PT Bank Mandiri (Persero) Tbk (BMRI) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen, and welcome to PT Bank Mandiri's Second Quarter '21 results announcement, and thank you all for joining us today. My name is Laurensius, Head of Investor Relations. And together with us today are speakers, we have Pak Darmawan, our CEO; Pak Siddik, our Chief Risk Officer; Pak Sigit, our CFO; Pak Tim, our IT Director; and Pak Panji, our Treasury and International Banking Director. Before we start, I strongly encourage you to download both our presentation material and financial statement currently available on our IR homepage of Bank Mandiri. [Operator Instructions] We are also happy to take questions via e-mail afterward, and we'll try our best to reply to your questions as soon as we can. Now let's start the presentation with our first speaker, Pak Darmawan, CEO of Bank Mandiri. Please go ahead, Pak Darmawan.

Thank you very much, Lau. Good evening, everyone. On behalf of my fellow board members, I'd like to thank you all for your participation in this earnings call. Allow me to run through the key messages of the second quarter 2021 by starting with highlights of our notable operational strengths during the quarter, as well as the key challenges that need to be addressed in the subsequent quarters. As highlighted in this slide, we identified loan growth, cost of funds and fee income as key contributors to our pre-provision operational profits or PPOP. Meanwhile, Retail loan growth, excluding the QR loans as well as yield, were the key challenges we faced during the second quarter 2021. This slide provides detail of the bank-only loans. On a year-to-date term, Bank Mandiri was able to achieve a growth of 5.4% higher than the industry level. Loan grew by 6.7% on year-on-year term and 3.4% on Q-on-Q term. On a consolidated level, growth was equally positive at 13.6%, 6.4% and 3.4% on year-to-date, year-on-year and Q-on-Q term, respectively. Please note, however, that the consolidated year-on-year and year-to-date growth is largely driven by the merger of 3 Syariah banks into Bank Syariah Indonesia, or BSI. By segment, our loan growth was mainly driven by Wholesale, especially Corporate loans that grew 8% year-to-date and Micro KUR, which was 21% higher year-to-date. On the other hand, mortgage, auto loans, salary-based or payroll loans and regular micro loans were on the weaker side. By type investment loans, which account for about 1/3 of our portfolio, had led the growth on year-to-date and year-on-year term followed by working capital loans. Meanwhile, consumer loan growth remained in the negative territory. Furthermore, our regional offices, which combined loans contribute about 29% of total portfolio posted positive year-to-date growth across the board. This is a positive trend compared to the position we had in March 2021. We continue to grow very selectively and prudently across the various economic sectors by closely following our portfolio guidelines. Internally, sectors are classified between prospective and selective, while these are not new classifications, in the context of the current pandemic, prospective sectors are those least impacted or indirectly exposed to the COVID-19 crisis, while selective sectors are those that are riskier. As you can see in the left-hand chart, the year-to-date difference in loan outstanding primarily came from sectors classified as prospective, which includes the likes of telecommunication, energy and water, mining and infrastructure, while selective sectors are riskier on the sectoral perspective, in few cases, they may offer a good opportunity for the bank. Some of these loans are also part of government's national recovery program. Next in the list of key strength of our cost of funds, several active strategy in optimizing balance sheet and reducing cost of funds have been put in place in the past quarter, which include rationalizing deposit pricing, lowering specialty deposit and focusing growth on high-quality CASA. These combined efforts have contributed to the reduction of overall cost of funds, as you can see on the top left chart of the slide. Yield was one of the challenge we faced during the first half of the year. Pressure on yield came largely from the Wholesale account due to several elements such as low policy rate environment, which affected our benchmark loans, competition, especially for top quality corporates, which are Mandiri's main target segment and slightly higher FX loans. On a more positive side, it is worth noting that yield from the Retail segment, such as SME, Micro and Consumer are stable. The significant increase in SME yield, for instance, was driven by payments coming from the COVID-19 restructured clients. The reduction in cost of funds helped us offset negative impact from yield. Furthermore, the bottom left chart shows the quarterly trend in the net interest margin of Bank Mandiri and 2 of our subsidiaries, BSI and Bank Mantap. We were able to book a consolidated NIM of 5.05% in second quarter '21, which is stable compared to the previous quarter supported by improvement in subsidiaries NIM and our cost of fund. Relative to our NIM guidance of 4.8% to 5.1% for the full year, we are running at the upper ends today. Noninterest income was also a key strength during the first half of the year with Wholesale fees driving the overall performance. For instance, fee from bancassurance, syndicate loans, custodian and bank guaranty grew meaningfully this year. On Retail side, fee from Livin' also grew nicely offsetting the decline from weaker areas such credit and debit cards and ATM fees that are directly impacted by the pandemic. As regard to asset quality, in general, progress has been encouraging. Total bank-only LAR ratio, including COVID restructuring is lower Q-on-Q in June 2021. Cost of credit is under control, trending downward and restructured book performance is stable. On this item Pak Siddik will further elaborate on asset quality. In general, overall profitability is trending well for the bank during the second quarter '21. However, we shall remain prudent going into the second half of the year. On a bank-only level, Bank Mandiri had booked IDR 12.1 trillion worth of PPOP, which is 11% higher Q-on-Q and 43% higher year-on-year. On bank-only net profit, we booked IDR 6.5 trillion in second quarter '21, which is 28% higher Q-on-Q -- more than double the profit of second quarter last year. With this, both ROE and ROA performed on a recovering trend. Overall, Mandiri's performance up to June 2021 is very much on track with our full year 2021 guidance and impact from the latest PPKM should be manageable and well contained within our targets. We do not see the need to revise it and therefore, maintain our target. Next, I would like to hand over the presentation to Pak Sigit, our CFO, to run through the details of the financial performance up to June 2021. Please Pak Sigit.

Thank you very much, Pak Darmawan. Ladies and gentlemen, now allow me to briefly update you on our first half and second quarter 2021 financial results. But before that, I would like to remind you that our first half 2021 consolidated performance had fully integrated the merger of the 3 state-owned Syariah banks into Bank Syariah Indonesia, or BSI, with Bank Mandiri as the biggest shareholder. This slide provides a quick snapshot of BSI's contribution to our consolidated numbers. On the balance sheet side, our second quarter 2021 consolidated loan booked a nice increase of 3% quarter-on-quarter, 16.4% year-on-year and 13.6% year-to-date. Growth was positive on both bank-only and unconsolidated level. Third-party funds were down 1% Q-on-Q unconsolidated, largely driven by lower time deposits and current account deposit, which declined by 3.7% and 4.3% quarter-on-quarter, respectively, while saving deposit was up 4.2% quarter-on-quarter. This is in line with management strategy at optimizing our balance sheet and cost of funds. Our initiative has resulted in sequentially higher CASA ratio and lower cost of funds in second Q 2021. [Technical Difficulty] in the previous quarter and we expect it to stabilize at current level in the subsequent quarter of the year. From 81% level in first quarter 2021, our loan-to-deposit ratio is currently standing at around 86% [Technical Difficulty] manage the bank cost of funds, a good position for growth through our overall economy and business environment start to recover. Additionally, other liquidity ratio, such as LCR and NSFR are very healthy level at -- of 196% and 122%. [Technical Difficulty] in our profitability, during the first 2 quarters of the year was up [Technical Difficulty] level as well as net profit and unconsolidated growth and stable consolidated net interest margin. [Technical Difficulty] contributed to the improvement of our non -- our net interest income in second quarter [Technical Difficulty] basis and about 32% higher year-on-year. Noninterest income also helped growth in overall revenue. We booked IDR 8.3 trillion of noninterest income during second quarter 2021, which was 9.2% higher quarter-on-quarter and 42% higher year-on-year. It is worth by some high-quality income from both Wholesale and Retail segment. For example, like what was highlighted by our CEO, fee from Livin' increased meaningfully on the Retail side and fees from like the -- like bank guarantee, bancassurance and syndicate fee were also up nicely. Thus last one are Wholesale fees. Some debt is nonrecurring in nature, such as subsidiary's dividend, which was about IDR 500 billion in second Q 2021 also help growth in noninterest income during the second quarter of the year. Throughout the pandemic, operational cost of things has been the management team's top priority, our effort to re-prioritize expenses and to operate more efficiently had given significant impact, having cost to income ratio at 44% and cost to asset ratio kept at below 3% in second quarter 2021 are evident of that. Further, lower provisioning on year-on-year term help Mandiri to boost a nice 177% net income growth in second quarter 2021 on consolidated basis. On first half term, Mandiri consolidated booked IDR 12.5 trillion or 22% higher year-on-year. Our consolidated key ratios are pointing towards positive trend in general in second quarter 2021. NIM was stable and in line with our internal target for full year 2021. CASA ratio increased with help control our cost of fund and secure our net interest margin positioning. Cost to income ratio improved in second quarter 2021 from the previous quarter and noninterest income to asset ratio also improved during that same period. Credit cost was down quarter-on-quarter in second quarter 2021, kept very much within our guidance. As a result, our return on asset and return on equity improved in second quarter 2021. Now let me elaborate our loan growth by segment. Our consolidated growth of 3% quarter-on-quarter was largely driven by our Wholesale segment, with Retail segment was soft, except for our Micro KUR that grew sizably in second quarter 2021, contributing to the overall growth in Micro. Sequentially speaking, Wholesale loan [Technical Difficulty] as well as commercial saw a nice increase on quarter-on-quarter term by 4% and 3.8%, respectively. Consumer growth took a back seat at 1.2% quarter-on-quarter. Progress in fighting against COVID-19 including the loan of PPKM, including government's effort on vaccination, a crucial to overall outlook on loan growth. Furthermore, I would like to highlight a few points on our net interest margin. Note all GAAP numbers in this slide are bank-only. The top left chart saw that net interest margin had slightly dropped in second quarter 2021 from the previous quarter that is driven by pressure on loan yield, which was partly offset by the decline in cost of funds. Pressure on yield was primarily driven by wholesale market, lower benchmark rate environment, competition and slightly higher ForEx loan had led to pressure on the Corporate segment. Meanwhile, yield in Retail segment was stable, if not better than in the second Q 2021 compared to first Q 2021. This was partly due to some payment from the COVID restructure book. Further, our cost of fund decline was a result of our active strategy in lowering deposit rates across products, which have led to bank-only time deposit cost down to 2.7%, current account cost down to 1.6% and savings at below 1%. We believe that room for further improvement in funding cost exists, which in turn should have growth of our net interest income. Net breakdown of the performance in noninterest income. Overall, our bank-only noninterest income was booked IDR 7.1 trillion during second Q 2021. That is 20% higher quarter-on-quarter and 50% higher year-on-year. Noninterest income, which among others, include loan and trading fee, deposit admin fee, e-channel fees and treasury gains also grew nicely. Subsidiaries contributed IDR 1.9 trillion to the total consolidated noninterest income, leading to IDR 8.3 trillion noninterest income on a consolidated level, up 9% quarter-on-quarter and 42% year-on-year. Lastly, I would like to discuss our operating expense. We have implemented a very active strategy to reduce our operating expense mainly from the changes in business environment, due to COVID-19. In general, the 2 most important ratios, namely cost to asset ratio and cost to income ratios are very much under control during the first half of the year, including second quarter 2021. I would like to now turn the presentation to Pak Siddik, our Chief Risk Officer, to discuss about asset quality. Please, Pak Siddik.

Thank you, Pak Sigit. The trend in asset quality has been progressing well within our internal expectation and guidance. In the second quarter of 2021, we continue to build up provisioning on COVID-19 restructured book on top of our BAU provisions. Both BAU and COVID provisions combined has resulted into 2.33% total consolidated credit cost in the first half of the year, which translate to around 2.3% credit costs in stand-alone second quarter 2021, lower on quarter-on-quarter term. This is again in line with our full year 2021 cost of credit guidance of 1.9% to 2.4%, which we keep unchanged today. Although we acknowledge that the uncertainties from COVID-19 remain high, at this point, we think that the upper range of that guidance should be able to cushion the potential [Technical Difficulty] increase on provisioning in the subsequent quarter of the year. Next, I would like to discuss about our COVID-19 restructuring book positioning and its risk profile in more detail. The outstanding balance of the COVID restructure book is higher in June at IDR 96.5 trillion, up from IDR 94.5 trillion in the first quarter. This primarily came from 1 particular SOE construction company borrower with around IDR 4 trillion of loan size, which was flagged as COVID restructuring in the second quarter under the medium risk classification. In other words, excluding that account, our COVID restructure books would have been down quarter-on-quarter. The inclusion of the aforementioned corporate into restructuring flag is in line with our internal plan and therefore, carry no meaningful impact into the outlook on the ratios, such as NPL ratio, loan at risk ratio or credit cost. Now regarding the risk profile, the segmentation, the high risk of the COVID restructured book remained stable at 11% of the book, as you can see on this table. More positively, our provision coverage level for the high risk segment had actually increased to 61%, up from 49% back in the first quarter. Our medium risk is slightly up to 29% of the restructure book from 23% in the prior quarter due to that 1 particular company borrower, I mentioned earlier, but the low risk is stable at 59%. The total provisioning of the book is higher compared to 10% back in the first quarter. We will continue to watch these accounts very closely and adjust our provisioning levels as needed. The following slide shows the NPL formation analysis of our COVID restructure book. Up to June 2021, about IDR 1.7 trillion was downgraded to NPL, which translates to about 1.8% of the portfolio. As we mentioned in prior quarters, we actually took the approach of more conservative versus POJK 48. So those restructured books, which we think can't survive, we actually downgraded to nonperforming loans without waiting for March next year. On the second quarter 2021 stand-alone perspective, the NPL was IDR 859 billion, which is a similar level to the first quarter amount of IDR 880 billion. The 1.8% of the NPL form up to June is substantially lower than our high risk assumption of 11%, which is good news. So in the subsequent quarters, we do not expect a significant increase for 1.8%. So the 11% remain a very conservative estimate of the higher risk portion of the restructured books. So this implies that the COVID risk to NPL is very much under control. By segment, a bigger portion of the downgrades came from Retail loans, such as Consumer and Micro, which is logically expected. Now in the next slide, I'd like to give an update on the NPL loan at risk trend. The NPL ratio on consolidated basis remained stable at 3.1% as well as loan at risk, both including COVID risk to book and excluding as you can see that in the trend line on the top right chart of the presentation. Our NPL coverage remained high at 222% as of June. And on a broader coverage perspective, which is loan loss reserve to loan ratio, we are now at about 7.5%, among the highest in the industry. Lastly, in the next slide, I'd like to update you guys regarding our capital positioning. In general, the KUR level is stable, in fact, higher in the second quarter versus the first quarter at 18.9%. So we intend to maintain KUR at the current level in the near to medium term. That's all for me. I'd like now to pass on the presentation to Pak Tim Utama to discuss the Retail legal initiatives. Please, Pak Tim.

Thank you, Pak Siddik. Actually, this is my first experience, also appearance as well in Bank Mandiri's quarterly analyst meeting event as IT Director. And it is with great pleasure to provide you an update regarding our performances up to June 2021 and in particular, related to our digital initiatives, including the much talk about application that we call it Livin' internally. I'm sure most of you are very familiar with the slide that is on display with our digital road map. And I'd just like to reemphasize without going through the entire slide and remind everyone the main ingredients powering this road map. And these are, I would think, summarized into 3 different elements. The first one is ecosystem. So digital is about ecosystem. It's not really just about technology. It is about ecosystem. And I think in Mandiri, we are extremely fortunate to have such an ecosystem that has both Retail and Wholesale. And then the second bit is our digital readiness to support the journey, the transformation in providing the right experience for our clients and the community that we serve. And then last, which is not least will be data. So we make decision and direction based on our data management that we have in the bank. So these are the ingredients that are unique to Mandiri. Separately, there are new initiatives to be launched as soon as the second half of the year such as the micro and small medium enterprise, merchant QR payments, these are actually a big push from the Central Bank as well as Mandiri Pay Later. And I'm so excited to let you know that we are going to have Livin' 2.0, which I will elaborate a bit more further down the track. And this is going to be something that is worth waiting for. So do stay tune in. So let me move on to the ecosystem that we talk about. Owning a strong ecosystem is actually one aspect of a business while leveraging or harvesting that ecosystem is another one. The latter, without actually having to need to go through in detail, requires the right skills and the right tools. That was going to differentiate how we are going to be able to mine the data that we have. For that, we actually have built internally our enterprise data management that plays an important role in our digital journey to bring about business impact and innovations to the bank. For instance, I think robust data analytics would be the backbone for Livin' 2.0 that I just earlier mentioned, which is our super app that we plan to launch in fourth quarter of this year. Livin' 2.0 offers a substantial upgrade from our existing mobile app. And it will bring more and more of the ecosystem and as well as Mandiri businesses that will provide the right experience for our clients to support their needs. But before that, allow me to update you on some of the statistics that we have on our existing Livin' which is the -- what's already available today in the market. And these are going to be data up to June 2021. If you can see the trend actually has been very encouraging. I would just quote a few to say that our registered users for our mobile app today or Livin' 1.0 has reached to close 8 million, and that is 45% higher on year-on-year term. More importantly, I think we correlate that registered users to a high number of active users that have reached to about 5.4 million, and this is 45% higher compared to that of last year. This implies a 70% conversion rate from registered users to active users, and we see this moving forward as an increase. In terms of the transaction itself, Livin' actually has booked more than 400 million transactions in the first half of 2021. And this is actually encouragingly showing a 65% higher year-on-year. By value, that is more than IDR 700 trillion in the first half of 2021, which is a 51 -- 59% higher year-on-year. It is worth noting that our mobile app garnered 51% increase year-on-year in fees to bring IDR 605 billion just for the first half of 2021. So if I move on to -- in terms of how this has actually translated as far as the transformation is concerned. We have actually introduced also digital campaign that will take part in our focus over the last couple of months to push and support the increase of the traction of Livin' users. On aggregate, overall digital campaign spending was up 70% year-on-year during first half of 2021. The migration from conventional ATM usage to Livin' on top of new customers, both in numbers of transaction as well as values are encouraging. We are witnessing up to June 2021 so far, which is going to be evidencing the success of our marketing effort. And let me break it down for you. During 20 -- second quarter 2021 alone, Livin' took part about IDR 388 trillion worth of customer transactions meaningfully higher compared to that of ATM, which is about IDR 210 trillion. So if you see the graphs, the transaction value has crossed that off the ATM in a significant way. And for the same period, which is second quarter 2021, we have seen a historical record, where our mobile app number of transactions compared to that of ATM. So this is number of transactions, which is the number earlier, I quoted was the value. And again, for the first time, we can see the one on the app has crossed that of an ATM, that tradition has been strong. So as I said earlier, the future of Livin' in the form of, we call it, term it as Livin' 2.0 will not just be about transaction statistics and income, it is going to be much more. One impact that Livin' could bring for the business is the increase of retail loan customers. As we speak, the total number of Livin' users are enjoying our retail product loans and such as credit cards, payroll loans and others. And it is about 30% of the Livin' active users, increase in this ratio when we launched Livin' 2.0. Another impact includes the Retail investment. As of today, about 5% of our total Livin' active users have enjoyed Mandiri Investment Products such as mutual funds, deposit investments and saving clients. We aim with the -- in terms of usage as an initial target within Livin' 2.0. There are more [Technical Difficulty] in Livin' 2.0 that we will be updating you with. So please stay in tune. And we are very excited with this development. Last but not least, the customer onboarding. Customer account onboarding, what we mean by is actually new customers to bank. So that's what we [Technical Difficulty] for a much wider new customer onboarding portal for Bank Mandiri on top of the existing onboarding channels that we already have. So practically, you can be at the ease of your living room and you can be onboarded to become a new client of the bank without even having to step out from your living room. As a reminder, I think I just want to show today, Mandiri has a web-based online account onboarding, which was introduced in April last year and has been able to onboard about 45,000 new customers on a monthly average so far. So in about a year's time, in just 1 year, we have actually been able to bring onboard the clients from a traditional -- compared to a traditional way in a much significant percentage. So I still look forward to having the Livin' 2.0 whereby it's going to be a super app where we can onboard our clients. It is going to be exciting. Branches continue to serve our onboarding alongside close to about 100,000 agents as well that we already have. So finally, a few CSM or customer service machine like the one you can see in the slide, are strategically placed in selected areas to onboard new clients as well. So beyond Livin', here are some of our digital initiatives that we have. We talk about Livin' being the application that we have for Mandiri. But at the same time now, it is about using the capabilities because of the development of technologies such as APIs. So the left side box displays various partnerships that enable us because of the technology now we can work with our partners, both fintechs and e-commerce to support our Retail loan growth. This would include loan channeling through the likes of some of the fintech players that are in -- already in the market such as Amartha, Crowde, Investree and are the key names in the space that we see as well as online loan applications through partnerships and e-commerce platforms such as Bukalapak, Shopee, among others. Whereby merchants can now apply for Mandiri loans directly via those platform online. So if you like, through API, we are placing Mandiri on their platforms. Partnerships are also being done with several corporates in a similar fashion. Separately, the right box will show a snapshot of our Pay Later initiative that we plan for the fourth quarter 2021, targeting primarily Mandiri existing clients, which we have about 25 million that we have today that can have access to this. So fully digital, easy application, fast approval, competitive pricing among the key competitive advantages that we will introduce. Now let me come to the last slide where we will show our open banking initiatives with businesses whereas earlier we talk more about loans, now we talk more about how we do transactions, not necessarily just loans through APIs. So up to date, we have partnered with more than 400 names. And through our API technology, we have been able to generate 136% higher numbers of transactions year-on-year in the first half 2021 and 208% higher year-on-year on value. So services through our API-based partnerships include account opening, loan application, card top-ups, card payments and many more, including merchant QR payments that we plan to enable in the third quarter 2021. That is all from me. Next, I would like to pass the presentation to Pak Panji to talk about some of the achievements and initiatives on Wholesale transaction side, and subsidiary performance. Please, Pak Panji.

Thank you very much, Tim Utama for this presentation regarding the retail, digital and retail performance, especially of digital. So let me address the conversation regarding the wholesale financial solution. And then we would like to talk about the wholesale banking development in Bank Mandiri. So beside the digital retail initiatives, Bank Mandiri as a wholesale bank, we also actively developed capability of wholesale services. But before that, allow me to update you on some of the key performance related to our Wholesale transaction and fees. As of first half 2021, Wholesale generated IDR 6.4 trillion, as you might see at the chart at the big pie, the IDR 6.4 trillion which has contributed to around 51% of Bank Mandiri total fee-based income and 16% of total revenue. This achievement were possibly largely drew key drivers such as straight, value chain, bank guarantee, cash management, treasury, bancassurance and custodian. As you might see below the figure of IDR 6.4 trillion at the slide, there is a 9 key driver, which is trade, value chain, bank guarantee, cash management, treasury, admin fee, transfer fee, bancassurance and custodian. So that is totaling the fee-based income was IDR 6.4 trillion. And then supporting the business, our Wholesale digital channel providing our clients with the best services based on their business fit. These channels contributed meaningfully to overall wholesale transaction, which amounted 49 million transactions during the first half of 2021, which is 20% higher year-on-year. And by value, Bank Mandiri's Wholesale transaction amounted more than IDR 5,500 trillion as of first half 2021, which is 38% higher year-on-year. So this is actually a sustainable fee-based income growth through the Wholesale financial solution. So like, Pak Tim mentioned at the beginning, it is on the Retail solution. Now we are talking about the Wholesale banking solution, which is the main strength of the Bank Mandiri. But now we are complete, both Retail and Wholesale. So I would like to move on to Page 39. It is a strong client base powered by best-in-class wholesale channels that we're taking. The performance we have achieved so far are backed by variables display in this slide, which includes strong client base, sophisticated channels and complete features. Strong client base is one of Bank Mandiri's advantage to have sustainable Wholesale business. We have more than 20,000 Wholesale clients both Corporate and Commercial segment, as you might see at the above page on the upper left, 20,000 Wholesale client, which is Corporate and Commercial segment. And more than 250,000 SME companies, which -- what do we mean companies is nonindividual. 250,000 SME companies. So that is the environment at the Wholesale that we have at Bank Mandiri. So both made up for more than 60% of our total deposit as well as 70% of our total loans. As part of Bank Mandiri commitments, we developed and continuously improve various wholesale channels such as cash management, trade, supply chain, ForEx trading as well as online custody. These different channels provide key features for businesses as displayed in the current slide. So let me move on to the best 40. At this slide, Bank Mandiri's commitment to becoming the preeminent wholesale beyond lending stays strong. Our Wholesale digital strategies focuses on keeping better customer experience based on reliability and stability improvements and features enhancement. About features enhancement, we are currently working on some of them, such as payment and receivable, payment and receivable manageable -- sorry, payment and receivable management for Mandiri cash management. And suppliers online onboarding, as Pak Tim mentioned, online onboarding for individual client. Now it's also to the suppliers online onboarding in Mandiri supply chain management. Also at custody, we have real-time portfolio and settlement inquiry digital settlement instruction. In addition to those improvements, we also see that business acquisition plays an important role to the journey in becoming a preeminent wholesale bank. Therefore, part of focus are to optimize business potentials with anchor clients and their value chain to explore the possibility of cross-selling potentials. Next, I would like to shortly update you regarding the subsidiaries performance. On aggregate, our subsidiaries performed adequately during the pandemic. During first half 2021, contribution for Bank Mandiri in terms of net profit is around IDR 1.5 trillion or 16% higher year-on-year, roughly 12.5% of the Bank Mandiri's consolidated profit. On asset side, strong performance came from Bank Syariah Indonesia, or BSI and Bank Mantap with 11.7% and 27.7% year-on-year loan growth, respectively. Meanwhile, some businesses mostly consumer-related struggled due to the pandemic. That is all from my side. I would like to now turn the presentation to Pak Lau to open for Q&A.

Thank you very much, Pak Panji, and thank you to all speakers. Ladies and gentlemen, we now open the Q&A session. [Operator Instructions] We have our first question coming from the line of Joshua Tanja from UBS.

Okay. Thanks for the good results. I have one question, really, and that is on the asset quality. You have a loan average of 21%. As far as I understand, you've got 50% in business as usual and 50% in COVID. But you also mentioned that for the business as usual, you've got 68% coverage. And for the COVID LAR, you've got only 13% coverage. As far as I understand, in the first half, most of the increase, I believe 90% goes -- on the credit cost goes to the business as usual, and only 20 basis points for the COVID provisions. So my question is really about this 68% versus the 13% coverage. What makes it 68% for business as usual loan at risk? I mean you have the NPL, SML and others, while you only have 13% mainly to cover your high risk COVID book? On that one, please.

Thank you, Josh. Maybe we can take one other question also in the line from Harsh Modi, JPMorgan.

I have 2 questions. One on what kind of regulations do you expect for buy now pay later loans at any point in time? And second, the fees that you are charging for Livin' related fees have gone up, but do you expect any kind of clamp down on those fees being charged on the app and either clamped down by regulators OJK or once challenges like SeaBank, Jago, and all of the others, Grab, ramp up. And if they don't charge any fee on app transactions...

Sorry, Harsh, can I clarify that your question is regarding pay later, right? So that's the product that you're referring to?

So 2 things. One is on buy now pay later. What kind of regulations you expect? That's first question. And second, on the normal, the fees that you're charging on transactions on the Livin' app, if SeaBank, Jago and Grab whichever it is stops charging for any of the transaction, on app transaction, can you keep charging those fees on Livin', let's say, 12, 18 months from now?

Got it. Maybe Pak Siddik can start with Joshua's question.

Yes. Thank you, Joshua, for the question. So the question is why there is a difference -- significant difference between the credit process and coverage for the BAU loan at risk versus the BAU for the loan at risk because of the COVID pandemic. What we need to be aware of, first of all, there is no requirement or regulations in the first place to actually put the credit provision for COVID-19 restructuring under POJK 48. So we did actually increase or build up the coverage on our own initiative. And second, I think we need to be aware that those accounts that were restructured under COVID, POJK 48 had essentially good, healthy accounts before the pandemic. There is no fundamental issues with the business model or accounts. Their business was just impacted because of the lockdown period. These are the sector of -- borrower who actually all of a sudden nobody comes to the mall, nobody comes to the restaurant and nobody is traveling on the airline or going to the airports so. And we expect these borrowers to be able to recover as and when the pandemic recedes, hopefully later this year or next year. While the LAR, the provision on the LAR BAU, these are accounts that fundamentally has problems. It can be character issues. It can be business issues that are more fundamental than COVID. And the COVID pandemic has actually made the problem worse. That's why we intentionally increased the provision coverage higher for LAR on a BAU basis versus LAR on because of the COVID restructuring. As you can see, actually, more than 88% of the accounts restructured under COVID are considered as low and medium risk. And many of them has actually stopped the restructuring program and gone back to BAU. Only 11% of the restructured book remain in high risk, even then as of today, only 1.4%, 1% going to the NPL. Hence, the coverage on the restructured book should be lower versus the coverage on the LAR on the BAU portfolio.

Thank you, Pak Siddik. Maybe Pak Tim can answer on the pay later front, and we may add some more after him. Thank you. Go ahead, Pak Tim.

Sorry, I think the question earlier, second was about the fees, correct? On the Livin', correct from Joshua?

Yes. So it's about fees and about what do you think regulators and the regulations will be like on such product, Pak Tim.

Yes. Okay. I think on the pay later itself, it is actually a similar regulation that we will face with regard to extending credit. This is actually not too different from a normal credit, but the only thing is we don't -- we offer this pay later as if a credit without a card or without a plastic. So the understanding of it is quite similar, but the only thing is this doesn't have a plastic behind it. So from a regulatory perspective, there's nothing new that has been introduced to govern pay later. In terms of actually the question, if I understand it correctly, about regulating the fees that we will see with regard to the usage of Livin'. So I think let me just take it back before I straight answer -- give a straight answer how this is going to be regulated. Livin' is about an application that will serve 3 different areas. The first one is our normal day-to-day banking, and we want to cover that comprehensively in terms of our banking services. So that would include payment services, that will include opening account, normal financial services. And the second one, as we have covered before, we are offering a full suite of financial services where we're going to upgrade in terms of the capabilities with investment, with securities, with P2P lending and the likes and digi wealth. And the last bit is about the open ecosystem where we are going to bring partners into the different parts of our application. So when it comes to pricing, I think the first one, if there are going to be regulations that will regulate certain pricing, then obviously, we will have to follow that. And so far, I think we have seen in some of the pricing with regard to the non-digital in terms of SKN or TGS. So we'll then move into the digital world. I think we're yet to see that. When BI is actually driving cash flow society. But the other piece that is going to be very important is going to be market sentiment and market forces. So I think all banks will have to make certain adjustment in terms of how they price. But at end of the day, we're going to be looking in terms of building the right values for our clients, in terms of building the right experience for our clients and in terms of building the right solutions for our clients. And then the rest, I think we work to see how this market forces is going to play and how we define in terms of the pricing. And what we have seen so far has been encouraging in terms of value and the volume. So that's probably how I would characterize the pricing side.

Thank you, Pak Tim. So yes, so this is just loans like any other uncollateralized loans or retail loans, like credit card with other cards. So we don't think that there is any regulations. And I think one thing to add and very important to note is that the pay later segment that we are targeting at least in the earlier stage is to our existing customers. To those that has been with Bank Mandiri, we can analyze their salaries. We can analyze their ABC date and whatnot. And that is actually one of the advantage of having more than 25 million customers in the bank and offering credit without the card can be easy, can be safe because we are -- we can analyze the data and all that. So I think that's one thing to remember. And I think Harsh is also -- important to note that fee is maybe part of pay later, for instance, but the big chunk of the revenue will come still from interest rates, right? It's going to be very likely not a double-digit yield for us once we basically launch this pay later to our existing customers on a prudent way. So I think we're going to move on to next in line. We have Melissa Kuang from Goldman Sachs.

Just perhaps a quick question back in terms of your coverage for your COVID-19 restructuring loan. It was raised previously from 10% to 13%. So do you think 13% at this level to see it sufficient from herein and would like to just keep it at 13%? And then just quickly in terms of the buildup of the provisioning on the business units on [Technical Difficulty] And then in terms of the digital, you showed earlier that you have seen a very large increase in levels of transaction at the Livin' and ATM -- and has surpassed the ATM transactions, and we haven't seen that fall in terms of the ATM transactions. Why do you think that is the key. And also in terms of the increase in the Livin' transactions, how do you see that helping your OpEx at this moment? And how do you think over time you can see your cost to income ratio further fall?

Sorry, Melissa, could you please repeat the last question?

In terms of the cost savings that you are seeing, maybe you can help us understand like through the Livin' license, there's a great increase in terms of the transactions covering there. Are you seeing quite a bit of cost savings for yourself? And also over time, how do we -- how can you anticipate cost to income ratios to pan out once you see that further acceleration in transactions on the Livin' app?

Sure. Got it. I think on the coverage level, Pak Siddik can touch on that and we'll move on.

Okay. Thank you, Melissa, for the question. Question is better. We're going to stick again to 13% provision coverage for the restructured book. The answer is depending on the mix of the restructure book itself. As you are aware of, we have 3 risk segments within the restructure book, there's lower risk, medium risk and higher risk. And every month, we run our models to actually recalculate the mix of this low, medium and high. And if an account is in the low risk category, we apply the provision based on Stage 1 under IFRS 9, with medium risk Stage 2 and high risk is stage 3. So depending if the condition, for example, in the next coming months, touch wood worsens, then there may be accounts that will migrate from low to medium from medium to high, for example. That means when you have a higher mix of the medium and high risk, they apply Stage 3. The situation improves, the vaccination to have a higher rate, recovery happens earlier, then mission of account from high risk to medium risk from medium to low risk, then this 13% may be adjusted downwards. So I guess, we'll have to watch and see, but we will adjust this provision level based on the prevailing outlook of the pandemic based on the segmentation. Question on, okay, why SME and Micro seems to have a higher kind of provision? Yes, the answer is that within SME and Micro segment, mostly these are the prime borrowers, the small, medium enterprises. And a big portion of the borrower in the last 1.5 years have been able to adjust their business model to actually adopt to the new normal. Some of them actually changed the cost structure from more fixed to more variables. Some of them adapted their business model to off-line to a bit of online. They open online shops in Bukalapak, Tokopedia et cetera. But those that cannot convert their business model, adjust to the new normal flow [Technical Difficulty] probably segment, you haven't [Technical Difficulty] to the new era.

Now, let me answer the question to the digital side. So your question -- the first one was about, one is that the ATM actually transaction has dropped whilst the Livin' transaction on application has gone up. It is actually the way I have to say that there is a move whilst Indonesia is still a lot of cash circulating around. But you can see how this pandemic situation escalates the need for online and digital. So what is evident through this is actually the cash transactions and where ATM is mainly used for, obviously, ATM can be used for other stuff. But what drives the decline in the ATM transaction is actually the cash transaction. And you can see that cashless has picked up significantly through both the number of transactions as well as value in terms of our applications the way we've seen it. The second question that you asked about the cost efficiency, no doubt when it comes to a transaction because we track cost per transaction for the various means and channels. So I've got good tracking, frankly. And my CFO has been pushing me from this angle. But let me just put this slightly from a different context. Our app primarily is not about -- obviously, cost savings is important, so don't get me wrong, and we got to keep pushing for it. It's going to impact in the way we service clients because if everything is done through apps then people just going to ask, how am I going to do with the existing infrastructure that we have that used to be brick-and-mortar. But what I need to highlight is actually this app whilst we will get the benefit of efficiency. More importantly is how do we support the business growth. So Mandiri that I see it, the excitement part is this app is actually driving business growth in both Retail and Wholesale, right? And it's a benefit that we're going to get the efficiency. So we're not going to lose sight of that. We're not going to lose sight of that. But suffice to say, the transaction cost on the app is a fraction to what it is normally in a branch. So maybe that hopefully give you a bit of an indication how we want to drive this forward.

Thank you, Pak Tim. Maybe a little more detail on the cost efficiencies and the aspiration on the ratios of cost and all that from Pak Sigit, our CFO.

Thank you. For the processing perspective with digital improvement, both in Retail and segment Wholesale, of course, would mean that we will need less ATM and less branches. As we know that last year, we closed more than 5,000 ATM and continue by close to more than 150 branches. And so a reduction of this infrastructure will have us to even more achieving cost efficiency. At this point time, we are running at a 45% cost to income ratio and sub 3% of cost to asset, but our aspiration in achievement even more than the current level in the future. We expect that our cost to income ratio around 43% or 45%.

Thank you very much. Now apologies, but this is likely to be the next question. We'll take the line from Jayden. And that is if Jayden is just one question then we can take one other.

Sorry to keep asking Pak Siddik questions and also Pak Tim, but I have to understand topics. The Slide 17 refers to the fact that you're not removing the lag on restructured loans. I just wanted to know what proportion of the book is paying on normal commercial terms. I mean that would give us a good sense of how many of these accounts and the exposure is actually normal, and we won't need provisions. So that was my first question. And the second is just on efficiency and costs with the digital platform. It just strike Syariah Indonesia is kind of going off on its own and building a digital app. Why not just use Livin' for those guys as well and just put Syariah Micro services in there. Is there any way you could work together to make this more efficient. And finally, your slide on fees, it's challenging. But this is the first time in many quarters that I've seen fees actually rebound in a good way. So which line items would you say are actually challenging and you should be making more money. Those are my questions.

Yes. Pak Siddik, please go ahead for the first question.

Okay. Jayden, I hope you're well. Question on the COVID at risk through book. So total loan at risk including COVID accounts is now at 21.19%, right? That is we did not remove any flag risk through on any of these accounts as per POJK 48. But if we were to actually make some assumptions that if some of these accounts actually are already paying normally, let's say, for at least 3 months post the end of the restructuring period. Our loan at risk, including COVID, would have gone down to around 15.2%. So meaning that around -- out of that, 15.2%, then BAU LAR is about 11%. So -- but the remaining COVID risk through book that are still under I guess duress is only around 4.2%. And we also made a simulation modeling that what would that risk including COVID at the end of the year. If we were to take out the flag for accounts that are already, then I think there would be 15% or even lower. So therein you actually bear [Technical Difficulty] 10%, 11% of the BAU LAR.

Thank you. I think the second question is, if I'm not mistaken, why BSI doesn't just Livin' and that's more efficient. Is that it, the Jayden for the second question?

Yes, exactly. So we're talking about efficiency before. I mean, it seems like Livin' is a great product you're developing, wouldn't it just make sense to add Syariah Micro services in there and just integrate it. I guess Pak Tim may have a view.

Yes. Maybe Pak Tim can touch on that.

Maybe I'll try that surely. Jayden, yes, it actually is very good. But what we got to understand is BSI, whilst it's actually an amalgamation of the 3 Syariah banks and of which one was Bank Syariah Mandiri, they are actually a different entity. So from a perspective of regulations, they are treated as a separate entity. So I cannot run the same application, if you like, Livin' as one for Bank Syariah. But what we could do and what we are doing actually in terms of cost savings, I would -- being a subsidiary of the group, we are working very closely with the way they built, the way they do their infrastructure and the way they do all the different application builds. So from that angle, that's where the efficiency is going to be gained. But in terms of actual sharing of the app because they are different entity as simple as that. So that's probably the positioning why they are not using Livin' from that angle. The second bit, I think you did ask why did I say fees would be challenging, notwithstanding the graph is still showing a growth, right? So -- in fact, that is actually a very encouraging number to say. What I'm saying is fees has always been challenging. In the traditional conventional way, you would have -- I don't know if you in Jakarta, you were picked up even as late as a month ago when bank wanted to up a bit more on their fees on an ATM, and that became actually a slightly different challenge, right? So all I'm saying is fees can be challenging, but the avenue of using the app that is just beyond the normal day-to-day transactions and payments is actually giving us opportunities, as you can see while we are picking up in terms of the fees for the transactions that we deliver. And like Lau mentioned earlier, it's not just about driving the fees are up, there are other loan products that will attract healthy margins for loans. So maybe that would be my answer.

Thank you, Pak Tim. And ladies and gentlemen, apologies due to the time constraint, that was the last question. We are going to close the second quarter '21 analyst meeting now. Thank you very much again for your participation. For those that still have further questions, feel free to reach out to the Investor Relations through e-mails and we'll try our best to come back to you as soon as we can. Thank you very much. Thank you to one and all. Thank you.

Thank you. Thank you.

Thanks.

Thank you.