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

Good evening, ladies and gentlemen, and welcome to the PT Bank Mandiri's Third Quarter '22 Results Briefing. 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 Junaidi, our CEO; Ibu Alexandra, our Vice CEO; Pak Siddik, our Chief Risk Officer; Pak Sigit, our CFO; and Pak Tim, our IT Director. Before we start, I strongly encourage you to download both our presentation material and financial statement currently available on the Investor Relation web page of Bank Mandiri. [Operator Instructions] Now to start the presentation, I'd like to hand the presentation to Pak Darmawan, our CEO. Please, Pak. Thank you.

Thank you very much, Lau. Allow me to start the discussion by providing a short commentaries from the macro point of view. The left chart shows Mandiri Spending Index, which we developed using our own internal customers' transaction data through credit cards, debit cards, et cetera. As you can see, in third quarter through 2022, the Mandiri Spending Index showed a more stable and better trend in customer spending relative to activities during the first half 2022, which was more volatile due to the Omicron activities restriction. The economic reopening helped businesses and should translate to better GDP growth, which we expect to be more than 6% in third quarter 2022, partly thanks to the low base of last year's third quarter '21 on the back of the Delta variant. On inflation, the recent fuel price hike has led us to increase our internal inflation estimate to 6.27% in December '22 from 5.95% in September '22 and less than 2% last year. This inflationary environment has led to higher BI rate, which we expect to increase further from current level. As regard to Bank Mandiri's financial performance, in summary, the positive trend since the beginning of the year continued in third quarter '22. Consolidated profit grew by 55% year-on-year. Pre-provision operating profit, up by 26%. Loans and CASA grew by 14.3% and 12%, respectively. The aforementioned achievements were supported by well-managed ratios such as NIM improvement, low cost to asset and well-managed cost of credit. As a result, ROE continued to be healthy. Asset growth continued in third quarter '22. Loan growth accelerated nicely across most segments, bringing total consolidated growth to 14.3% year-on-year. Corporate segment booked 12.2% year-on-year, while high-yield segment, such as SME, micro and subsidiaries booked higher growth on year-on-year term. Retail loan segment growth performed well, with aggregate new booking higher than the pre-COVID level at IDR 131 trillion in 9 months 2022, as you can see in the bottom left chart. Additionally, loan growth also accelerated across all type of use, which are working capital loans, investment loans and consumer loans. On a quarterly basis, we saw a nice improvement in nice interest margin strength. As you can see on the right-hand chart, both bank-only and consolidated NIM improved in third quarter 2022 from previous quarters, driven by higher yields and flat funding costs. The increase in loan yield shown on the left-hand chart was largely due to the repricing of US dollar loans, which as of September 2022, accounted for about 24% of bank-only loans. Slight change on loan mix between wholesale and retail, also helped with the yield improvement. Meanwhile, rupiah loans yield remained flat. On the other hand, our cost of funds was well managed, up slightly compared to previous quarter, largely due to the higher time deposit pricing, while CASA pricing trends still declined. Bank-only CASA ratio remained high at 73%, but lower compared to previous quarter at 75%. This is due to the higher time deposit that we raised to anticipate for tighter liquidity. As of September 2022, our bank-only LDR stood at 83% and consolidated LDR at 85%, which is a good positioning. The right-hand chart shows cost of deposits by type. As mentioned earlier, deposit cost increased compared to the previous quarter. However, both cost of demand deposits and saving deposits continued to decline during third quarter 2022, despite higher benchmark rates. Let us now shift gear to operational cost side of the equation. Much has been done, and the results so far is encouraging. Bank Mandiri was able to maintain lower cost-to-income ratio in September 2022 at 36%. Moreover, cost-to-asset ratio was flat at 2.3% in September 2022. The bank's level of efficiency has improved meaningfully over the past years. Our average asset managed per branch and PPOP employee has improved, as shown in the upper right chart. Lower cost-to-income ratio is achieved as a result of better productivity. At the same time, jaws ratio reached more than 13% in 9 months 2022, one of the highest in the past 10 years. Additionally, digital innovation resulted in better productivity and lower customer acquisition costs. We acquired our customers directly through Livin App, 100% online, which has reached 55% of month-to-date total new customers, almost double since the beginning of the year. We expect this trend to continue in the future. As we're approaching the end of COVID [ restru ] moratorium in 2023, I would like to highlight our COVID restru loan portfolio update. Bank-only COVID-19 restru portfolio stood at IDR 45.6 trillion, or 5%, to total bank-only loan in September 2022. It has declined significantly from the peak in June 2021 at IDR 96.5 trillion. Moreover, we have set aside more than 4x loan loss provisions, which is more than enough in our view. We will continue to watch these accounts very closely and monitor existing COVID-19 restructured book to adjust our provisioning level if necessary. More detail on COVID-restru portfolio will be discussed by Pak Siddik later on. I will now pass on the presentation to our Vice President, Director, please Ibu Alexandra.

Thank you, Pak Darmawan. A year has passed since we launched Livin' and Kopra back in October 2021. Within a year, Livin' and Kopra has led an outstanding achievements in both users and transactions growth. Livin' has been downloaded by more than 18 million times, with 14 million registered users. Kopra has also gained 68,000 of registered users, with IDR 13,420 trillion transaction value year-to-date September 2022. More features and updates for both Livin' and Kopra already in the pipeline to be launched in the future. As a result of the above, bank's profitability continued to be maintained with consolidated ROE spending at 18.3%. Overall, we are happy with the achievements so far, but remain heavily focused on our long-term goal, that is sustainable performance and high profitability. Next, I would like to touch on the guidance. All of the guidance remain unchanged with loan, NIM and cost of credit guidance, respectively, at 11%, 5.1% to 5.5% and 1.4% to 1.7% for this year. Now, I would like to pass on the presentation to Pak Sigit, our CFO.

Thank you, Ibu Alexandra. Ladies and gentlemen, now allow me to run through our financial highlights. In 3Q 2022, our total asset increased by 12.3% year-on-year, driven by a 14.2% growth in loans. On the liability side, demand deposits grew by 8.5% year-on-year, and savings grew by 15% year-on-year, both combined drove CASA growth of 12.1% year-on-year. Time deposit grew slightly higher than CASA at 12.18% year-on-year. And overall, consolidated CASA ratio stand at 70% as of September 2022. On the P&L side, net interest income was up 20% year-on-year to IDR 64 trillion in 9 month 2022, driven by the both interest income and interest expense improvement. Non-interest income was up by 3.7% in 9-month 2022, driven by recurring fee-based income. And total revenue grew 16% year-on-year to IDR 91 trillion, higher compared to the growth in operational costs of 6% year-on-year, leading to positive jaws and maintain cost-to-income ratio. PPOP was 23% higher in 9 months 2022 year-on-year, while provisioning was down meaningfully during the 9-month 2022, which helped net profit to grow by 59% year-on-year to IDR 30.7 trillion. Most of the key consolidated ratios are showing positive results in 9 months 2022, starting with net interest margin, which was 5.42% or 39 basis points higher year-on-year. Our consolidated cost-to-income ratio came down to about 41% from level above 44% in September of last year. Equally cost-to-asset ratio have also come down to 2.66%. Asset quality ratios are showing encouraging trend in general and credit cost was kept at a very healthy level of 1.46% during the quarter. All the above led to the increase of the consolidated return on asset to 2.3% in 9 months 2022 and return on equity to 18.3%. The next slide shows the group's loan and deposit breakdown. Growth of loans until September 2022 was led by corporate at 12% year-on-year, SME and micro at 14% year-on-year and consumer at 10.3%. Our subsidiaries also contributed meaningfully to growth with 22% year-on-year. On deposit, focused growth was demand deposit and saving deposits, as you can see on the right-hand chart. Loan yield improved in third quarter 2022, as you can see on the top left chart, especially from the wholesale repricing. This is primarily driven by the higher IDR and US dollar against market -- we are seeing in the market. At the same time, our initiative on CASA has led to maintain our funding costs. Both combined supported the uptrend in net interest margin. The bottom right show the NIM of bank-only as well as key subsidiaries, Bank Syariah Indonesia and Bank Mantap. With a relative stable NIM trend in both subsidiaries, we were able to improve our consolidated NIM as well in 9-month 2022 to 5.4%. Our consolidated non-interest income saw a growth of 3.7% year-on-year in 9-month 2022 to IDR 24.7 million. This was primarily driven by the recurring fees, such as loan-related fees, card, Kopra and e-channel, including fees from the Livin' app, which was up 29% year-on-year in 9-month 2022. On the nonrecurring fees, cash recovery helped growth, while treasury income remain challenging. Overall, our consolidated non-interest income to total revenue remain at healthy level of 27.2% during 9-month 2022. Trend in operational costs during Q2 2022 was good, with cost-to-income ratio and cost-to-asset ratio trending down. In third quarter 2022, our consolidated cost-to-asset ratio was 2.7% and cost-income ratio [ 40.7% ], lower relative to historical -- our historical level. I would like to now pass the presentation to Pak Siddik, our Risk Director. Please, Pak Siddik?

Thank you, Pak Siddik. Ladies and gentlemen, please allow me to run through some updates on the asset quality trend up to the third quarter 2022. Overall, the indicators that you can see on the slide are showing positive progress for the group. The COVID-19 restructured book portfolio continued to decline as shown in the top left chart to 5.3% of our total consolidated loans. Both subsidiaries and bank-only saw improvement. Further, the improvement we had for NPL ratio and SML ratio in third quarter has led to lower loans at risk ratio of 13.4% consolidated, lower quarter-on-quarter and year-on-year. The NPL ratio, which stood at 2.24% consolidated is well covered with 268% NPL coverage on a consolidated basis. As a result of the above, we were able to maintain our credit cost at 1.6%, consolidated in the first 9 months of 2022, lower than the previous years. Our guidance on the consolidated gross cost of credit is unchanged, and we intend to keep our credit cost level between 1.4% to 1.7% for the full-year 2022. Next, I would like to update you guys about our COVID-19 restructured book positioning and its risk profile in more detail. The numbers shown in this table are in bank-only terms. In September 2022, the outstanding COVID restructured loans dropped to IDR 46 trillion, lower compared to IDR 58 trillion in the second quarter. More importantly, the improvement happened across all segments in both wholesale and retail banking. The medium-risk and high-risk COVID restructured loan remained manageable at around 39% and 21%, respectively, as you can see on the table. Please note that the provision set aside for particularly high-risk group is 60% as of September 2022, and the provision set aside for the total book is 21.8% higher as compared to 19.5% in the second quarter. We've set aside 4.3x COVID restructured coverage to NPL. Our coverage is more than enough in our view. We will continue to watch these accounts very closely and monitor existing COVID-19 restructured book to adjust our provisioning level, if necessary. Finally, I'd like to update regarding our capital positioning. In general, the CAR level has improved to 19.3% in September 2022, and well kept within an optimal level. On a yearly context, we intend to maintain CAR and Tier 1 ratio at around 18% to 20% range in the near to medium term. I'd like now to pass on the presentation to Pak Tim Utama, our Chief Technology Officer, to discuss more on super app Livin' and super platform Kopra. Please, Pak Tim.

Thank you, Pak Siddik. Allow me to break it down into 2 parts. I'll talk first on the Livin' side, and then I'll move on to Kopra. I would like to, again, take you because this is absolutely the foundation of how we built our super app. And this has been designed as a journey, and that journey is not just about building mobile banking app. It is about going beyond banking, where we look at all the different stages. And Stage 1, as I've actually explained before, it is about having the right crowds, having this super app used in a significant way. And that is moving from the physical distribution to a new digital. And the focus for that is very simple. That is about UI and UX, providing the right experience, giving the right use cases. And that's how we're going to build crowd. So once we have that done, we moved to the second stage, where we start monetizing the crowd and unlocking values. And we are now in Stage 3, where a lot of development has happened. And then moving on from there is going to be endless opportunities. So let me now cover a bit more what we have seen on the next page, please. Where -- as you can see, I think I'm very optimistic to provide an update today where the performance has been outstanding. So with this consistency that we are seeing since the very first of its inception, in just 12 months, as Ibu Sandra has actually alluded before, the app has been downloaded more than 18 million times. But what is more encouraging is after the download, we see reasonably high percentage of registered users. But again, the more critical thing to look out for is the active clients that are there of the registered users. So Darmawan said earlier, of all the new customers onboarded up to now since the launch of Livin', 55% has actually come through our app. And the transaction has grown significantly. As you can see on the volume side, it has grown more than 60% year-on-year. On growth transaction value, it has grown by 50% year-on-year. So annualized, it's a significant GTV that you can see by just looking at the last quarter, IDR 630 trillion, 4x. That's where we are seeing in terms of annualized transaction. So now I'm just going to focus a bit more. Next page, please, on the newest features that we have introduced in Livin' beyond banking. We have Sukha, an investment. So, this is all about looking to answer and satisfy the clients' needs beyond ordinary banking. And this has given us a new opportunity for value creation. So let me just briefly touch on Sukha. Sukha is really about venturing beyond banking. And we continue to do innovation to bring a lifestyle use cases to our clients. And we have Sukha, you can see there and those that have used us can see underneath Sukha, and this is still, again, is an ongoing development, where the user growth base has doubled, the growth of transactions. While volume has grown 4x more and then the transaction -- sorry, the growth of value has grown 4x more, and the volume has actually grown 6x more. Sukha will enable people to stay within the Livin' app, address the lifestyle of needs from them without moving or leaving the app. So it is integrated. And today, we have ability to buy plane tickets, train tickets, golf courses, concert, games and so on and so forth. The other piece that is quite exciting that I see very encouraging and has been responded extremely well is on the investment side. So, we have democratized investment, and this, therefore, unlock the door to wealth creation for the masses, because with IDR 100,000, you can buy mutual fund. And what you've seen in terms of growth is the user base has grown 20%. The AUM has grown 45%. We have now about IDR 1.5 trillion value of transactions since launch. On the average, when we first started and until now, was launched in May, we are now matching 1.5 million to 2 million. At peak days, we can touch $3 million in 1 day. We will continue to develop on this investment front. Very soon, we're going to be launching the bond products, primary bonds, and there will be more beyond that. So let me move on very fast now. I think the key to the success of Livin' next page, please, where it is about endless innovation. So, we got to keep innovating to stay focused and stay relevant, where we are going to be creating new revenue streams. So the use cases that we think will be used for our clients, but at the same time, we'll be bringing new revenue streams to the bank. So as you've seen -- followed us, since October launch in 2021 until now, on a monthly basis, we are preparing new features. But what's coming up soon is going to be a registration for overseas customers. So as long as they are Indonesians, they are living overseas, don't have to have Indonesian mobile, they can open an account through Livin. We're going to do cross-border remittances at the cost of less than a Starbucks with very attractive exchange rates, where you can do cross-borders with full amount. And then obviously, I've mentioned about the primary bonds. So let me now switch gear to move into the next phase, which is the Kopra, which is our super platform. What we have -- actually, we are very proud to say that we will continue to look for features and we are offering now superior mobile features for extra convenience for every business transaction. So Kopra has been designed as a super platform, but now we have introduced mobile app, where people on the go, especially people that are authorizing transactions can do so. And also, at the same time, we are allowing now to open Giro online without the need to actually visit a branch and additional Giro accounts can be opened through the app. And obviously, the other thing that we have added is virtual assistant that are able to help answer clients without the need to, again, engaging our branches. So as you're following that, we continue to see that the effect onboarding suppliers and onboarding transactions via a channel has been responding extremely well. And on the next page, you can see that with Kopra, we are able to continue to secure our position as the lead operating bank account -- operating account bank for our business clients. I mean, this is the underlying principle where Pak Sigit earlier mentioned about the CASA ratio. So through this, our position has been very dominant in the market as a wholesale player. And you can see that wholesale transaction value now through Kopra has grown extremely encouraging by [ 20% ] up. And it has touched on the 9 months at IDR 13,420 trillion. On the cash side, significantly, it's grown by 25% to the number that we've seen on the page. E-FX, I think is doubled to IDR 149 trillion. Value chain is picking up. This is absolutely going to be in the next phase that we've got to keep pushing. And this is where we're really going to push down to the lower levels. So the wholesale transaction volumes and trade banks and Kopra FBI, you can see on the chart is showing meaningful increases. But I would like to actually draw to your attention -- if I combine Kopra and Livin', if I were to follow BI's digital economy transactions, that has been somewhere reported at around IDR 51,000 trillion, Bank Mandiri loans through our digital platform now has captured 40% of Indonesia's digital transactions. So if you annualize Kopra, of the IDR 13,420 trillion, becomes about 18,000 plus and then Livin' alone is already 2,500 plus, we are actually getting the 40% of that share in Indonesia. So with that, I think we can show a report to say that our digital transformation has been responded very well by the market. And now let me pass you to Ibu Sandra, who's going to take us through the presentation on ESG. Ibu Sandra, please.

Thank you, Pak Tim. Ladies and gentlemen, let me now touch a little bit on some of the bank's ESG initiatives. In general, we are on track and very much aligned with the banking regulation on sustainable practice under POJK 5, which covers sustainable financial products and services, human resources and corporate governance. Some of our sustainable financial products and services are the sustainable bonds, which we issued last year with 54% allocated to finance social projects, electric vehicle financing for retail customers and sustainable loans. We also continuously educate our clients through workshops and group discussion forums. For the social aspect, we participated in several corporate social responsibility programs, along with loan disbursement through our financial inclusion channel, such as agent banking and P2P lenders. Our sustainable portfolio has gradually increased throughout the year. As of third quarter, 22% -- about 24% of the total loan is categorized as sustainable portfolio, which consists of 52% micro, small, medium enterprises, 42% sustainable palm oil and the remaining being financing towards renewable energy, clean transportation and more. Moreover, Bank Mandiri is committed to support sustainable banking by prohibiting financing projects that endangers the environment and social. Some of the credit policy can be seen in the right-hand side of the slide. This slide provides a specific update on our palm oil exposure. Out of the total outstanding of IDR 88 trillion in third quarter '22, about 80% is wholesale, corporate and commercial, while 20% SME and micro, which are largely the plasma farmers. Mandiri is actively financing more than 76,000 CPO farmers. Moreover, we also have a strong policy in growing palm oil sectors. Some of the criteria we ask in our debtors are ISPO certification requirement, no child labor, grow palm trees in sustainable land, no peatland policy and NDPE policy, which is no deforestation, no peatland, no exploitation. More of the policies can be seen in the upper right part of the slide. The bottom right chart provides an update of the mix between ISPO certified and uncertified loans. Here, we believe we are making a good progress of currently having around 90% of our exposure in certified ones. We also take part in supporting renewable energy ecosystem. As of third quarter '22, our exposure is about IDR 4.8 trillion in renewable energy, which increased by 13% since 2021. We signed an MOU on green financing and expand utilization of the solar rooftop systems and an MOU for electric vehicle charging station as our commitment to support renewable energy. Lastly, through various channels, Bank Mandiri has carried out several CSR and financial inclusion initiatives that have had a positive impact on approximately 2.8 million Indonesian people through Mandiri's Sahabatku program, which provides entrepreneurship and financial management training program to more than 15,000 Indonesian migrant workers. Collaboration with fintech companies such as Amartha, CROWDE, Akseleran and Investree with credits that has been disbursed amounting to IDR 1.8 trillion to more than 128,000 borrowers. And lastly, program for distributing banking products to all corners of Indonesia and providing job opportunities through more than 156,000 banking agents. That is all from me. And I will hand back the presentation back to Lau for Q&A question. Thank you.

Thank you very much, Ibu Sandra, and thank you very much to all speakers. [Operator Instructions] We'll first take some of the questions from the raise hands and then we can go to the chat box ones. I'll start with Ferry Wong from Citi.

Yes. Can you hear me?

Yes, we can.

Okay. Yes. Okay. Congratulations on your good results. 2 questions from me to the management of Mandiri. The first one is, can you elaborate more on your US dollar loan-to-deposit ratio? Because as of the second quarter, I think your LDR for the US dollar rates around 107%. Could you please update on the third quarter number? And as Pak Darmawan mentioned that the US dollar loan composition at the bank only reached around 24%, what do you think about the demand going forward? And then are you expecting that the deposit funding on US dollar will be increasing in the fourth quarter and also in the first half of 2023? And then how is the -- your growth in terms of the deposit funding on the US dollar? And the second question is on your credit costs in the third quarter of 2022. There is a pickup in terms of quarter-on-quarter from the second quarter of 2022. Could you please elaborate on that? Because if I see the quarter-on-quarter for the other 2 banks, BNI and BCA, they are experiencing a decline in terms of credit costs in the third quarter. So is it because you are more conservative and then you wanted to allocate a bit more in the third quarter.

Ferry, I think Pak Sigit will take your first 2 questions on the loan to deposit and liquidity situations on dollar and rupiah and perhaps Siddik will later on touch on the cost of credit trend. Pak Sigit? Thank you.

Yes. In third quarter, our loan-to-deposit ratio improved compared with the second quarter as you know that our bank-only loan-to-deposit ratio, 83% in total. For the US dollar, our loan-to-deposit ratio is 105% are down compared with the second quarter, 115%. And for the LDR, loan-to-deposit ratio, still maintained at around 78% in third quarter 2022.

Thank you, Pak Sigit. And I think just to give a perspective, the growth that we're seeing so far has been driven by the rupiah. So, I think there is more likelihood of growth going forward that is going to be driven by the rupiah as opposed to the dollar, which is part of the bank's initiative in order to basically control the liquidity situation and the dollar. Maybe to the next question about asset quality and credit cost, Siddik on...

Actually, the cost of credit in June 2022 is around 1.27% and in September is 0.130%. So it's really insignificant increase and there's no particular uptick in any particular segment. We're just adding a little bit more reserve here and there. And then you can see that as well in the higher coverage bank-only now, we are at [ 192% ]. So that's why we'll continue to maintain that, but there is nothing -- anything significant in any part of our portfolio. So 1.27% to 1.3% in our opinion, no plans of worry, but we don't know what the others did. But I think we have different mixes of portfolio across BNI, BCA and Bank Mandiri. And we have our own strategy in terms of credit provisioning.

And just to give a reminder, Ferry, I think relative to our guidance, which is 1.4% to 1.7% consolidated, the 1.46% that we have in the 9 months of 2022 is very much within the guidance that we're leaning at. And next question coming from the line of Harsh Modi, JPMorgan.

Yes. 2 questions. First is loan growth, pretty good numbers, 14% year-on-year, slightly above that. How do we think of not only for the year '22, but your initial discussions on budget for '23, do we expect 15-odd percent loan growth to sustain next year? That's the first one. Second, back to liquidity. Right now it seems to be all right. But as you look at your growth requirements over next 3 months, 6 months and given that from September, we have very high reserve requirement, how do you think your cost of fund is shifting, especially competition for both special savings and time deposit? And how should we think about cost of funds and your ability to pass that cost of fund in next 6 months?

Maybe Pak Siddik, is it possible for you to just provide some insights on the growth and then Pak Sigit can touch on the cost of fund side.

Sure. Yes. I think we have been fortunate to have quite a high degree of loan growth, including the subsidiaries at around 14%. But I think next year, in our opinion, we will be very cautious in terms of decisioning how much loan growth we want to be, because, I guess, we have to take into account the potential impact of the various macroeconomic environment, global, that may impact our growth of economy in Indonesia. And we also need to think through about the -- any potential impact of the change in OJK policy on credit relaxation for COVID portfolio as well as any other geopolitical risks that we have to take into account. In our opinion, probably the loan growth may be slightly lower than this year's, but we'll probably update you more in the next Analyst Meeting.

Pak Sigit, on the cost of funds?