PT Bank Danamon Indonesia Tbk (BDMN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to PT Bank Danamon Indonesia Tbk's First Half of 2020 Analyst Briefing. My name is Reza Sardjono, and I will be your moderator. With us for this event are Danamon's Board of Directors as well as CEO of our subsidiary, Adira Finance. To comply with health protocols, today, they are joining us remotely from their respective locations. Before we begin, I will provide some information to ensure the event goes smoothly. Please ensure you are in a room with stable Internet bandwidth connection. Please do not access MS Team link in more than one device during the conference. Please use headset to optimize audio when joining the conference, and participants' voice access must be on mute during the presentation. [Operator Instructions] Now Bapak Yasushi Itagaki, as President Director of PT Bank Danamon Indonesia Tbk, will present company update; followed by our CFO, Bapak Muljono Tjandra's presentation on the first half 2020 financial highlights. With that, I will hand over the floor to Pak Yas. Pak Yas, please?

Sure. Thank you, Reza. Good afternoon, everybody. Thank you for joining us for the analyst briefing on the semester 1 2020. Let me, I guess, move to the next page. To begin with, let me touch upon a couple of highlights in the second quarter. The first is a synergy with MUFG. As you see, we just passed over our 1-year anniversary in May since we became a family member of MUFG. Over the year, we are closely working with MUFG and realizing more visible deals and arrangements. By the way, let me touch on -- share with you the sort of potential scale of MUFG customer base. Just taking an example of Japanese corporate customers. There are roughly around 2,000 Japanese corporations actively operating in Indonesia. And they contribute to Indonesia by about 8.5% of our GDP output and roughly 25% of export, Indonesian export. So you are able to see the scale, potential scale of the MUFG customer base, which, right now, we are targeting and accessing right now. As a result, you see the so-called synergy loan book in Danamon grew rapidly. Now it's a size of about IDR 4 trillion and 4x bigger than the end of 2018. And these synergy deals are across many segments and products, as you see on the right-hand side of the table page, like financial supply chain, Sharia employee benefit programs, so a very wide range of products and segments that we are accessing and generating synergy deals. But one notable interesting proposition that we have is this digital partnership. This is unique because MUFG keeps investing in e-commerce and fintech players in Indonesia. And we, Danamon, are in the preferential position to capture the commercial benefit out of this MUFG's investment such as CASA, payment, credit card and et cetera. And in addition to this business synergy, we are also benefiting under this COVID-19 situation. Both Danamon and Adira Finance received strong liquidity support from MUFG on top of our already very solid and healthy liquidity position. Next page, please. Yes. The next highlight is, obviously, COVID-19, the impact. But business impact or financial impact will be briefed by our CFO, Pak Mul, so let me just highlight the nonfinancial aspects of our activity or countermeasures dealing with COVID-19. Since the beginning of this pandemic, we set up a crisis command center, which functions to ensure the 3 mandates: health and safety, business continuity and maintaining productivity. This is on daily base 24/7. Thanks to this activity, we are able to monitor our safety condition and ensure the business continuity to our customers and community. We are also quite active in contributing to the community or customers engaging with relevant government and government body and the private organization. Well, these activities are, how would I say, not financially measurable. However, I do believe that these activities or our sense of priority on these things, business continuity, safety, is crucial for us to prove that we are strongly committed on long-term growth here in Indonesia and serious to win a trust from our stakeholders, stakeholders like -- such as shareholders, customers, employees and regulators as a trusted institution. So I do believe this approach will make us prosper in the long run. Let me finish at this point, and I pass it over to Mul for a detailed briefing on business and financials. Pak Mul, can you? Pak Mul?

Pak Mul, you may put -- be putting yourself on mute still.

Okay. So sorry, I'll start again from the beginning, probably. So I will share the first half 2020 financial highlight. We see that we achieved double-digit PPOP and CASA growth despite economic slowdown. On the loan, we see that EB loan grew by 16% year-on-year, partially contributed by MUFG collaborations, as Pak Yas mentioned just now. We focused growth in the blue-chip large corporation and SOE segment. Lower loan disbursement in Adira and SME loan because of the weak demand. On the liquidity and funding growth, CASA grew 14% year-on-year, comprised of growth in current accounts by 20% and saving accounts by 10% year-on-year. Our granular funding, which is -- consists of CASA and TD regular in IDR, increased by 19% year-on-year. And our CASA ratio reached 53.2%. And we have our quite ample liquidity shown by healthy RIM, LDR and LCR. On the profitability, we have stable NIMs year-on-year. Operating income and PPOP grew 6% and 15% year-on-year, respectively. Cost-to-income ratio stood at 46%, improved by 4.4% year-on-year. And we proactively improved or increased our provisioning to strengthen our balance sheet. Next on the Page #6, on the first half 2020 balance sheet highlights. We see that loan and trade finance stood at IDR 143 trillion or lower by 4% year-on-year due to weak demand in auto financing and SME. But we were able to deliver double-digit growth in EB, which partially contributed by MUFG collaboration, as we discussed earlier. Government bonds increased significantly, partly due to the profit from the default transaction end of 2019 and CASA showing 14% year-on-year growth comprised of current account by 20% and savings accounts by 10%. Continuing on the income statement on Page #7. So we see that our operating income grew by 6% year-on-year, supported by 3% growth in net interest income and 18% growth in noninterest income, which mainly from banca and treasury activities. Our OpEx is well under control. With this, our PPOP grow by 15% year-on-year. Cost of credit increased [Audio Gap] IDR 1.7 trillion in first half 2019 to IDR 3.2 trillion in first half 2020, and we have recorded a loss on restructuring of IDR 402 billion in first half 2020. With this, our operating profits first half 2020, lower by 47% compared to the same period last year. Moving to the Page #8 on the first half 2020 key financial ratio. We see that we were able to maintain NIMs same as last year of 8.2%, cost-to-income ratio at 46% and improved by 4.4% compared to last year. CASA ratio, we mentioned that we have improved significantly. NPL increased by 100 basis points from 3.2% in June 2019 to 4.2% in June 2020. With this, our loan loss coverage increased to 117.2%. CAR consolidated also increased from 21.7% in June 2019 to 23.4% in June 2020. Next on the Page #9, on the liquidity. So here, you can see that we have quite ample liquidity, strengthened by CASA growth. We see that our RIM and LDR are very healthy, strong CASA growth and focus on granular funding. So we say just now -- we discussed just now that our granular funding increased by 19% year-on-year. Next on the Page #10 on the capital. See that we have a solid capital structure. So strong capital adequacy ratio at 24.5%, bank only, and 23.4% consol with almost 100% in Tier 1 capital. So as of May 2020, Danamon was officially announced by OJK as a BUKU IV Bank, affirming our strong capital. Moving to the Page #11 on the detailed loan composition, the left chart showing the loan composition and the right table showing the details loan growth by our 4 engines. As discussed earlier that EB loan grew by 16% year-on-year, partially contributed by MUFG collaboration, focused growth in the blue-chip large corporation and SOE segment. Lower loan growth in the Adira and SME due to weak demand. So next on the Page #12, the update on the auto financing business. So as you may aware that social distancing has impacted dealers' sales activity, and most dealer in red zone were temporarily closed their store. This obviously impact to decline Adira new financings. Hence, Adira Finance new booking in new car dropped by 52.2% and 43.5% year-on-year for new motorcycle in 5-month 2020. As a result, Adira Finance outstanding loan dropped by 7% compared to the same period last year. Continue on Page #13 on the noninterest income. So we were able to enhance our fee income in treasury and in banca. So we see the strong growth in the noninterest income, supported by noncredit related, banca and wealth management and also in treasury activities. On the top right side, the revenue composition between the interest income and noninterest income, so you see that the composition now between interest income and noninterest income is 79% and 21%, which is consistent compared to last year. Next on the Page #14, on the special mention and NPL. So we see that some improvement in special mention despite pressure on the NPL. On the top chart showing the special mention and NPL trend here, and as mentioned earlier, we proactively increased our provisioning. And this resulted improved in the coverage ratio to the 117.2%. Next on the Page #15, on the provisioning. So on the top chart showing our cost of credit in amounts and also in percentage to the total average loan balance. The bottom chart showing total restructured loan in amount and also in percentage of the total average loan balance. Yes. So next, on the last page of my presentations. So we will continue monitoring the asset quality in key sector. Yes. So with that, I conclude my presentation. Reza?

Thank you, Pak Mul. We have a few questions. I mean, it is actually the same questions from Pak Raymond from [ Verdana ]. The question is, what would be your loan at risk if it were to include COVID-19 impact? And what would be the loan at risk coverage if we include COVID-19 restructuring? So maybe Pak Adnan or Pak Dadi can address this question.

Yes. Sure. So I think you just presented the actual numbers on your previous slide on the loan -- on the COVID portfolio versus the other restructuring portfolio. So the numbers are already given there. From a percentage perspective, it's 15% versus 33%. So if we add COVID, it goes down to 15%. If we exclude COVID, our coverage ratio is 33%.

Thank you, Pak Adnan. [Operator Instructions] At the moment, there is no additional questions yet. Okay. So we have one question. "Could you explain more on the composition of your restructured loan per segment?" Again, maybe, Pak Adnan or Pak Dadi, you can address this.

So is it COVID or non-COVID?

Restructured loan per segment. I assume this is more related to COVID.

Yes. It's COVID, right? Yes.

Sorry. Go ahead, Pak Dadi, if you want to.

Okay. All right. Yes. Well, basically, the largest COVID restructuring is in -- as expected, is in Adira, right? This is in line with the other finance companies, which stands at -- at the end of June, that stands at 34%. While for the bank itself, it is at 17%. So probably, if we give a breakup, it's 17%, that's the bank without Adira, basically. But on the enterprise banking, it's -- was at 8%. While in SME, it was at 22%. So that's probably -- that probably will give you some idea.

Okay. Thank you. The next 2 questions, I think, can be sort of combined together. "Can you elaborate more on loss of restructuring. And also, do you recognize interest income on cash basis or also some accrual basis?" So Pak Mul, I think you can address this question.

Right. So basically, the loss on restructuring is largely coming from the Adira Finance. So from Danamon itself, we do recognize growth on restructuring, especially on the mortgage sides. So other than mortgage itself, the amount is quite small, basically. So in the -- how to recognize interest income, so basically, if we do not waive the interest income, so we can accrue the interest income. Yes.

Thank you, Pak Mul. Another question from Jayden from Macquarie is, Does restructured loans include Adira also or just Bank Danamon? And are there much more loan restructuring to do from here until year-end? So maybe Pak Mul can address this or Pak Dadi.

Let me -- or probably, I can address that, probably. And it was specifically about loan restructuring, right?

Correct.

Yes. So the question is -- I think the first question has already been answered, right? Basically, yes, it was in both the restructuring. It's both in Adira Finance and also in the bank. But in Adira Finance, this is a larger proportion, like I mentioned earlier. It was at 34%, while the bank is much less than that. The bank average is at 17%, bank without Adira Finance. While on the second question, whether there will be a large -- more restructuring to come, we do not believe so. At the moment, we are still -- if anything, we are still catching up in the consumer side in our mortgage restructuring, which has started a bit slow. But it's not -- mortgage is not a big -- does not account to a big portion of our loan portfolio. So it's not -- and we have also done like definitely more than half of all the restructuring that is being requested. So we don't think so. We believe it's already -- I think the peak was in May, basically. By June, we were already sloping down.

I think, Pak Dadi, just to mention, that obviously does not include any second restructuring if people want to go beyond the current -- maybe you can explain that, although the OJK allows us to restructure up till next year, currently, we are not offering in a normal case 1-year restructuring. It is normally 3 to 6 months, but some clients will go back to the original schedule after 3 or 6 months. And some may request for a second restructuring. So we will look at that on a case-by-case basis later this year.

Thank you, Pak Dadi, Pak Adnan. And the next...

Sorry, if I may add also, the number of requests has tapered down significantly and has been stable in the last 1 month. In the month of June and July, in fact, it's very, very stable and at a very low level.

Thank you, Bu Dhany. The next question is from Gary from Crédit Suisse. "Would you share the latest earnings guidance for 2020?" Pak Mul?

I think from the earnings guidance, we do recognize that we're going to have a significant provision on the assets. So -- and I think we have shared that. So we are going to deliver probably a lower number compared to last year.

Right. Thank you.

Let me add a little bit on this sort of our expectation of the -- our earnings. Basically, top line up until PPOP, preprovision operating profit, we are better than last year for the first half. And this trend is likely to continue. However, below PPOP, we have lots of uncertainties as we presented and as we are questioned. So it all depends on how soon the economic recovery will come up and how likely that restructured customers will start the repayment. So as we set sort of the restructuring tenor between 3 to 6 months, but most likely 6 months in the bank's customer, so at the end of the third quarter, we have a better visibility. But at this juncture of the time, still lots of uncertainty about cost of credit and the loss on restructuring. So that's kind of the best that we can give a color to dear analysts, yes. We closely monitor, and we already apply more prudent origination credit policy as well as we keep close communication with debtors. So in the next 2 to 3 months, we have a better view.

Yes. Thank you, Pak Yas. Moving on to the next question related to the result, Joshua from UBS. "I have some questions. First, what is the driver for the NIM decrease in Q2 '20? Second, why is fee income dropped so much in Q2 '20? And third, why savings grew 4% Q-on-Q despite lockdown and pandemic?" The fourth question, I think, related to forecast and projection, and I think we have addressed in the last question. So maybe, Pak Mul, you can address the first question.

On the -- what was the question, Reza?

The first question is on the driver for the NIM decrease in Q2 '20.

So basically, what happened in the Q2, because we also have -- facing a number of loan restructuring as well as the increase in some of the NPL customer, and that's why the loans -- the interest income is lower. And as I mentioned earlier that, the growth that we are now having is coming from the blue-chip and blue-chip large corporation and SOE company, with the loan yield is -- tend to be lower compared to the mass market, if you like, yes. So -- and that's why the NIM dropped. And if you are aware, if you get a loan and fall to NPL, you are no longer able to accrue the interest. But we were able to mitigate some of this through to the improvement in our cost of fund. So we see that the growth in our funding is slightly coming from the CASA and our granular funding. So we hope that the improvement in cost of fund will continue going forward. And further, the drop on the SBI rate will also improve our funding and also will help us in term of cost of fund.

Yes. Thank you, Pak Mul. Maybe you can add that to kind of -- or move to the third question, which is related to what you just mentioned. Why savings grew 4% Q-on-Q despite a lockdown and pandemic? Actually, there's another question, they are similar, asking how sustainable is CASA growth that we have.

So if you see the -- as Pak Yas just mentioned that the way that we are able to grow CASA, of course, the customer is quite different lately after the bank owned by MUFG will now approach the institutional level instead of to the one-on-one, if you like. So when we tap to the customer, we try to tap the ecosystem, so for example, the company, the supplier, the vendor as well as the employer. So -- and also, we were able to do this due to our digital banking. So we try to engage it through online. That's why our granular funding, granular funding meaning CASA and TD IDR that we can book through online, yes, which grew by 19% year-on-year.

Yes. Thank you, Pak Mul.

Reza, maybe -- I think in addition to Pak Mul's point of institutional approach in the funding, collaborating with MUFG, but maybe Bu Dhany would -- may be able to touch upon our core funding strategy, like sharpening the segmentation and arranging the right bundle of the products to the tailored segment with the customer. Bu Dhany, if you want to add something, color, please.

All right. Thank you, Pak Yas. So basically, on the retail, we have been focusing a lot in focusing on the segment. Basically -- recently, we just launched Danamon Optimal. So what we're trying to do -- but before launching that, we also have been trying to bundle our offering to our customer when we bring new customers into the bank. Obviously, in the month of -- at the beginning of the COVID, which is in the month of April and -- March and April, and we see a significant drop. However, the sales our front liner has adjusted quite well in the month of June toward the end of May and month of June, where they were able to close the sales through remotely, which we are going to be able to continue in the second half of the year. So this is more of a granular funding or smaller ticket size, but it has been -- we have been doing that in a more sustainable or consistent manner.

Yes. Thank you, Bu Dhany. The third question from Joshua is, why fee income dropped so much in Q2 '20 as compared to the first quarter? So maybe, Pak Mul, again?

The -- on the fee income, we have -- can you go through -- can you have the detailed fee income -- then can you show the detailed fee income, Reza? So you see the detailed -- this is the detail of our fee income. You see that credit-related is, obviously, is lower because of the -- it's because it's linked to the loan balance or -- and linked to the new booking of loan as well. So on the -- we were able to gain some advantage from the banca because of the renewal of the Manulife. And you see that this year, we continue to mix a lot of money coming from the treasury activity from our sales and trading, where in the same time, our wealth management also improved significantly.