2023. Now our digital channel is also important for our business growth. As you can see on the right-hand side, online saving account opening through our digital channel grew 3.6x in the past 3 years, while online account opening now contributing to almost half of all our total saving account opening. So we'll continue to invest our capital into technologies and innovations to further enhance our digital capabilities for better and better customer experience. If you go to the next page? Now that was the 2023. So looking forward to 2024, we expect our loan portfolio to conservatively grow about 5% to 7% the guidelines for 2024 with renewed emphasis on profitable and quality growth in consumer, SME and selected corporate segments. Meanwhile, on the NIM guidelines, we expect to be in a range between 4.2% to 4.1%. And with an optimized loan portfolio, we expect cost of credit to be healthy between 1% to 1.1%. And the next is actually CIR, cost-to-income ratio, which we expect to remain below 45%. And overall, on ROE, we expect to improve between 15% to 16%. So I think with the peaceful 1 round elections just done recently, we are hopeful that 2024 will still be providing us the opportunities to continue to grow profitably. Now I will return the presentation -- I will turn presentations to Pak KK for further more detailed financial results. [Foreign Language] Pak KK.

Thank you, Ibu Lani, and a very good afternoon, ladies and gentlemen. Welcome to the full year 2023 results briefing of PT Bank CIMB Niaga. I'll kick it off with the balance sheet. Go to the next page. Yes. The size of our balance sheet grew about 1.6% in the fourth quarter and 9% overall year-on-year. For the quarter, asset growth were primarily anchored on a healthy loans growth of 3.8% and was slightly offset by some strategic reduction in bonds investment by 1.2%, as well as lowering overall cash holding by 7.3%. For the year, you will see that we have shifted about 24% of the cash and short-term funds we had in excess in 2022 into perhaps higher yielding assets. You can see that our primary investing in more marketable securities and particularly government bonds. In the fourth quarter, particularly towards the close of 2023, we did face some challenges in sustaining the CASA growth momentum. CASA declined by 4% in the fourth quarter as naturally clients sought higher yields for their deposits. Then that shift resulted into an 8.9% growth in TD. So in spite of the CASA challenges or setback, overall deposits remained stable, relatively stable, inching up by 0.3% quarter-over-quarter. For the year, deposit grew at 3.8%, CASA showing a stronger traction, up 4.3% compared to time deposit at 3%. Next page to our P&L. So in the fourth quarter, NII contracted at 5.6% attributed to a 2.1% decrease in interest income and that was also accompanied by a 2.9% hike or increase in interest expense. And when compared to the same quarter in 2022, interest expense surged quite high by 52.6% surpassing the 9.8% gains we had in interest income, resulting in a 9.6% decline in NII. This trend cut persisted also throughout most of last year with interest expense for the year increasing 58.8% compared to 2022 far outpaced that 16.7% growth that we saw on the interest income side, leading to a marginal decline in NII of 0.9%. On the NOI side, felt a little better. Fourth quarter did see a decline of 1.9% and 12.9%, respectively, when compared to the previous quarter and the fourth quarter of 2022. For the year, we felt better gaining 0.8%. So with the weaker net interest income in the fourth quarter, total operating income declined 4.7% quarter-on-quarter and 10.5% compared to fourth quarter of 2022. For the year, operating income came in slightly flattish, declining 0.4%. So where we have done really well is our continued improvement in operating -- operations efficiency, bringing down quarter-on-quarter by 3.4% the expenses and lowering 9.7% versus the fourth quarter of last year and for the year also we saw achieve -- we will achieve much lower operating expenses, reducing our operating expenses by 0.6% and help us maintain a positive job to reduce our cost-to-income ratio. Consequently, pre-provision operating profit was lower by 5.8% in the quarter and 11.2% lower versus the same quarter from a year ago. For the year, PPOP was lower by 0.6%. So a lot of earnings dynamic continued to shift into the direction of improving asset quality. That has led to the much improved provisions or cost of credit provision. Expenses came down -- came in lower in the fourth quarter by 8.6% and a very significant 77.2% lower from -- compared to the same period last year. And for the year, total loan loss provisions were reduced by 47.4%. That actually held up pretax earnings growth to 27% to IDR 8.36 trillion. And like what Ibu Lani mentioned, this is a historic high for CIMB Niaga. Over to the next page on key ratios. Maybe I'll just focus on the right side of this table on the year-on-year key ratios. You can see that all except maybe 1 -- all except 1 of this ratio have shown green, which is good. Few notable ones, ROE actually surpassed the 15% level. Cost-to-income ratio at 44.8% in spite of the tough operating income, and more impressively on the asset quality trend, NPL ratios down to 2.0 and LAR, which includes the special mentions and restructured loans, has come down to 11.2%. And ultimately, that translated into a cost of credit of 1%. So with the cost of trending down, we saw the risk adjusted NIM, while NIM was challenging. But the risk adjusted NIM did improve by 52 basis points to 3.36%. So all these ratios that you see here can outperform our guidance to the market. But you will see also that 1 challenge that we have is to turn around the compressing NIM. It has been steadily coming down in the past several quarters, but the compression in the fourth quarter do have an element of seasonality in there. I think what we did not anticipate was the bigger than usual increase in deposit costs. But we do not foresee that the funding costs will remain elevated going into -- deep into 2024, and we will kind of normalize each quarter as we move along in 2024. Maybe we go to the next page. Yes, so this 2 charts basically show the challenges that we have in NII. So the NIMs fell from 4.69% to 4.40% year-on-year. So that also you saw the decline in NII very evidently, really by the cost of funds, which is the purple line you see there, 11.91 (sic) [ 1.91% ] to 3.04% in 2020 -- between 2022 to 2023, while the year-on-year loans yields, while we have improved our loan yields, but it wasn't keeping pace with the increase in the cost of deposits or cost of funding. As mentioned earlier, the greater-than-expected competition that we saw in the fourth quarter, especially on deposit costs, were the main reason for these compression. Then next page, please. NOII, please. Yes. Okay. Overall core fee income commission did well in the fourth quarter, up 16.7%, and for the year, sales likely up by 0.1%. We did have some one-off fee commission takeouts in the first 2 quarters of this, causing the year-on-year number to be relatively flattish. But if you look at the other lines, the Treasury business, especially a risk taking business, had some volatilities in there. Income from derivative products and bonds investment were largely mixed in the fourth quarter, with derivatives taking a hit, coming down, basically going to a negative territory, but a strong bounce back on the marketable securities or bond side, which was up significantly, giving us $345 billion in revenues. For the year, the same 2 lines, we saw it decline 22.2% on FX and also 12.7% on marketable securities. These are actually pretty strong numbers already because we have such a stellar year in 2022. The year-on-year difference in percentages came a lot bigger. It looks a lot worse than what it is. Loan recoveries -- maybe go back to the previous page. Loan recoveries for the fourth quarter was lower compared to the previous quarter, but for the year, we did much, much better in overall loan recoveries, up 52% and that brought the overall NOII, non-interest income better by 0.8%. Okay, next. Operating expense continued to be well managed, lower by 0.6% year-on-year. There was an increase in personnel costs of 5.8%, but every other expense lines and establishment expenses, tech, as well as admin costs provided us a good offset to reduce the overall expenses. This was really attributed to a lot of structural cost takeouts we had in the previous years, such as branch reduction, ATM optimization, EDC optimization, as well as getting a little bit more efficient in managing tax provision, really helped drive down the OpEx for each of the last quarter, resulting in the overall reduction year-on-year on the total expenses. Now on loans. Okay. In the fourth quarter, actually we saw the biggest growth in loans in all 4 quarters last year, improving 3.8% and driving the year-on-year loans growth to 8.5%. Good to report that -- happy to report that all 4 key segments achieved positive loans growth in the fourth quarter. And looking at from a year-on-year perspective, loans growth were led by corporate banking and SME, up 11.7% and 9.5%, respectively. It's also good to note that our commercial banking post our portfolio derisking exercise that we have undergone over the last 2 to 3 years, has now began to see some growth, up 4.0% or 4% in the quarter, 3.9% in the year. Consumer banking also recorded a growth of 6.9%, spearheaded by that auto business, as well as the growing unsecured lending business. But the competition in loan pricing has slowed down the growth in our mortgages. Deposit, Ibu Lani shared a little earlier already. I did also make mention of it a little bit earlier. CASA contracted 4% for the quarter as we saw the migration of CASA in time deposit so causing time deposit to be up 8.9%. So this resulted in CASA ratio actually coming down to 63.9%, not showed here. Yes, at the high, we were about 67% level. I think it was the last quarter. So most of the growth in deposit really came in the Sharia funding, up 13.7%. Next page to asset quality. Perhaps the most significant positive impact to our franchise came in the form of a consistent improvement in asset quality. Just look at the 5 bars on the screen here. This is after maybe 3 to 4 years of driving a balanced risk culture, we now can see a steady reduction in NPLs, special mention get 1 restructuring balance, which sums up to about 11.2% of the loan at risk compared to, let's say, 15.1% just a short 12 months ago. With the better asset quality, what we has done is, translated into a much lower cost of credit and perhaps also arriving more to a steady state of cost of credit as we go into the next 5 years of our planning strategy. Okay. Overall, you will see here the coverage is also very, very comfortable with NPL coverage coming close to about 300% already. Coverage on impaired loans, right, is also above 100% and on the loan at risk more than 50%. And finally on liquidity. Our liquidity and capital adequacy position remain very strong as mentioned by Ibu Lani, LCI, NSFR, way above our regulatory requirement and CAR surpassing the 24% level already. This is my last page. I will hand the session over back to Ibu Lani for final remarks before we take questions.

Well, thank you, Pak KK. So before we begin with Q&A, I'd like to make a few remarks about our results and our strategy going forward. So we continued the progress in the execution of our strategy centering on the first one is actually accelerating the new customer acquisitions. I think we have been successfully increasing our customers. That's the basis of our growth for the instrument for CASA growth further through digital, as well as the ecosystem partnerships and market share penetration in selected Tier 2 cities across Indonesia. So currently, we have identified 16 cities which provide a good pool of growth for us. The second is actually expanding our CASA growth by amplifying the digital adoptions and engagement to expand retail, as well as operational CASA coming from non-retail. The third one is growing profitably and then going through profitable and quality loan portfolio in targeted segment with the emphasis on return, RAROC. Then continue to optimize our loan portfolio mix as well along with the enhanced asset quality processes that we have a good risk appetite, proactive risk analytics and optimum credit risk portfolio management, which I think we are good in it to improve further on the asset quality, lower cost of credit and also elevate the risk adjusted NIM. And then, of course, very important to maintain operating efficiency amid the investment in the future growth will continue and including as well to navigate within the challenging high interest rate environment and continued discipline in cost management. We stay on track to accomplish our long-term strategic aspirations, which are aligned with CIMB Group Forward23+ strategic plan and continue the business activities and earning growth momentum in 2024 with higher ROE expected above 2023 level. So that brings my presentation to an end. So we can go to the Q&A. I'll go back to Teguh. Thank you.

Thank you, Ibu Lani and Pak KK, for the presentation. Before we go to the Q&A, let me remind everyone in this call, if you want to ask a question, please type your name and company name in the chat box. We will then open your line so that you can speak to our management directly. So we already have some name here, registered to ask questions. So let's begin with the first question from Samuel Woo from MIDF. Samuel?

Congratulations for your great set of results. I got a couple of questions. My first question is, in terms of ROE. I see that you've reached a pretty good level at this point, and you've given your guidance. But I'm just wondering, from this point on, are we just going to look at organic expansions. Or are we looking at inorganic expansions to boost it? Like, do you have anything in mind getting more profitable segments or starting up bad debt banks and something on those lines? That's my first question.

Okay. Let me take that. Samuel, yes, we have the appetite to do, not only organic, but also inorganic. But it depends on whether we have the right points and the right price as well for us. But yes, we do have the appetite and look for, not only organic, but also inorganic.

Is there any specific segments you are targeting or bad debt banks? Or is it too early to say at this point of time?

I think that will be across some of it here and there. It depends on whether it will fit with our growth plan as well.

Okay. So, Sam, I think you may be also looking at analyzing the Group as well, where we see some bad banks in there, right, bad banks in there. In Malaysia, we have 1. In Thailand, we have 1. In Indonesia, we do not have 1. Maybe to your first question on segments, yes, I think we will look for opportunities. Like what Ibu Lani mentioned, any opportunity that comes along, it can be a bank or certain segments, or multifinance, or even community banks, I think if there's opportunities, we will definitely take a look at it. Bad debt banks, Indonesia, we do have quite a sizable bad debt Indonesia. So it's not beyond our ambition to maybe look at these opportunities as well.

Okay. Maybe for my next question, because I look at Page 12 of your slides and I see your digital transaction value in your saving account opening just really ramped up a whole another level this year as compared to the past years. I'm just wondering what actually drove this. And is this run rate sustainable in the next couple of years? Are we expecting more of a normalized growth?

Yes. You're right that we have several new initiatives last year, which actually -- some of it is actually partnerships with several of our digital partners and the others is actually leveraging further on our capability of digital, say, for example, a seamless straight-through process for account opening, which from time to time we manage to have even better and better UI/UX for customers. So to eliminate some of the discrepancies and process of -- some of the process block here and there. So I think in term of UI/UX, we are getting better and better, but majority of the increment is actually coming from our partnerships.

Okay. So I think it's safe to assume that we can sustain this level of growth in the next couple of years.

Yes.

Okay. Got it. Okay. Maybe my final question, quick one, I'm sorry if I missed this, but maybe reiterate your asset yield outlook for the moment because I understand one of your BUKU 4 competitors, there was talk on them perhaps being forced by OJK to increase their LD ratio. I'm just wondering what are the effects on the banking sector as a whole. And whether you guys will be hit by it?

You're asking about LDR?

Yes. Okay. So if I'm not mistaken, one of the BUKU 4 banks in Indonesia, I don't know how -- I don't know what the update is told to increase their LD ratio and something along those lines. I'm just wondering if there's going to be some -- if the other banks are going to see some effect throughout the industry in terms of asset yields because they're probably going to price more competitively or something on those lines. Is this something that we are looking for?

Yes, I think we just had a meeting with the regulators recently, but I think they're also happy with the progress and including the loan growth that we have. So I think the situation is a little bit different because as presented, our LDR is also on a very efficient and healthy level. So from regulatory point of view, we are also considered as contributing directly. So with the LDR, about 85% to 90%. So I think that it's different compared to certain bank in BUKU 4.

Yes, the next question is from Jason Kentjana from STAR Asset Management. I think Jason has also typed the question in the chat box. Let me read for you, for Ibu. Can you explain further on the expectation of declining NIM despite aiming for higher contribution from consumer and SME segment?

Yes. Let me answer this by Jason, that as explained by Pak KK previously. So if you are looking at Q-on-Q, the NIM decline is rather seasonal and we hope it's not permanent. It is, again, on Q-on-Q basis. And we have some point that it's coming from lower yielding bonds and rapport to fund the bond book in the year-end. But there is -- we see a path to recovery when we focus more on CASA and rebalancing our loan portfolio as well. So we think that we can ramp up and jack up some of the NIM on quarter-to-quarter basis. And I think we consciously and explained by Pak KK previously as well, we're consciously focusing on asset quality that we held some of the key accounts loan pricing rather low, yes. So some of it is actually by design last year because again, we book a loan growth of 8.5%. Asset quality, we're focusing on asset quality because at the end of the day, on bottom line basis, the cost of provision will be much higher. So we're consciously focusing on asset quality. We take a benefit. So fundamentally, we can see from this adjusted NIM was actually improving on year-on-year basis. Does that explain?

Pak Jason is here.

Yes, okay. That quite explains. And I also have the second question. Previously, one of the management focus for loan growth is from auto loan, if I'm not mistaken. And throughout the ending of 2023, we see that auto loan -- sorry, auto sales is actually slowing down. But your auto loan continue to grow, even accelerate by the end of '23. Maybe you can share a bit on your strategy to achieve this and going forward?

Yes. One of our strategy actually is -- the other part is actually to take the benefit of NIM. As we know, the NIM come from auto business is actually quite rich, quite good practically, right? So this is one of our key loan growth. The reason why that we can grow much larger compared to the car sales, because the car sales that you are looking at in the market is only comprising from new cars. Our business model in auto, through our [ CNAF ] subsidiaries is actually divided into new cars, used cars and refinancing. So if we are looking at those 3 elements and contributions for auto loans, we are not directly impacted by the lower car sales in the market because practically 60% to 70% of our book is actually not depending on new car sales in the market.

The next question is coming from Rahmanto from Stockbit Sekuritas. [Foreign Language]

Congratulations for the results for [indiscernible]. I would like to ask regarding your OpEx because I think one of the most decreasing is the other expenses in Q-o-Q is reduced by 21.5%. Can you give us any color on regarding this will continue or what's the expectation for next year?

Pak KK [Foreign Language] on OpEx Pak KK.

Yes, sure. Pak Rahmanto, yes. So when income is not seeing the kind of growth that we want, what we really need to do is, look for opportunities where we can optimize expenses. And we do have multiple expense lines that we have to comb through to really look for -- we have some of the things we can really tighten the belt on, and that's essentially what we did. I think we have started doing a lot of cost optimization for a number of years already. So what we have seen in terms of branches, 450, 470 branches maybe from 2 years ago now to 411 branches. ATM down about 500. These are sort of structural cost takeouts that we are now yielding the benefit of already, right, in terms of all these establishment costs that we had to -- that was saddling us in the past. So whether we have opportunities to keep this going into 2024, 2025, I think a lot of the low-hanging fruits we have taken now really have to look a little bit deeper, study our expense lines a little bit harder to continue to find opportunities to keep the expenses low. We do foresee that there is still opportunities for us to keep a manageable operating expense. But one thing that we are always investing on is really on our people. You can see here that personal expenses continue to move up 5.8% in spite of a lower headcount, right? So I think this is really investing on the future of the franchise, actually. Tech costs a bit suppressed in 2023, but some of these may catch up also in 2024. So where we are really optimizing is really on the establishment costs, right, which things includes rental, repair and maintenance, relooking at it, combing through it with a fine tooth comb to really find for opportunities. For us, it's really coming to within what we can afford to do given looking like a fiscal control really. If we have more revenue, we'll spend more. If we have less revenue, we will spend less. That's the mantra we have.

Maybe I also have another question. Do you guys have any updates regarding the spin-off of CIMB Niaga Sharia? Or is there any updates regarding the regulation?

Yes, on spin-off, again, it is regulations, then, in fact, it's that our Sharia asset is actually above IDR 50 trillion. So we are not preparing ourselves for the spin-off. We have no choice for the time being, actually, Pak. So we are preparing it.

And then the next question is from Yong Hong Tan from Citi.

Maybe just 2 questions. I think maybe looking at your loan growth guidance and coupled with your very strong capital position, how are you thinking about your dividends for this year? And I think in terms of payout ratio, last couple of years was over 40%. Do we see that higher for this year?

Yes, so I think last year dividend is actually 60%, Pak Yong Hong. So we expect -- Pak KK, you want to add as well? So we expect the same this year, but it will go through some of the AGM first, of course. KK, you want to add?

Yes. So we will likely propose this to our Board, right, same as last year. As you may also know that Group CIMB has also proposed quite lucrative dividend payout. So we are glad to be contributing to the overall group dividend payout.

Okay. Got it. Maybe second question on asset quality. Are you expecting NPL ratio to continue to improve? I think obviously that improvement, 80 basis point that supported a lot of your improvement in coverage ratio. And also, a flop to that is, do you have any breakdown between your expectations for underlying cost of credit? And how much offset from the use of your excess provision coverage?

Yes, I think our NPL ratio right now with 1 -- below 2%, 1.96% is actually much better than the industry in Indonesia. So, our guidance with risk appetite more to retails and, as we speak, auto, for example, of course, in term of NPL will be slightly larger. So our guidance for this year on NPL will be around 2% to 2.2%. So we still think that we can swallow that. We have done our homework last year, did the best that we can to suppress the quality so we can really grow in the area which give us a good return.

Okay. Got it. Do you have any...

[indiscernible] COC.

Yes.

COC on...

Just wondering if you're in --. Yes, sorry.

I can help Ibu Lani. Hong Tan, on the COC, as Pak KK and Ibu Lani mentioned earlier, this -- we are really aspiring to maintain this as our state to state COC 1% and on bank-wide basis. And in terms of by segment, actually it's quite natural that a pause on the business banking and because we focus on the good quality top tiers on each segment and on each industry, the winner of each industry, so cost below 1% on the bank-wide and the rest is depending on the product. So, of course, if it's unsecured, then the COC is higher and it's more to secure, then it's also even below 1%. So plus and minuses, we have so-called in 2023, we found the balance and then the optimum level in the [indiscernible] and returns. So I hope that gives you some idea about our COC by segment.

Okay. Got it. Just wanting to clarify. So you're saying that the underlying credit cost is 1% and if you decide to utilize your very strong NPR coverage ratio, so the COC can potentially be lower than 1%. Am I understanding that correctly?

No, the COC on bank-wide basis, this will be like our steady state. So we would like to maintain at this level, of course, plus and minuses every year, but not so far from 1%.

Yes, I think with the risk appetite, which is good because we have proven that we are able to manage it with 1% super healthy. But I think we still put some room for us to grow, especially in certain segment in retail and SME, as we know with a slightly larger in COC. So I think the steady state right now is actually between 1% to 1.1%.

Okay. Got it. And maybe just one quick follow-up for your loans growth guidance mid- to high-single digit. Is that driven by basically continue to be very conscious about asset quality and also looking at planning costs, potentially you want to manage it better? And if these are maybe what you are considering into the second half of last year, if the funding cost environment improve, especially with the reserve requirement ratio cut, then you could potentially be more aggressive in funding? It is the right way to think about your guidance?

Yes. Well, the way that we take a look at that is actually for some segment like corporate banking, for example, with the political year this year, that will be a little bit of a wait and see, even though it's a good part that election is only 1 round, but the new President and the cabinet will only be announced by Q3. So I think we toned down the loan growth on corporate banking while we remain bullish actually, and put quite a high target on retail and SME. But plus and minus, it toned down milder the loan growth up to the 6% to 8% practically.

The next question is from Ben Lim from Macquarie.

Well done on a good set of results. My first question is just around the NIMs to that 4.2% to 4.4% assumption. And also, you talk about increasing your consumer mix here. How much of that NIM compression is coming from your yields being blended down? And how much are you assuming is coming from further yield compression going forward?

Yes. Well, actually in term of mix portfolio, we don't really think that we can really price up right away looking at the cost of fund for certain segment like corporate banking. But, again, their composition is actually corporate banking is about 30% of the book. So it will also taking an impact of the NIM will not be elevated as fast practically. So the yield down, but we don't expect the yield will be coming down again in overall across the business segment. But one of the things which impact NIM will be on the cost of fund because the way that we look at it, cost of fund will start to come down only in Half 2. It seems that it won't happen on the Semester 1. It will only gradually happen in Semester 2. While we still want to maintain accept quality, we don't really think that we can really pass on the whole increment of cost of fund to 30% to 40% of our loan book currently.

Okay. Coming to the funding side of the business, do you think your pace of customer acquisition is sustainable? I mean, what number do you think is realistic? And also, could you give us a bit of complexion on the kind of customers you're onboarding? I think it's come at a time when maybe there's a lot of churn in the industry. Are you seeing good customer stickiness? What kind of demographic are you acquiring?

Yes. Well, it's good question, Ben. So we have been investing in increasing number of customers, especially in retail. But we have to mind that a retail customer has a low average ticket size. But it's a good CASA, most of the time it's very sticky, sustainable and practically low cost of fund. So we can't really get it right away. But even investment for retail CASA to grow, some of it is actually majority is actually coming from a partnerships that we have with the other companies. Some of them is actually fintech, some of them is telco. So we can see the traction. But it is only starting mid last year. So if you are asking me on, who are the customer onboarding, majority are retail and some of them, so for affluent retail is also an SME customer, practically majority of them is cross-sellable to SME customers. So I should say 30% of the base, 25% to 30% of the base is actually not a source of good cost of fund CASA, especially, but also cross-sellable to retail and retail loans.

Okay. Just a quick one on the loans growth. If I'm hearing you correctly, you're saying it's the political environment that's capping your loans growth this year. You're not liquidity constrained at this point in time. Is that a fair inference?

Yes, I don't think that the liquidity is actually the one which actually dragged the loan growth into the mud. But I think 6% to 8% is quite decent enough. Well, of course, compared to 8.5% this year, but let's see. But one of the things that we calculated will not be a high growth like last year. Say, for example, last year corporate banking grew more than 11%. We don't really think that corporate banking, which contribute more than 30% of a portfolio will grow double-digit this year. We talk to our key clients, mid-clients as well, it seems that, that will be the moat. So we will be depending on retail with much lower ticket size, but profitable, right, but profitable. So we put between 6% to 8%.

Just to add some color in terms of the -- on the business banking side, I think last year is a great year in terms of asset growth for business banking or especially in corporate bank because as you're all aware that the cost of funds in Indonesia are relatively lower than versus in offshore. So we've seen a lot of companies in Indonesia refinancing their bond capital market through bank loans. So there's a lot of huge large syndication in the market. Secondly, also the offshore dollar that usually people tap into dollar offshore now they're coming onshore. But as we see as cost of funds are steadily rebalancing, we foresee that, that opportunity of huge growth as well, Ibu Lani mentioned, probably will be milder this year. And it's also coupled with a lot of the companies are front-loading their CapEx last year because any expectation of political year this year. So we're seeing this mix. So that's why I think we kind of put a modest target for corporate bank this year.

Okay. Just a quick last one. What have you assumed for rate cuts into your NIM assumption?

Pak KK, do you want to take that the calculation?

So I think the events of perhaps the last maybe 12 to 18 months as well. It's highly unpredictable what the rate cut will do to our NIMs simply because it's the ability for us to transmit all these rate cuts into our deposit pricing and our loan pricing. So if I look at the last 6 -- last 12 months when interest rate were rising, right, you can see that the transmission to deposit was much faster. So using that same rationale, if rate cuts come in, the transmission of deposits is much faster, then NIMs will improve first, because in the loan side we did not really catch up to the interest rate hikes. So similarly, if the rates come down, we will not be repricing loans down also. So in that sense, I believe our NIMs will improve, even though we have models that we have built around on the sensitivity of interest rate hikes and cuts. But generally, we have to look at what the market, how the market is behaving to really find out how will we transmit into our NIMs. So I believe it will be the reverse of what we've experienced with the rate hike. With the rate cut, I think cheaper funding will come in first, followed by a gradual decrease in loan rates.

So sorry, just to summarize that. Rate cuts will be an upside risk to your assumption? Or it's...

I think it's upside opportunity, the same rationale as what has happened in the rate hike statement, yes.

We have a lot of questions from the chat box and also participant raising hand, but totally, we have few more minutes. We only have 4 minutes. So let me open 1 more line as a final question today from Melissa Kuang for Goldman Sachs.

Just perhaps, maybe just a follow up quickly in terms of the loan growth again. As you mentioned, in terms of the corporate banking, you don't see much because of political risk. But can you also explain a little bit as what those have asked questions earlier, whether or not this is also due a little bit to the competition you are seeing from the BUKU 4 guys being a bit more aggressive in terms of the loans growth that is causing this problem? Also, in terms of the funding cost, how do you think, or how could we see the system actually having a much stronger deposit growth? Because deposit growth, as you shown in your slides, in the system has been falling over time. What will it take, in your view, to help this turnaround? And also, for yourself then, what will we be able to see to kind of ease your funding costs and help you grow your deposits a bit more strongly?

Yes, probably on loans -- on corporate loans, Rusly can add, but loan growth versus BUKU 4, if you are asking us whether there's a competition, it is. It's a tough competition, actually. Last year, well, we still managed to grow 8.5%, I think it's not bad. And in corporate banking, still managed to grow above -- a little bit above 11% last year. But yes, if you are asking on who will be the biggest competitors, especially in term of pricing, is actually BUKU 4. So we have to manage in such a way to go through in such area, including for retail, for example, to second tier cities where the competition will not be head-to-head. But just like our presentations today, mortgage growth is actually low compared to previous years. It's only about 3% because of those competitions. But looking at the price, we have to take a more making sense approach that it's not profitable, we don't take it, right? So, I forgot who will make some of the points in the beginning that regulators is actually asking BUKU 4, especially to increase their LDR and mortgage, for example, is one of the things which is actually straightforward, much easier. That is the area which actually BUKU 4 is focusing on. So competition from BUKU 4, yes, it's also one thing. So we push for retail and SME to second tier cities and for corporate for this year. So we have to lower down the target. On funding growth versus the market, I think last year our funding growth is actually a half market. Market is only growing about 3.2% to 3.3%. We are growing about 3.4% to 3.5%. So, yes, the growth is actually milder, but I think it is also reflect -- it's a reflection of what happened in the market that lending growth is actually higher. And the competitions on third-party fund is actually, as we know, several instruments, including the export placement to Bank Indonesia and et cetera, which is happening to the industry. So I think we are not the only one who is actually facing the challenge in term of deposit growth. So on the funding -- but we put much aggressive funding growth this year that we tested some of the initiatives that we have on CASA last year starting Semester 2, especially in a second tier city, it works quite well. So I think we hope to execute that on full year basis this year, especially to manage -- more manageable cost of fund from CASA. Rusly, you want to add on loan?

Yes, you perfectly say, Ibu. I think I echo what you said. I think we have been blessed corporate bank with the bank cost of fund structure, who is very, I would say, very competitive. They're supporting us to grow last year. I think we -- but at the end of the day, when the competition is too fierce, we just need to be disciplined to walk away on loans that are priced way below market. So that kind of combination of continuing to work to be disciplined in terms of cost of fund, which is the focus this year for us to really comb the market and look for the best, most efficient cost of fund and then continue to be disciplined in terms of cross-sell. I think we can earn, not only true asset growth, but also true fee income generation. So this year will be our focus on fee income generation through our trade bank guarantee, LCs, all export-import businesses. So there are a lot of things that we can leverage on to achieve the revenue target by the bank.

Can I just ask one last question on your capital? So you mentioned your payout ratio is 60%, but I guess, with the loans growth that you are coming in at and the ROEs that you are producing, the capital is still likely to grow. Just wanted to understand where your comfortable level of CAR would be or CET 1 is. And also just wanted to understand in terms of the notional capital as well. Are you still wanting to grow that to grow your corporate book a bit bigger? Or is it not the case? Can we just have a little bit more understanding on, are you -- is it possible to funnel up more dividends to the group?

Pak KK, you want to take that?

Sure. Yes. So we are at a 24% CAR right now, right? We look at a couple of things, right? So we do have a target capital ratio, which is a lot lower than what we have right now. So we are actually comfortable with anything Tier 1 capital, anything above 18% for us, it's very comfortable already. So we also have to, at the same time, juggle the expectations of the regulators and also, how we measure against peers. So it's a balancing act that we have to take into consideration. Obviously, with higher amount of capital, we have higher capital ratios that we have will give us some liberty, also some leeway to the first question that Samuel asked earlier. Do we have ambition to invest in organically? So the additional capital do give us this opportunity to do it locally, as CIMB Niaga, not as part of the group. So, yes, I think this capital ratio at 24%, it's a level that I think may be ideal for us at this juncture.

I think that will be the last question for today, because, yes, we have reached our -- the end of the session. But before that, let me request Ibu Lani to share maybe the final remarks for the session.

Yes. Well, thank you, Teguh. So thank you, everybody, for our joining our session today. So I think in overall, we are happy with our performance last year that we have implemented and executed the F23+ quite good. And several decisions, conscious decisions that we made to maximize our profitability in 2023. So, again, thank you for all your support and stay healthy, and happy. Thank you.

Thank you, Ibu Lani. With that, we conclude today's session. Please contact our Investor Relations team if you have any further questions. Thank you so much for joining the call, and have a wonderful day. Thank you.

Thank you, everybody.

Thank you, everyone.