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

Good afternoon, ladies and gentlemen. Welcome to PT Bank Danamon Indonesia Tbk First Quarter of 2021 Financial Results. My name is Reza Sardjono, and I will be your host during this event. Today, Danamon's Board of Directors and the CEO of Adira Finance, our subsidiary, are joining us via MS Teams live event. Before we begin, please observe the following. We encourage participants to join this event by using laptop and headset. Please ensure to join the virtual session in a close environment or room with stabilized Internet connection. Do not access MS Teams link in more than one device during the conference. Participants' voice access will be on mute during the presentation. For the Q&A session, please note the following points. Each question raised by participants will be conducted through Q&A box feature. Participants can start writing questions during the presentation by typing in the chat bot. Participants must inform name and company in the Q&A box when writing the questions. And I will read each question raised by participants through the Q&A box to the BoD. Now it's time to listen to the presentation of the first quarter of 2021 financial results. We invite Bapak Muljono Tjandra, as CFO of PT Bank Danamon Indonesia Tbk, to deliver his presentation.

Thank you so much, Reza, and good afternoon, everyone. So let me start with the result of the first quarter. We look at it as steady improvement supported by healthy asset quality, high coverage ratio and CASA ratio. On the loan, we see that EB portfolio grew by 11% year-on-year, supported by collaboration with MUFG network and focus on the blue chip segment. Steady improvement in auto financing disbursement. Adira Finance first quarter 2021 new financing continues showing good strong -- showing strong trend in Q4 2020 and has recovered by 20%, 22% compared to the lowest productivity quarter in 2020. On the liquidity and funding growth, CASA grew 12% year-on-year, and CASA ratio improved by 480 basis points year-on-year to 55%. And currently, we have ample liquidity shown by healthy RIM, LDR and LCR. On the asset quality, loan at risk lowered by IDR 3.7 trillion. And loan-at-risk percentage improved by 230 basis points Q-on-Q provided by improvement in special mention, NPL and restructured portfolio -- and restructuring portfolio. Loan loss coverage increased from 129% in the same period last year to 171%. And COVID restructured loan declined by 21% Q-on-Q to IDR 10.4 trillion. On the profitability, stable operating income and PPOP trend since the pandemic, OpEx improved 7% year-on-year. NPAT reached IDR 522 billion in first quarter 2021. Next, on the balance sheet, we see that CASA grew 12% year-on-year. And CASA improved -- CASA ratio improved by 480 basis points year-on-year to 55%. The excess of fund are currently invested in government bonds, and this explains our gov b increased significantly compared to last year. Next, on the income statement, lower operating income was mainly due to lower loan balance and also due to temporary shifting portfolio from high-yielding asset like auto financing in Adira Finance and SME to lower-yielding assets in EB FI. But again, as I mentioned, this is temporary. However, as explained earlier that Adira Finance first quarter 2021 new financing continued the strong trend in fourth quarter 2020 and has recovered by 222% compared to the lowest productivity quarter in 2020. Noninterest income has been steadily around IDR 600 billion to IDR 700 billion per quarter post pandemic and contributed by diversified source including credit related, banca, wealth and treasury activities, so treasury activities basically supported by trading and sales. OpEx improved 7% year-on-year. And NPAT reached IDR 522 billion in first quarter 2021. Next, on the key financial ratio. NIM lower due to lower loan balance and also to temporary shifting portfolio, as I mentioned earlier, from the high-yielding asset like auto financing in Adira Finance and SMEs to lower-yielding assets in EB FI. As growth in other area pick up, we expect NIM will improve. CASA ratio improved to 55% from 50% last year. NPL at 3.3% improved by 10 basis points compared to the last year. And NPL coverage ratio improved to 171% from 121% last year. Loan at risk percentage, including COVID restructured loans still under moratorium, improved 210 basis points Q-on-Q provided by lower -- provided by improvement in special mention and restructuring portfolio. CAR remained very strong at 25.7%. Next, on the CASA ratio, we see that the CASA ratio grew 12%. And we focus on the CASA to have to optimize our cost of fund. As mentioned earlier that our RIM, LDR, LCR, NSFR remain healthy, and we have ample liquidity. Next, on the capital, very strong capital structure as a foundation for future growth. We see that the bank only at 26.2% and consolidation at 25.7% and almost 100% in the form of Tier 1 capital. Next, on the detailed loan portfolio by our major engines. So as mentioned earlier that our EB FI continued to show strong growth through partially offsetting lower demand in other segments. We see some good news from auto financing, and we hope the good trend continue. Next, on the ADMF steady improvement trend in disbursement. So as mentioned earlier, the Adira Finance in first quarter 2021, new financing continued the strong trend, yes, and has recovered by 222% compared to the lowest productivity quarter in 2020. So despite the strong growth Q-on-Q, the loan repayment is also significant, and this is the nature of the auto financing business. And this resulted the loan balance lower compared to last year. Next, on the noninterest income, we see that Adira Finance credit-related fee has picked up in line with the loan disbursement. Noncredit-related fees have generally performed well post-pandemic. And compared to the first quarter 2021 comparable fee to first quarter 2021, banca increase of income are now amortized evenly throughout the year. Next, on the special mention and NPL, we see that, as special mention balance improved by IDR 1.3 trillion. And special mention ratio improved by 80 basis points Q-on-Q. NPL coverage ratio remained high at 171%, an increase from last year of 123%. And next on the COVID restructured loan, basically, we see that loan at risk as a percentage of total loan continues showing improvement trend from previous quarter and have reduced further by another 230 basis points. COVID restructured loan improved another 21% Q-on-Q. Next is my last slide. Basically, this is showing that we're continuously monitoring the asset quality in key sector. NPL percentage in key sectors such as trading, processing and financial intermediaries improved year-on-year and are in line and better than industry. So that's all I have in terms of the details. Reza?

Yes. Thank you, Mul. Ladies and gentlemen, we are now entering the Q&A session. For those of you who have not had the chance, please write your questions in the Q&A chat box feature. Again, participants must inform the name -- your name and company when writing the question. And I will read each question raised by participants to the respective BoD member.

The first question is by Handy Noverdanius from CLSA. On Adira Finance, how do you see the impact of the used car price drop in your asset sales recovery? Maybe Pak Hafid can help to answer.

Very insignificant impact. The price differential because of tax is not significant. And also, that is somehow compensated by the less discount from the customer. So net-net, the price changes in the market is insignificant.

Thank you, Pak Hafid. Another follow-up question from Handy is also on Adira Finance. How is the restructuring trend in the Adira Finance segment? Maybe Pak Hafid, you can also -- have to respond.

The majority of the loan, close to 80%, has gone back to normal, either paid or normal. So it's less, about less than 20% under monitored accounts.

Thank you, Pak Hafid. Yes, we have a question, Agus from Aldira. What is your view on your asset quality going forward as NPLs still increased and its coverage declined? Perhaps Pak Dadi or Pak Adnan can help to respond.

Sure. Thank you, Agus. Yes, well, actually, the -- when we see that our NPL increased in the first quarter, right, that is actually a process that we were quite conscious that, that would actually happen. That actually mainly happened, because the restructuring itself, the COVID restructuring that was allowed since last year, right, that was regulated by OJK, et cetera. As we no longer continue the restructuring, so then some of these accounts actually fell into SM and then NPL. However, we have actually increased our coverage significantly, our loan coverage significantly last year. During the whole year 2020, we increased our provisioning level by not less than IDR 2 trillion during the full year of 2020. And we continue to do so actually this year. That is the reason why you probably saw that our cost of credit during this quarter is at IDR 1.16 trillion, which remains at an elevated level compared to the normal years in 2019 and prior to that. So this is, in a way, we maintain our asset quality, our NPL level especially. We keep a close watch on it. So we believe we should be able to manage this, as the restructuring -- as we tried to manage the restructuring process, tried to cease so that it doesn't continue further basically. So yes, if you look at it, during the first quarter, there is like, let's say, our coverage seems to fall from 200%, right, to 171%. But that's actually -- probably you should appreciate the next page, probably Reza, we should move to Page 11, I suppose, right, where it shows the coverage -- the total coverage. I believe there is a loan average coverage. Is that -- okay. So okay. So loan -- I think probably from the -- we should look at it from loan at risk itself, right, whereby it has gone down. And in terms of loan-at-risk coverage, which is not shown here...

It's in ratios.

It's in the ratios, yes. Yes. So this is actually -- the loan coverage actually is at 25% level, actually. Yes, that's correct. So the loan coverage is not -- is actually -- has actually improved. If you look at the loan coverage from the third quarter of 2020, for example, or from second quarter, it's at 14.9%. And then third quarter, 13.9%. And then fourth quarter -- first quarter, we continue to increase. So this is basically a number -- in terms of coverage, you probably should look less at the NPL coverage itself, the loan loss coverage. But you should look at this loan at risk coverage closer, which it has not deteriorated. If anything, it has actually improved.

Thank you, Pak Dadi. Maybe there's a related question from Gathrie from Mandiri Sekuritas. I'm skipping ahead, but it's the same topic. For the remaining restructured balance, do you know how much will need another restructuring and how much will go into NPL?

Yes. Yes, we actually, at the moment, we have about IDR 10.4 trillion left in the restructuring. By and large, most of it, we will not continue the restructuring further. So after the end of 2022 -- at the end of 2021, most of it will be out of restructuring. With regards to the -- how much will actually fall into NPL, that is, obviously -- it's something that we are continuously trying to validate. But we believe that about 20% to 30% of that would probably be at this stage our estimate.

Okay. Thank you, Pak Dadi. Okay. The next question is for Pak Honggo. Which sector did Danamon enter in corporate segment. This is from Erisa Habsjah from Manulife.

Well, thank you, Elisa Habsjah.

Erisa, Erisa.

Erisa. So historically, Danamon is very big in the -- not big -- I think historically, the corporate banking in Danamon consists of financial institution sectors, automotive, food and beverage CPO industry, construction, wholesale and trading, automotive components, there is our main clients. There are also questions before this, the question, what do we see in the second half of 2021 and our projection for '22? I think the Indonesian government have done a very robust and a very good job. We are very confident looking at the second half. We are anticipating there is a new, what we call, demand in the loan growth. As you know, the government just published the PMI, the manufacturing index increase. Today, if you look at the news, the ADB also forecast the index will grow 4.5% to 5% for 2022. The [indiscernible] positive result. People are confident now and also the vaccinations. This is -- we've got to be careful, look at these people confident now moving around. It could be a backlash later on, but the government are very cautious. And also the government with the, what you call it, [indiscernible] the program, Penjaminan PEN, there are -- pushing all the banking to grow to extend the loan. So going forward, we are anticipating. Of course, in the industry like food and related, the ICT, the digital, the computers, the infrastructure related to the digital and call communications as well as the -- we are not very big in the SOE in the past. Now we are, what to call it, opening ourself and we are extending loan to -- this quarter like [indiscernible], those kind of industries that I think we are going to grow in the next quarter or second half of this year.

Thank you, Pak Honggo. Pak Adnan, do you want to add?

Yes. Thank you. If I may add, we are entering not only local corporate segment, but also foreign corporate segment as well, including a subsidiary of Japanese, U.S. and European corporates by leveraging MUFG's strong relationship with their parent company. By industry, we focus on all the manufacture of fast-moving consumer goods, health care, IT, real estate developers and so on and so forth. Thank you.

Thank you. The next question is from Jayden from Macquarie. Can funding costs be lowered much from here to support the NIM? How much more repricing or reprofiling of funding is possible. Pak Mul, do you want to...

Thank you, Reza. So we see that If you look at Danamon for the last few quarters, our cost of funds have improved significantly. The reason behind it because we were able to grow our CASA. So grow our CASA that's supported by the MUFG collaborations. That's why CASA in the EB grew significantly as well as in the SME and consumer. So with the rate cut, we also believe that we have a further opportunity to lower our cost of funds and improve our NIMs going forward. Now on the NIMs, basically, as I mentioned earlier, we have -- there is a temporary shifting portfolio, I'd like to stress that again, temporary shifting portfolio from the high-yielding assets to lower-yielding assets. So from the Adira Finance from the SME to the low-yielding asset in EB FI. But the good news that we see that from the progress in auto financing for the last few quarters, the improvement of the loan disbursement. And we hope this good trend will continue going forward, and we should be able to benefit from that trend.

Reza, I want to add to Jayden questions. I think to add what Hafid just more already explained, on top of the strong franchise of our branches getting the low-cost funding, I think this is also the result that the relevant strategy to grow the FSC and ecosystem. So we are starting from last year -- as we explained to all of you, we are nurturing our traditional banking. We are focusing to onboarding the anchor and the distributors, not only the first tier distributor also the second tier distributors. So in the past, not many clients using Danamon as the traditional banking. Now we are growing our transactions. We are also upgrading our system. We are investing in the digital as well. We're revamping our digital capability. So I think to answer your question, you can see going forward the capability of Danamon to serve our clients better and more to get the -- not only saving account, but also current account. Thank you.

Thank you, Honggo. Thank you, Pak Mul. There's another question related to what Pak Mul said.

A bit addition on this cost of funding management. Look at Page 5. Yes. Yes. What is notable in the first quarter is that we have a significant reduction of the TD. This is as a result that -- of our efforts to aggressively cut the pricing in TD, which enables us to manage a stable NIM. And this will be fully effective in the second quarter onwards, because this initiative started in March. So back to the question, I think that our cost of funds, we still have room to lower the cost of fund by not only growing the cost, but letting go the high-yield TD. The combination of these 2 efforts will sustainably make the cost of funding lower over the year.

Thank you. Thank you, Pak Yas. Next question is from Raphon Prima, UOB Kay Hian. Pak Mul already mentioned this a little bit about Adira Finance disbursement. But perhaps, Pak Hafid, you can elaborate a little bit more about how do you see the upcoming trend on disbursement. And when do you expect disbursement to reach pre-COVID level?

It's a very big question. Obviously, we have a lot of dependency on the industry. So looking at the industry, the question is where the industry is going back to the pre-COVID level. 4-wheeler industry pre-COVID is about 1 million. 2020 is about 500,000. Well, projection for this year, probably about 750,000 to 800,000. So it will take maybe another 2 years to get back to the pre-COVID. Likewise, the 2-wheelers from -- at the 4 million last year, 4.8 million, still far away from 6.5 million pre-COVID. So I would say that's the expectation from the industry level.

Thank you. Thank you, Pak Hafid. The next question is from Handy again from CLSA. There are 2 separate questions. First is, what is CoC ending guidance for this year? Perhaps Pak Mul can help to respond? And then the second question is, can you elaborate on Danamon's digital development. So after that, maybe Bu Dhany can help to respond.

Maybe I can address on the NIMs. So as I mentioned earlier, basically, you look at Danamon, our NIM dropped compared to last year. That is basically because of the temporary shifting our portfolio from the high-yielding asset to the lower-yielding asset. As I mentioned earlier, I'd like to stress it again, this is a temporarily shifting, yes. And we hope that if the demand recover from the high-yielding asset, both from the Adira Finance as well as SME, we should be able to improve NIMs in line with the improvement of our cost of fund, as mentioned by Pak Honggo and Pak Yas just now.

Thank you, Pak Mul. How about the CoC guidance?

Okay. On the CoC, yes, well, last year, obviously, we ramped up our provision building. So that's why our CoC was at a very high level last year of IDR 6.5 trillion total CoC for the year. This year, we do not think that we will come anywhere close to that level, I mean, having built quite ample level of provision then. But obviously, given that this -- we have this -- we still have this IDR 10.4 trillion of restructuring portfolio, right, and the fact that this year will still not necessarily be a normal year, so obviously, our CoC will continue to remain at elevated level. So if you have followed Danamon for a few years or several years, you will notice that in normal years, probably our CoC would probably be at about anywhere from 2.5% to probably closer to 3% level. That will be at the high side, right? This year, most likely, we will be still higher than that, but we do not believe that we will be -- we will come close to the same level like last year. That's the view that we have at the moment, yes.

Thank you. Thank you, Pak Dadi. Bu Dhany, can you elaborate on Danamon's digital development?

Yes. Thank you, Reza. So I think this year -- and since last year, we focused a lot in investing on our digital capabilities, that including our resources in IT. We strengthened our resources in our IT department as well as on our digital team. A lot of our work are focusing on what we call digitizing the core or making sure the basic works well. This is through improving the end-to-end process through straight-through processing, enhancing the process and digitizing the process, for example, loan processes, onboarding process and so on. Second, we also focus on improving the customer experience. So that is creating better customer experience in transacting with us, which includes our transaction banking capability for our corporate customers as well as our mobile banking for consumer customers, our consumer segment, whether that will be new features like wallet or soon we're going to launch is the omnichannel experience for our consumer business. The third item that we are working on is on working with ecosystem. This is the e-commerce or the fintech ecosystem and coming in as an institutional, how do we provide a solution for our partner. So recently, we also launched [ Walk-Off Digital ], which is new in the market and a quite breakthrough solution. And we will continue to focus on this partnership with many e-players or tech players in the market. Thank you.

Thank you, Bu Dhany. That was our last question. With that, I will close the Q&A session. Ladies and gentlemen, all participants, thank you for taking part in the first quarter of 2021 financial results. Stay safe, stay healthy, implement COVID protocols. See you at the next Danamon corporate event. And for those of you who are fasting, enjoy your fast-breaking soon. Thank you. Bye-bye.

Thank you.