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

Good afternoon, ladies and gentlemen. Thank you for participating in the presentation of PT Bank Danamon Indonesia Tbk Full Year 2020 Financial Results. For this event, Danamon's Board of Directors and also Adira Finance President Director are joining us through MS Teams from their respective locations. Before we begin, I will explain some information, analyst, colleague, investors. We encourage participants to join this event via laptop with headset. Please ensure that you are joining us in a closed environment or room with stabilized Internet connections. Do not access MS Team link with more than 1 device during the conference. And participants, voice access will be put on mute during the presentations. For the Q&A session, please note the following points. [Operator Instructions] Now to start the event. We invite Yasushi Itagaki as President Director of PT Bank Danamon Indonesia Tbk to deliver his remarks. Pak Yas?

Okay. Thank you, Reza. Can everyone hear me?

Yes, we can. Yes.

Okay. All right. Thank you very much, valued analysts and investors, for joining us this event where we present full 2020 financials. Moving on the next page. As a reflection, the year 2020, we are really tested how good we are for balancing act on execution of new growth strategy and adoption to the new normal. The simple answer is we made it. The details are from our CFO, but I just touch on key highlights here. On growth strategy, our enterprise banking grew 25% loan while increasing NPL coverage up to 200% bank-wide. CASA grew 18% through enhanced productivity in our branch, active digital channel acquisition and more transactional accounts acquired in enterprise banking. Treasury income grew more than double. On foundation building, this is critical for long-term sustainable growth. We invest in people and digital, and this started to improve the productivity. MUFG collaboration is being proven, increasingly proven as a key driver to sustain the growth. At the same time, we set our top priority as the safety of our employees and operational resilience to adapt to the new normal. This is all for the sake of helping our customers. As an example, we diligently engaged in credit restructuring. And now -- as of now, 41% of our restructured loans are back to normal condition, and this is particularly notable in Adira Finance. Next page. Next page, please. Yes. Okay. Here, we elaborate a bit of the MUFG collaboration status. We -- as you see in the bar chart on the top left, we gain pace in growing synergy, loan and CASA last year, and we diversified the arena of collaboration as we penetrate deep in the ecosystem of our MUFG value chain. Well, a couple of notable deals are presented here on the right hand. We acquired that status of solely providing the data finance to Daimler dealers, both passengers and commercial cars as a result of collaboration with MUFG, Singapore and Frankfurt. The bottom one, we won so-called the end-to-end property financing to Daiwa House, the leading Japanese property developer from corporate loan to mortgage by working with MUFG Tokyo. These are kind of typical example of what we are capturing the value chain, but of big international customers, corporate customers in Indonesia. Let me stop here, and I pass it to Pak Mul, our CFO. Pak Mul, please?

Thank you, Pak Yas. From [indiscernible], let me share full year 2020 financial highlights. So we start with the high line. Basically, we have the strong foundation for 2021 through CASA growth, healthy asset quality and record high coverage ratio. So on the loan side, we see that, excluding Adira Finance and run off portfolio, total loan grew by 6% year-on-year, and as Pak Yas just mentioned, just now that EBIT loan grew by 25% year-on-year. Supported by the collaboration with MUFG, of course, and Adira Finance, loan disbursement grew by 67% Q-on-Q. So we see some good news from the auto financing, basically. On the liquidity and funding, CASA grew 18% year-on-year and CASA ratio stood at 52.3% at year-end. Our granular funding increased by 12% year-on-year. And currently, we have ample liquidity shown by our healthy RIMs, LDR and RDR. On the asset quality, NPL ratio improved 20 basis points year-on-year to 2.8%. Loan loss coverage reached record high at 20% and corporate restructured loans stabilized at IDR 29.3 trillion, of which 41% representing of 65% of debtors are already entering normal payment. On the profitability, PPOP improved 14% Q-on-Q, cost-to-income ratio improved 290 basis points year-on-year at 48.5% and our treasury income doubling up from last year. Next, on the summary of our balance sheet. So overall loan and trade finance portfolio, overall is lower by 6%. However, as I mentioned earlier, that excluding Adira Finance and run-off portfolio, total loan grew by 6% year-on-year. The excess of fund are impacted in the government bonds, and this explains why our [indiscernible] increased ineffectively compared to last year. Lower equity was due to implementation of new accounting standard in the beginning of 2020 and also the dividend payment. Next, Page 7 basically is a detailed 2020 income statement. So we see the lower net interest income compared to 2019 was mainly due to lower loan balance and also higher balance in the lower-yielding asset in EB. We were able to defend some of our NIM by having a better cost of fund through CASA growth. Loan noninterest income was also mainly due to lower credit-related fee. However, noncredit-related portion are quite resilient and able to grow significantly. Banca and wealth management and treasury-related activity success trading and sales. OpEx is fully under control and lowered by 12% compared to last year. With those, our PPOP slightly lower compared to the same period last year. CoC increased significantly compared to last year. And as you are aware, that near to year-end, we increased the CoC significantly to improve our capital ratio. Next, on the key financial ratio. So the NIM lower by 90 basis points compared to last year due to lower loan balance and also higher loan composition in EB FI. As mentioned earlier that we were able to compensate through better cost of funds during the year. Cost-to-income ratio stood at 48.5% or improved by 290 basis points compared to last year, with UUS stood at 51.4% last year. RIM and RDR remained low at 85% and 84%, respectively. And currently, we still have quite ample liquidity. NPL consol growth at 2.8%, additional CoC and further increased our loan loss coverage level to 20% at year-end. And our LAR, loan at risk, coverage stood at 15%. CAR remained strong at 25%. Next, on the liquidity. So as I mentioned earlier, that we have ample liquidity supported by strong CASA growth. So CASA year-on-year grew 18%, and this result in our CASA ratio improved to 52.3%. So last year was 47.1%. So we are continue focusing on the granular funding, which is consists of CASA, TD RDR from customer -- consumer and SME. So compared to last year, our granular funding grew by 11.6%. As I mentioned earlier, our RIM remain healthy. And currently, we have ample liquidity. Next, capital is very strong, solid capital structure, bank-only 25.6% and consol at 25% and almost 100% in the form of Tier 1 capital. Next, on the retail loan composition and loan growth by 4 major engines of growth being Adira Finance, enterprise, SME and consumer. So as mentioned earlier that our EB FI had a very strong growth compared to last year at 25%. And a lower balance on the Adira Finance and SME was mainly due to weak demand in the auto financing and [indiscernible]. Next on the Page 12. On the information on the auto financing. So we see some encouraging recovery of the auto financings. On the left chart, showing Adira finance -- new financing versus industry, both for 2-wheelers and 4-wheelers. And on the top right chart, showing the Q-on-Q loan disbursement, both for 2-wheelers and 4 wheelers. So as a result, it's quite encouraging, and we hope this trend will continue going forward. Despite the strong growth Q-on-Q, the loan repayment is also significant, and this is the nature of the auto financing industry. And this resulted our loan balance of lower loan balance in the -- compared to last year. Next. So this is the picture of our noninterest income, showing the strong growth in wealth management and treasury-related activities, which is like trading and sales. So our treasury income increased from IDR 430 billion in 2019 to IDR 979 billion in 2020. So it's double basically. It contributed from the activities like training and sales. Total noninterest income in full year 2020 represent 20% of total income, which is pretty much similar to last year, but the beauty of the fee income is the shift of composition from the credit-related to noncredit-related, such as like wealth management and treasury activities. So we are no longer depending on the credit-related, if you like. Next, on the asset quality. So improved asset quality combined with the stronger coverage ratio. So we see that our NPL improved by 40 basis points compared to the same -- compared to last quarter or 20 basis points compared to last year. Special mention, slightly higher compared to last quarter and NPL coverage ratio stood at 20% at the end of the year or improved significantly compared to the same period last year was around 113%. Next. On the provisioning, we see that we have proactively provisioning, increased provision to have -- and better-than-expected corporate restructure loan trend. So we see that the CoC stood at 4.7% and significantly increased compared to last year at 3.4%, and restructured loan profit-related stood at IDR 29.3 trillion or lower compared to the third quarter 2020 at IDR 31 trillion, if you like, so -- and 65%, our 752,000 debtors have already entering normal payment in December 2020.So the progress on the restructuring is showing a good result. Next. On the -- basically, this is the -- my last slide, the details, loan and NPL by sector. That's all I have, Reza.

Thank you, Pak Mul. Ladies and gentlemen, we are now entering the Q&A sessions. For those of you who haven't had a chance to write, please write your questions in the Q&A chat box feature. [Operator Instructions] And then I will read each questions raised by participants to the respective BoD member. Now the first question is probably for Pak Adnan and Pak Dadi from Ferry Wong from Citigroup. Hi, you have decided to increase coverage ratio by a lot in 4Q '20, a bit of different direction post 2Q and 3Q '20 results. Do you expect that your NPL or your write-off will be relatively high this year, thus you decided to increase the credit cost significantly in the 4Q '20? Pak Adnan or Pak Dadi?

Sure. Why don't I start and then maybe Pak Dadi can take it forward. So I think if you look at the numbers that we are showing on the slide, our credit cost increased twice this year. One was actually in Q2 and then again in Q4. And I think the questions that we have been asking ourselves this year is with obviously the stimulus program, the restructured loans in our portfolio for COVID, reaching up to IDR 30 trillion at one point. And the fact that it can be maintained under stage 1, the overall provisioning requirement or ECL requirement from a model perspective is still not large. That said, we do realize that there are several clients or many clients who may, in the coming years, may not be able to perform under these restructured loans because either their businesses have not recovered or the COVID pandemic has not sort of abated to the extent that we would have hoped. So in order to prepare for 2021, 2022, really, we've been asking ourselves whether we should accelerate our provisioning coverage, and is it more prudent as a bank to have a much higher coverage level for our NPL book and our COVID restructured book. So if you look at our coverage levels in the past, normally, they tended to be between 100% to 120%. But given the stress scenario in the country or the world, rather, we felt it was more prudent to build provisions last year to face any eventuality this year or beyond. So that is really the third process behind it. I think some of the good news is the fact that our COVID restructure portfolio, which was up to IDR 30 trillion is now down to about IDR 18 trillion, IDR 19 trillion, the number shown in the screen. So obviously, a lot of it has gone out of a restructured period. So those are clients who are now going either back to a normal repayment program, although some of them may have gone back but are paying late. So they are now in the SM bucket, and you see a slight rise in Q4 in SM or they have flown to NPL. So I think in order to prepare ourselves for this year, and add OJK stimulus ends now by next year, we thought it was more prudent to build our reserves and have a much stronger balance sheet than at the beginning of the pandemic.

I think that follow-up on -- further on the question of whether there will be a sizable write-off, right, or whether there will be write-offs or not in 2021, basically. Well, on this issue, obviously, at this stage, right, we are still not able to quantify exactly, right, how big the write-off will be because at any rate, it will depend on how well the overall ability of these borrowers who are currently under the COVID-19 restructured accounts, right, to actually return to normalcy. But as what Adnan has mentioned, right, and as our provisioning level actually shows, we are actually taking steps to revamp basically, to prepare ourselves in a good position to manage that. So even if there are write-offs, basically, right, we will be able -- we will be in a good position to deal with that because we will have -- we already have sufficient provisioning level as the coverage ratio actually shows.

Okay. Thank you, Pak Adnan, Pak Dadi. A bit of a follow-up question. What was the write-off that you allocated in the 4Q '20?

So our write-off number that I have is that, for 2020, it was about 4.4% or about IDR 6.1 trillion. If I compare that to 2019, we were at about IDR 5.7 trillion or 4%. So just to remind everyone, we do auto write-off for our retail portfolio. So data finance, cards, mortgages, they have a certain DPD counter or days past due counter, and they move out auto write-off. Obviously, our Adira portfolio is the largest part of our write-off book. But just to show you that the year-over-year impact is from about 4% to 4.4%. So it's not a drastic increase despite the fact that we have taken large provisions this year -- last year.

Okay. Thank you, Pak Adnan. The next question is from Laurensius from CIMB. General -- provide general outlook on loan growth and its drivers, NIM guidance and CoC for fiscal year 2021. Pak Mul?

Maybe I can take this question. I think the -- as you may aware that, today, I had revised the prediction of loan growth for 2021 and become low single digit ranging between 4% to 5%. I think in our side, I think we are also thinking about -- we are also predicting about also single digit and low single digits. And we hope that the auto financing business would be able to increase or improve significantly in terms of the demand here. So it will depend to the demand on the auto financing as well as the [indiscernible], the SME side. On the NIMs, basically, currently, we are at about 7.4%, 7.5%. And we hope that you should be able to maintain at that level. And today, BI has also reduced their benchmark by 25 basis points. And by reducing the benchmark, we also believe that we should be able to lower our cost of fund. I know that we may not be able to respond 25 basis points directly, but we should be able to reduce our cost of fund further.

Reza, maybe I add some of the color in terms of the loan growth. As Pal Mul said, yes, we are expecting single-digit loan growth. However, in terms of the composite of our segment, last year, clearly, it was -- our enterprise and banking really led the loan growth, right? But after such high loan growth last year, the growth in our enterprise banking would become moderate -- a bit moderate, while we expect a recovery of the loan growth in SME and consumer. So in total, it's a more balanced loan growth than last year. In SME, for example, or Adira, I think in terms of the new loan disbursement, we have a significant substantial recovery of the new loan disbursement. But however, in both this portfolio, we need to count on the runoff and the write-off so that, as actual balance, we cannot expect a high growth. However, in terms of the loan new disbursement, we expect a significant recovery, particularly in the second half of this year. Okay.

Okay. Thank you, Pak Yas. The next question is from [ Gary ] from Mandiri Sekuritas. Sort of 2 set of kind of questions. The first one is related to restructured loans. Do you have a target of the number of restructured loans that will remain in the balance at the end of 2021? And then after restructured loans, how much do you expect that will fall into stage 3? And how much your provision for this launch? Maybe Pak Adnan or Pak Dadi can answer? And then the second part is maybe Pak Hafid from Adira Finance. Related to Adira Finance, what is the company's disbursement growth target for this year. After restructured loans from Adira Finance, how much has entered normal payment? So maybe Pak Adnan?

So let me start. So I think -- I don' think we call it a target for restructured loans. But obviously, our budgeting planning for this year's cost of credit, their underlying assumptions on how much of the restructured loans will go back to normal or would flow to SM on NPL. I don't think I'm at liberty to give those exact numbers currently. But just to give you a sense, Adira, which is the largest part of our restructured loan, with, I think, was IDR 18 trillion, IDR 19 trillion at one point, is already down to about, let's say, IDR 8 trillion, IDR 9 trillion by the end of last year. So about IDR 10 trillion or half of it almost has gone back to paying. Now I think the question is that Adira has chosen to do short tenure restructurings. So typically, 3-month restructurings. And what they are currently thinking is to stop at some point and not allow a sort of force restructuring for borrowers who are already aware, let's say, 3 restructurings. So to that extent, actually, we feel that the bulk of their restructured loan book will go back to normal paying by the end of this year. So clearly, that is the largest part within Danamon. I think we're looking at the other businesses as well, so mortgage, consumer, the risk and enterprise banking. Typically, we have been giving 6 months restructuring, and a lot of the clients who have come back now over the last 3 months for a second restructuring for another 6 months. So I think we're seeing at least 80% of the clients coming back and asking for a second restructuring for another 6 months. How many of that will ask for a third one for the rest of this year? Still uncertain. I think it still depends on the external environment. But given the fact that Adira, which is the largest part of our restructured book, is running off quite quickly where clients are going back to paying. I think we're assuming that our total restructured book will go down quite a lot by the end of this year.

Thank you, Pak Adnan. Maybe Pak Hafid for the second part of the question. What is the company's audit Adira Finance disbursement growth target for this year?

Yes. For the target of disbursement goal, this year, our target is around 30% increase versus 2020. The second point to reiterate what Adnan is saying about the restructured loans in Adira Finance, more than -- as of December last year, more than 70% of the loan has been going to a normal repayment. So we expect the number is going to be much smaller this year and going to be insignificant if there is no shock in the economic environment, obviously.

The next question is from [ Ghibran Imran ] from RHB. I think the first part on loan growth is already being answered. The second part is more related to SME. So maybe Ibu Dhany can help to answer or maybe Pak Dadi also. Is the coverage in SME segment already enough at this level? Will we see write-offs in the SME segment? And then lastly, what's the overall strategy for the SME segment? So maybe the first 2, maybe Pak Dadi can help answer. And then on the strategy segment, Ibu Dhany.

Yes. Okay. Thank you. Yes, I think I would probably, first, there was a question on the guidance for CoC that was -- that has not been responded earlier, right? So I think I'll provide some information, which will then relate to this question on SME, right, on the coverage on SME. Well, in terms of CoC that we will have this year in 2021, we believe it will remain at an elevated level although it will not be as high as last year as 2020 because of the fact that we have indeed built up a sizable reserve last year. So -- but obviously, it will not -- we will not return to our normal level of CoC this year, which reflects basically the current situation, right, the current pandemic situation. On the provision level for SME itself, it is already at a much higher level compared to before. It's already doubled up, basically, more or less reflecting the overall provision level that we have, right, in the coverage level in the bank. But nevertheless, we believe that we will need to continue increasing this coverage in the SME side. SME maybe the one where we need to beef up further our reserve more than the other lines of businesses. So write-offs, again, like the answer on write-offs will depend on the exact situation later on of the restructured portfolio. I believe on Slide 15, which is currently still shown, it is -- that our current portfolio -- COVID restructured portfolio is IDR 5.8 trillion, right? So obviously, how big will -- of this will need to be written off? It will depend later on. But like as you can see, right, even if you compare with the restructured amount, right, of IDR 7 trillion in SME [ 7049 ] by -- actually about IDR 1.2 trillion have actually returned to normal. So as the pandemic is moderating, the impact of pandemic is moderating, obviously, more and more of these restructured portfolio will return to normal. So that's basically the answer.

Maybe Ibu Dhany, can you answer about the strategy for SME?

Sure. So SME is among the hardest hit in terms of negative impact due to COVID in the industry. But in line with the forecasted growth in the GDP in the third and the fourth quarter of this year, we expect that our SME disbursement will be much better than this year. In terms of our strategy to grow SME, we are using the time actually last year, not only to restructure our portfolio, but actually to look at our segmentation. And we are going to segment -- use the segmented approach in our SME, whereby for the small SME, we have a separate business model as well as sales model for the smaller SME as well as for the medium SME. We also take the time to form partnership with fintech players. This is an area that we are exploring and further deepening. And the third one is improving our process end-to-end. So we are putting a straight through processing, developing straight through processing for our SME. So hopefully, that -- which is the aim to speed up our turnaround time in processing our loan. And the fourth one is obviously to continuously deepen our relationship with our existing SME segment, customer, whether it is through fee-based income as well as CASA.