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

Good afternoon, ladies and gentlemen. I would like to welcome the respected investors and analysts. Thank you for joining PT Bank Danamon Indonesia Tbk’s Investor and Analyst Briefing First Half 2024 Financial Results. Before we begin, I would like to emphasize on the following information. We encourage participants to join this event by using laptop and use of headset to optimize the audio quality. Please ensure that you are joining from a closed room and quiet environment with stable Internet connections. During the event, please kindly mute your microphone and turn off your camera. Please also put your mobile phone in silent mode to avoid [ a home ] sound and do not access the MS Teams link simultaneously in more than 1 device. When we enter the Q&A session, you can type your name, company and questions through the chat box menu, and I will read each question and our BOD members will respond to your questions. Please also note that this event is live-stream and accessible via Stockbit’s YouTube channel and apps. Ladies and gentlemen, I would like to welcome and thank our respected investors and analysts for joining PT Bank Danamon Indonesia Tbk’s Investor and Analyst Briefing First Half 2024 Financial Results. Today, I will be your host, and please allow me to quickly introduce myself. My name is Marcella Tanamas, Investor Relations of Danamon. I would like to welcome Danamon's Board of Directors, Board of Management and also President and Director of our subsidiary, Adira Finance, who have joined from their respective locations. Signifying our strategy, before we start the presentation session, let us have a look at our [ news ] clip on Danamon to grow as a financial group. [Presentation]

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Ladies and gentlemen, before we present the detail of PT Bank Danamon Indonesia Tbk’s financial results for first half 2024, I would like to invite Daisuke Ejima, as our President and Director, to deliver his remarks highlighting the progress of our 3 key strategies. Dai Ejima, the screen is yours.

Thank you, Marcella. Good afternoon [Foreign Language] all investors and analysts, and thank you for all your support and joining this [ merger ] [indiscernible] conference briefing session for the first half of 2024, the financial results of PT Bank Danamon Indonesia. Next, Page 3. Let me start off through the macroeconomy and some industry data. We saw a solid GDP growth at 5.1% level. Also, inflation rate is well managed at 2.5% level, meaning, overall macroeconomy, we are seeing a good, solid growth continuing. However, looking at the bottom part, left side, Banking business, the lending average growth was 13.2% and funding was also 8.2%, meaning fierce competition in financial industry still continues. Right side is showing the automobile industries in Indonesia, 2-wheelers a slight minus and 4-wheelers significant minus at 20.9% year-on-year basis. Next page, please. Left side, I would like to recap the Danamon strategies for next 3 years, until 2026. In 3 years, we want to continue double-digit growth in Lending and Funding with sustainable profitability growth. 4 business engines still remain the same, Enterprise Banking, Small and Medium Enterprise, Consumer Banking and Adira Finance. We also have 3 strategic themes, namely the ecosystems and building ecosystems in a dominant manner and also unique MUFG propositions and data analytics and process improvement. Also, second pillar is the foundation for building a solid, one financial group. Also, core banking enhancement continues in people, IT/digital, branding and branches. We will cover these 3 pillars in the next 3 slides. But before that, let me explain the right side, the quick peek of our first half financial results. Lending, we continue to grow plus 15% year-on-year basis. To support the Funding side, we also saw a growth in 15%, a similar level. NPAT, we saw a slight minus. This is reflecting the lower risk-adjusted net interest margin and cost of credit due to sluggish automobile market, which I explained in the previous page. Other key metrics, such as nonperforming loan ratio, et cetera, are solid and consistently healthy. Next page. Mostly, this is the ecosystem focus on our business. Left side top, automotive ecosystems, we continue to see a good collaboration between Danamon and Adira. We saw a 37% growth on the loan disbursement through the synergy collaboration. We also had cosponsored the IIMS Bank and also had several car events, including BYD Test Drive in our branches, et cetera. Right side top, we also started to pick up the Hajj and Umroh ecosystems. We started new initiatives, launched Danamon BISA Haji for Special Hajj and managed events. [ The Manasik ] ecosystem also saw a good, healthy growth. We have partnered with 17 Japanese developers and have 39 residential projects continue to grow through the new partners. This resulted in significant increase in real estate loans, particularly for Japanese developer corridors. Next page, please. This is the page about foundation building for one financial group. You see a big circle in the page, in the center, centering around Danamon. On the top side, from left, you see Mandala Finance, which recently joined us through the first half. We also have Adira Finance, the core subsidiaries. They are in automobile industries. We also added the Home Credit Indonesia since last year. They are strong in smartphone financing and durable goods. Zurich Finance. They are all our group companies. Going to right-bottom, we also have strategic partners, Grab, Akuloku, Garuda Fund, Manulife. And on top of that, left side bottom, we have the region and global network through MUFG partner bank. So with this combination of all group companies together on the right side, we are now able to cover a whole segment of customers, not only bank but [ Anda Bank ] and [indiscernible] Bank even. Not only digital and branch network in banking business, we are also able to support the offline business through home credit activities in shopping malls, et cetera. So back to this slide, we have synergy loan growth very large, about 48% year-on-year basis. Also, the IDR 26 trillion in synergy loan is accounted about 14% of our total loan portfolio now. Number of synergies we also increased by 16% year-on-year basis. Next page. The page is about foundation building for our banking infrastructures. Left side top first, D-Bank PRO, this is our mobile banking applications, mainly for consumer retail customers. There has been brushed up and added many good new features in the first half. Number of users, number of transactions and transaction values, you see all positive growth during first half year-on-year basis. And left side at the bottom, we also have Danamon Cash Connect, which is the online banking solution for corporate clients. Again, we saw a number of users, number of transactions and transaction values. We see – we saw a healthy good growth in the first half. We also launched a new feature to support BPJS Ketenagakerjaan Payment. Moving to the right side top, we continue to transform our branches, funding, loan disbursement and new customers to the bank, all we are seeing good growth through these transformed branches activities mainly. In first half alone, we had total 159 community events such as inviting kindergarten kid to fill and pack the banking activities. We also had an overseas study session for our customers' health care session, et cetera. At the right side bottom, people management side, we try to do HR activities all together with our group company that I mentioned in previous pages, Danamon, Adira Finance, Home Credit, Zurich, and, of course, MUFG. All are doing some joint recruiting activities and leadership training, et cetera. This is a key high-level summary for the first half activities. Now let me pass to Pak Muljono, Danamon’s Finance Director, who will share details of Danamon's first half financial results. Thank you.

Thank you, Pak Ejima. Let me share on the financial highlights for the 6-month period ended 30 June 2024. So we maintained the double-digit growth in Loan and Fundings. So on the top left top, showing strong growth in loan and trade finance, growth by 14% year-on-year, supported by all engines. So you see that our Wholesale Business grew by 11% year-on-year and Consumer grew by 19% year-on-year. So on the bottom left table, showing asset quality, healthy asset quality with the loan growth with the loan at risk, improved by 90 basis points from 12.9% to 12%. And NPL [ Cov. ] gross improved by 10 basis points to 2.2%. And our coverage ratio also increased to 263%. Funding, on the top right table, our total deposit grew by 15% and supported by growing in our Granular Funding by 10%, yes. Bottom right tables showing our operating income grew by 8% to IDR 9.4 trillion. PPOP grew by 10% year-on-year to IDR 4.3 trillion, and NPAT reached IDR 1.5 trillion for the 6-month period. Next, on the balance sheet, so our total asset grew by 14%, supported by loan and government bonds. On the Funding side, including Adira borrowings, increased by 19% year-on-year to support our loan growth, yes. So we see that there is a big increase on the time deposit, where our CASA decreased by 5%. Next, on the profit and loss, as discussed earlier that our operating income grew by 8% year-on-year, supported by increase in net interest income by 5% and noninterest income by 21% year-on-year. Our operating expenses increased by 6%, so we are able to maintain a positive growth by 2% despite the investment commitments, yes. With that, we delivered -- PPOP amounted to IDR 4.3 trillion, or grew by 10% year-on-year. Our CoC increased by 28%, mainly coming from Adira portfolios, especially in the commercial vehicle due to the [ overcoming ] economic conditions. So we identify as well as rectify the issue and ready to move forward. With that, we delivered NPAT for the first -- for the half year amounted to IDR 1.5 trillion. Next, this is our key financial ratios, yes. NIM year-on-year declined by 70 basis points, mainly due to an increase in cost of funds, yes, and also increase in borrowing in Adira due to the increase in benchmark debt as well as competitions. So as Pak Ejima mentioned just now, that we see that growth in Lending in the industry is significantly higher than the growth in Funding. So of course, there will be competition in pricings as well as some of the customers move to the higher yield, which is to the wealth management product and as well as ROAE. Our CoC year-on-year increased by 30 basis points due to the same reasons. Cost-to-income ratio improved by 80 points to 54.8% despite that we have a continued commitment on the [ IFRS ] to sustain our growth going forward. NPL consol. gross improved by 10 basis points to 2.2%, so very healthy. And loan loss coverage increased to 263% and loan-at-risk coverage remain at 47.2%. CAR consol. remained strong at 25.9%. Next. So this is the picture of our Granular Funding. So we see that we continue focusing in growing our Granular Fundings, strong, in the top left charts, grew by 10% year-on-year, supported by healthy LCR and also NSFR. So refer to the top right chart. Strong capital, as I mentioned earlier, yes, as shown in the bottom table, with almost 100% in the form of Tier 1 capital. Next. So this is the detail of our loan portfolio. So you see that the loan composition, if you like, it remained unchanged, yes, with the portion of the -- with the 4 major engines, yes, on the top right table, like EB, FI, SME, Consumer and Adira Finance all showing very nice growth with EB/FI grew by 12%, SME 9, Consumer, 32%, and Adira Finance by 15%. So we also provide the detail of loan by sector, which is pretty much similar with the previous years, as well as loan by purpose. So heavily more than 50% in the form of working capital loans. Next. And this is the picture of the Adira Finance. So we see that the industry for the 2-wheelers and 4-wheelers, both have big challenges, as Pak Ejima mentioned. And despite that, Adira for the 6-month period are able to show decent growth by 15%, supported by all products. 2-wheelers grew by 16% and 4-wheelers grew by 10% and multipurpose loan grew by 26%, yes. Despite that, the new financing, if you compare to the like-for-like compared to last year, we are slightly dropped by 2%. Next. The -- this is the net interest income. So you see that our net interest income, or fee income, year-on-year grew by 21%, supported by all type of fees, credit-related and noncredit related, which is related to the [ Banca ], Wealth Management and cash management, all signs of nice growth and also our treasury also grew nicely. Next. This is the asset quality. So we see that both our NPL ratio at 2.2% and SM ratio at 8.5%, yes. Both ratios improved by 10 basis points compared to the same period last year. Loan at risk, bottom left table, bottom left chart, in percentage improved by 90 basis points from 12.9% to 12%. And our NPL coverage also increased to 263% -- refers to the top right table. Cost of Credit for the first half at 2.8%, so increased from last year at 2.6%. Next. So that's pretty much the summary of our highlight results for the first half 2024. So with that, I'll pass it to the -- Marcella for further guidance.

Thank you, Pak Ejima, Pak Muljono, for your explanation. Before we start the Q&A session, I would like to introduce our BOD members and also our subsidiary President, Director, Honggo Widjojo Kangmasto, our Vice President, Director; Hafid Hadeli, Vice President, Director [indiscernible] [ Sharia ] Sustainability Finance Director; Rita Mirasari, Compliance Director; Pak Dadi Budiana, [ Case ] Management Director; Pak Thomas Sudarma, Enterprise Banking and Financial Institution Director; Pak Jin Yoshida, Global Alliance Strategy Director; and also Pak Made Susila, President Director of PT Adira Dinamika, Multifinance Director.

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Ladies and gentlemen, now it's the time for us to start the Q&A session. Please write down your name, company and questions on the chat box menu, and I will read the questions. This month, in our 68th anniversary, we have the expo to continue engaging our customers and communities where we operate. While waiting for the incoming questions, let's have a look at the short clip on the expo event. [Presentation]

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Now let’s start our Q&A session with -- the first question is from [ Ilfan ] from [ Banglen Investment ]. May I know the full year outlook for Adira this year, new booking target, NPL and et cetera? Thank you. And how is the market?

Yes. Thank you. I think, okay, let's start with the outlook of the sales of our domestic 2-wheeler and 4-wheeler. Number one, with regard to the outlook of the domestic sales of 2-wheelers, we expect flat or slightly negative growth as compared to last year while the sales of new car is expected to drop double-digit. You see that right now, passenger car dropped by 11%, and then commercial car already dropped by 20%. So with that kind of situation, coupled with a challenging situation, we are expecting our new booking will be flat compared to last year. In the first half, Adira already booked around IDR 20 trillion of new bookings, and we expect probably towards the end of the year is around IDR 40 trillion to IDR 41 trillion. With that, we expect our loans still growing single-digit. With regard to NPL, NPL of Adira is over around 2%, in part because we are doing discipline of [indiscernible] and resolution of problem loan. I think that's the question, right? Thank you.

Thank you, [ Pak Made ], for your explanation. So let's wait for another question. Okay. There's another incoming questions from [ Ibu Linda ]. The first question, may I know what caused the higher NPL formation and CoC of Adira?

Okay. So we -- automotive sector in Indonesia right now is having a lot of headwind. Number one is weakening purchasing power of consumer, particularly on the middle to lower segment, as well as Commercial segment. So we see a weakness in terms of purchasing power as well as credit worthiness. This is partly due to lower commodity prices and much higher inflation, particularly food and energy prices for the mass market segment. As a result of that, we see that the demand is already become [Technical Difficulty] as well as a pressure on the asset quality. On top of that, we see also higher loan on deposits asset, even though we may need to [ repost ] the asset. Because of the sub-automotive sector, we see that the loss is higher than the normal [ trade ]. So that is resulting in higher Cost of Credit as compared to the last year.

Thank you, Pak Made. And I believe the next question is still related to Adira. Are you planning to do channeling with home credit?

Okay. Right now, we have a framework of collaboration within the group. We will continue to look at any opportunity to do a lot of cooperation among the group, not only by business but also another nonbusiness aspect. One area that we do is probably cross-sell between the product of Adira to the – the customer of Haji as well as selling Haji product to customer of Adira. That is being now is planned and then trying to execute as soon as possible.

Thank you, Pak Made. And the last question from [ Ibu Linda ] is related to the [ Contrabank ] loan. What is your current corporate loan yield?

Yes, the corporate loan yield, we see a slightly increasing trend. Currently, the yield is about 8.3%.

Thank you, Pak Thomas.

Maybe debt is INR [ 40 ], right, Thomas? We also see the same trend for dollars. The rate increase is offering around more than 6%, 6.3%.

Yes.

Okay. Thank you, Pak Thomas [indiscernible]. We are still waiting for another incoming questions. You may type your questions on the chat box. There is another follow-up question from [ Ibu Linda ]. Which segment showed the highest increase in Adira financing? Is it from the 2-wheelers or 4-wheelers? Dealer or non-dealer?

Yes. Overall, we see a higher Cost of Credit this year across all products, but the higher increase coming from Commercial segment. That we are basically financing to the -- mostly in the commodity-related area. So [ that ] is driven by [ 2-1 ] is higher write-off as well as, when we sell the product, the loss rate is higher. It could be double than the normal rate around 20%. So that is the segment. But the other segment is we see some pickup but still very manageable and profitable.

Thank you, Pak Made. We have some other questions from [ Pak Kresna ]. I will read the questions one by one. The first question is regarding the NPL coverage. NPL coverage has been held relatively steady at 250% to 260% level in the past 1 year. Can management please remind us what will be the NPL coverage target in 2024 and 2025? What indicators does management watch before considering NPL coverage and credit cost reduction in the next 1 or 2 years?

Sure. Thank you, Marcella. Thank you, Pak [ Kresna ]. In terms of the NPL coverage itself, we are looking at the level of anywhere between 200% to 220% this year. And it actually – this year -- from this year actually to 2025. So that's the level of the NPL coverage that we are aiming at. I think your next question is on the -- what is the reason, right, for us to actually determine that level of NPL coverage? Basically, for us, we – the -- it is our aim to maintain a sufficient level of coverage, basically, same sufficient level of reserve for our loan losses. So we would like to have it at that level, the level that we believe is adequate. And we do not actually think that this -- that there will actually be, like, let's say, to your next question of CoC reduction, well, that may actually result in reduction of NPL coverage also. If I'm not really getting your question, the second part of your question, please let me know again because I'm not too sure where exactly you are getting to, because I think -- Marcella, probably, if you can, you can repeat the question again. But I think Pak [ Kresna ] was asking about the reduction of CoC, right, and how it actually affects the NPL coverage, isn’t he?

Yes. The second question is what indicators does management watch before considering NPL coverage and credit cost reduction in the next 1 to 2 years?

Okay. All right. Yes. I think, in terms of the credit cost reduction itself, our -- I mean credit cost itself, our credit cost remains the same, right? The projection’s at the 2.5% level actually. So that remains very much for 2025. But for 2026, because of the increased level of credit cost in Adira, so we are looking at the slightly higher CoC level than 2.5% that we are aiming for in [ 2025 ] or earlier. So that will probably be around 2.7% to 2.8%. That was because of the pressure in Adira site that Pak Made has earlier explained. But on the NPL coverage itself, despite the higher CoC level this year, we remain confident that the NPL coverage will be at the level that we are aiming at, at 200% to 220% level. Thank you.

Thank you, Pak [ Dadi ]. So let's move on to the next question from Pak [ Kresna ]. How much of the strong loan growth in EB/FI was driven by business CapEx cycle versus market share gain from other banks or corporate bond market?

Let me try to answer these questions here. So basically, our year-on-year growth on the -- what you call corporate banking loan, EB/FI, 12% and the -- some of the commercials, also large commercial, 9%, mainly from the business group. So today, if we compare the working capital versus the infamous -- investment loan, our composition, 57% is the working capital loan and 43% investment loan. This investment loan grew quite nicely. So I would say most of the growth of the corporate loan is coming from the [indiscernible] instead of taking it from the other banks. Then our corporate [bond ] market, so the amount is not so much in the corporate bonds. Our corporate bond exposure is very small. So the replacement -- the replacement of the corporate bond market basically we are giving to the corporate customers are very small. So I think, as a [indiscernible] we are not in the business of replacing the long term from corporate bond markets. So this is mainly from the business agreement.

Thank you, Pak Honggo. So the third question from Pak [Kresna], any thoughts on NIM impact from potential [indiscernible[ [ rate ] cut and the rate cut later this year? How much cost of fund improvement can Danamon expect to secure, say, from early 2025 onwards?

So let me take this question. I think it's very hypothetical questions. So any rate -- any decrease in rates will be benefiting the amounts because the structure of our fundings where deposit is reduced -- deposit is normally short term and will reduce faster, decreased faster than loans. So the challenges we see there for the first half is the -- as we have shared, that the loan grew faster than deposits. So that’s increased the [ composition ] of funding in the markets as well as many customers move their better yield, so move their fundings to -- from CASA to TD, as well as from TD to wealth management products. So any rate cut from feds, which is -- we hope it’s followed by central bank, will [ be ] benefiting Danamon. That is the general guidance, if you like. So how much we are benefiting from the rate cut will depend on the -- how much the rate cut by fed and followed by central banks, if you like.

Thank you, Pak [indiscernible].

So [indiscernible], let me add something here. So basically, all the Indonesian banks, if you look at the asset and liability side, the [ tenure ] of the asset is longer than the liability. So in general, we are having shorter liability [ tenures ]. So if there is a rate cut, we are not going to immediately usually pass on the rate. So it's -- a rate cut will benefit for the banks. I think that's the short answer. Thank you.

Thank you, Pak Honggo. Okay. So we have another question from Pak [ Henry ] [indiscernible]. It’s related to Adira. Adira's Multipurpose segment grew 26% year-on-year as of first half 2024. How do you growing differently on this segment this year versus previous years?

Yes. Thank you, [ Pak Henry ]. Let me just try to answer this. I think now Multipurpose loan will be one of the key pillars for the growth of Adira going forward. So it's not only about customer acquisition, but it also to retain customers. As you know that the penetration rate of Multipurpose is already very big. Then based on our [ surfacing after they have in a ] vehicle, they typically have another need such as education, [ hearts ], this kind of thing. So since we are [ multifinance ], the only cash loan that we can structure is a multipurpose loan. So Adira has basically capitalized that opportunity to grow more on this loan as a solution for our customers if they want to adding more vehicles. That's number one. Number two, this is the growth strategy because our multipurpose loan is using to a strategy. One is on the retention to existing customers as well as we also acquire directly customer from the market. So we expect this type of loan continue to grow and keeping not only growth but also diversification because we know that automotive sector is proven to be very volatile in Indonesia. So we expect this also to bring more [indiscernible] in the [ Multi portfolio ] to Adira going forward. Right now, the contribution is slightly above 20%. We expect 1/3 of our business will be non-auto loan. We call it non-auto loan because the purpose is not buying a loan -- auto, but is using mostly productive usage. So now we also invest in terms of capacity to continue to grow this business. So I think it's one strategy. Second is execution and third is capacity build up to grow this business.

Thank you, Pak Made. So we have another questions from Pak [ Armando ] from [ Stock Blue ]. I would like to [ know ] about the perspective of Japanese corporations regarding their expansion plans in Indonesia in the near future. Could you please share their general appetite and views on the Indonesian market, along with any concerns they might have? Additionally, how do BDMN and [ MUFG ] Group view and position themselves in relation to this trend?

Okay. Let me take these questions. Yes, of course, given the potentiality of the economic growth in this country, definitely Japanese corporate has the appetite to invest into these countries. Actually, in fact, we also received some -- the consultations from such a Japanese corporate. The MUFG Group, the -- [ including ] Danamon, we are one of the largest financial groups in Japan and also the strong relationship with the Japanese corporate. So of course, we are supporting such an appetite and also the activities. That's my questions -- answers.

Thank you, Pak Jin. Let's wait for another incoming questions.

Marcella, while we’re waiting for other -- the questions, let me maybe a bit add a comment on the question in terms of the [ turning ] to the Home Credit.

Sure, Pak Jin.

So the home credit becomes our -- one of the group companies. So we are trying to support their liquidity and also the reduction of the cost of fund. So in any aspect, the -- including the [ channeling ] that we are discussing with the Home Credit to support their needs or it helps for their questions.

Thank you, Pak Jin, for your explanation. So before we end the Q&A session, I would like to invite respected investor and analysts, if you still have more questions to us [Technical Difficulty ] we are waiting for the final questions. I would like to say thank you to Pak [indiscernible] and Pak [ Hernando ] for the questions. So I would like to close the Q&A session. And ladies and gentlemen, the respected investors and analysts, once again, thank you for taking part in the PT Bank Danamon Indonesia Tbk financial results for first half 2024. For any further interests and questions, please do not hesitate to reach us through our Investor Relations mailbox at [email protected]. See you at the next Danamon corporate event. Thank you.

Thank you.