PT Bank Negara Indonesia (Persero) Tbk (BBNI) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Good morning and good evening for those in Europe, U.K. and U.S. Welcome, and thank you for your attendance at BBNI Virtual Analyst Meeting for Financial Result First Quarter 2021. I hope you are well, staying healthy and staying safe. In authorization, we have here our Board of Directors to give explanation of first quarter financial result. First, we have Mr. Royke Tumilaar, President Director; Mrs. Adi Sulistyowati, Vice President Director; Mrs. Novita Widya Anggraini, Managing Director of Finance; Mr. David Pirzada, Managing Director of Risk Management; Mr. Silvano Rumantir, Managing Director of Corporate Banking; Mr. Y.B. Hariantono, Managing Director of IT and Operation; Mr. Henry Panjaitan, Managing Director of Treasury and International Banking; Mr. Muhammad Iqbal, Managing Director of MSME; Mrs. Corina Leyla Karnalies, Managing Director of Consumer Banking; Mr. Sis Apik Wijayanto, Managing Director of Institutional Relations; Mr. Bob Tyasika Ananta, Managing Director of Human Capital and Compliance; and Mr. Ronny Venir, Managing Director of Service and Network. Mr. Royke Tumilaar, our CEO, will begin the presentation and followed by our Vice CEO, Mrs. Adi Sulistyowati, by delivering management highlight. Our Director of IT and Operation, Mr. Y.B. Hariantono, will later on follow with digital initiatives and strategies. Our CFO, Mrs. Novita Widya Anggraini, will continue with highlighted result and financial performance in first quarter '21. After that, presentation on loan quality and risk management strategy by MD Risk Management, Mr. David Pirzada. And lastly, our MD of Corporate Banking, Mr. Silvano Rumantir, will deliver some updates on corporate and consumer business highlight. Before we head to presentation, we'd like to inform that our latest corporate presentation can be downloaded through the link we provide in the chat room. If you face any difficulty in accessing the link, please contact IR team at e-mail, [email protected]. And ladies and gentlemen, should you have any question during presentation, you may send it to IR e-mail address, so we can accommodate it later in the Q&A session. Our Board will run through the presentation for about 30 minutes and then followed by a Q&A session. And now, our CEO, Mr. Royke, will open the presentation. Royke, please.

Thank you, moderator. Good afternoon, ladies and gentlemen. Allow me to spend the opening section of today's earning call to highlight first quarter 2021 results and provide our direction in entering the recovery year of 2021. I will then turn the call over my fellow Board member. The pandemic has been going on for a year, and as the financial numbers show, we are quickly adapting to the normal -- sorry. Compared to previous quarter result, most of our financial indicators are showing improvement. Firstly, the net interest margin at 4.9% is slightly ahead our full year guidance at 4.6% to 4.8%, thanks to agile management of liquidity and funding, where our cost of fund declined to only 1.7%, the lowest level we have ever had. Note the slight NIM contraction quarter-on-quarter in -- already expected as we have abnormally high loan yield in the previous quarter due to back-end loading of government's subsidy of KUR loan. As a result of healthy margin, we managed to book IDR 7.8 trillion PPOP in quarter 1, even higher than the prepandemic number a year ago. Loan at risk gradually declined as some client, which were affected by pandemic, now start to resume the normal operation that we removed their restructuring flag. Cost of credit improved significantly quarter-on-quarter, in line the gradual construction in loan at risk. The management team tries our best to front-load credit costs. We booked 7.5% cost of credit, in line with our full year guidance. Further detail regarding our loan quality will be shared by our Chief Risk Officer later in the presentation. Taking into account all situation until the first quarter, management has underlying 7 priorities going forward. First, we want to foster the risk culture in every layers of the organization. Fundamental improvement will be delivered through end-to-end transformation of underwriting process. Second, we see opportunity to leverage our global network, which is already quite comprehensive, facilitating Indonesia company to go global and be a doorstep for foreign investment coming to Indonesia. Third we all know that pandemic has accelerated the growth of digital banking. To ensure we adapt quickly to our customer needs, we are enhancing our digital capabilities to serve our customers better and to improve productivity and efficiency in our operation. Fourth, we want to optimize our subsidiaries performance by shopping their business model. One of the closest example in upgrading our investment banking capabilities through BNI Securities Indonesia and Singapore. Fifth, we see significant opportunity to grow our future business with selected top corporate names in Indonesia. This is in line with our effort to improve our asset quality in the long term. Our corporate banking team focuses on deepening client share of wallet through cross-selling to optimize fee income and low-cost funding and tapping opportunities with value chain of the top corporate groups that we expect to boost sustainable business growth going forward. Sixth, we believe that human capital is our greatest asset. We need to boost investment in employee soft and hard skill from now in order to ensure strong talent pool in the long term. Lastly, in line with the previously mentioned priority regarding sustainable business growth, we remain focused on building a strong CASA franchise in Indonesia and optimizing fee-based income through increased transaction. We -- with these 7 priorities, BNI will become more resilient and be able to deliver consistent result to our shareholders in the future. We believe building a strong balance sheet is crucial for systemic bank like us, especially during pandemic situation. And also because our strategic direction to be more active in lending to key industry players, we need a bigger capital base to support bigger lending -- legal lending limit. We decided to use a current positive market momentum to issue the Tier 2 securities. Last month, we successfully priced in USD 500 million sub debt with 5-year tenure priced at 3.7%. And the bond investor appetite was quite good with almost 5x oversubscribed. This corporate action boosted our Tier 2 capital by around 120 basis points. In term of business expansion, our corporate banking team are quickly winning business from new-to-bank customers who are also top players in their respective industry. For example, in [ Q4 ] last year, we strengthened the relationship with Indofood Group and Rajawali Group by providing on plain vanilla financing to support their business expansion. Early this year, we also managed to provide financing for several large business groups such as Ciputra, [ Astra ] Group and other top private sector company in the chemical manufacturing, energy and telecommunication business. All of them are previously either have no relationship or immaterial business with us. In order to provide better service to clients, just recently, we reorganized corporate banking team into 3 subgroups with different industry sector specialization. Within these subgroups, we are deliberately create 2 new industry focus: digital economy and sustainable finance. We believe these 2 sectors will grow rapidly, and we want to be preferred banker for them in the future. The reorganization also involved some improvement in their KPI. Their KPI now focusing more on sustainable profitability as measured by PPOP and credit cost number. We keep encouraging our RM that they're a banker, not a lender. So they should cross-sell with other products to generate fee income and low cost funding. In addition, we try to improve our capabilities in investment banking through our subsidiary, BNI Securities, that will provide holistic solution to corporate clients. BNI Securities representative will be established in Singapore to offer more solution alternative to the client. Ladies and gentlemen, in today's world, we have to always review which investment is the most wise to make in order to get ahead in this highly competitive business environment. The pandemic also reiterate the importance of investing in the company's largest asset, people. Therefore, our intention in this area is clear: a continued investment in human capital which focus on productivity and engagement. First of all, in term of talent acquisition, temporarily, we are getting more active in bringing pro hire, especially in areas where specific skill set is necessary. This is important to help executing our transformation program quickly. Parallel, we are investing in our employees' competency and productivity improvement to equip them with global and digital mindset. Human capital investment is our priority right now as it will take several years from now for BNI to enjoy the result. We understand the importance of upgrading our business to be more ESG-oriented, thanks to continued feedback from our shareholders to do this. We want to develop ESG culture among our employees in order to drive sustainable performance in the long term. Also still within ESG, BNI encourage diversity of increasing the proportion of female leader. At the Board of Director level, we have 3 female members that the among -- the most among big banks in Indonesia. For senior level, VP and above, the percentage of woman leader has reached 21%, while in total, the number of female employees has reached 52% of the total employees. I would now like to turn the presentation over to [Foreign Language] Susi, our Vice CEO, to run through our digital highlight. [Foreign Language] Susi, please.

Thank you, Royke. Ladies and gentlemen, to survive and remain of new forefront of the competition, we keep improving our digital capability to service our client better. In retail banking, we are spending up our digital transformation. Firstly, from the organization structure, we are recruiting a [indiscernible] EVP to lead our digital initiative execution. And we expand the number of division under IT and digital banking from 3 or 5 divisions. Secondly, we are also improving feature in our mobile banking application. Some of the key highlights we launched recently are biometric login, digital account opening with facial recognition feature, preapproved personal loan offer as a pop-up in mobile banking apps, credit card billing integration, investment in bond and mutual funds as well as QR payment, which is accepted in all retail merchants that already adopt a standardized national QR system. This series of innovation has received appreciation from user as reflected in the rating improvement of BNI mobile banking on Android Play Store from 3.6 in August 2020 to 4.9 in March 2021. Our apps now is enjoying the highest customer rating among all BUKU-IV banks. Not only in retail, we also have strong capability in wholesale digital journey. For our business banking client, we have developed cash management total solution in 1 portal where our client are able to do various transaction. As of March 2021, total transaction value via BNI Direct [indiscernible] IDR 968 trillion are growing by 23% year-on-year. BNI Direct plays a crucial role to us as a contribute half of total CASA in [indiscernible]. We do expect it [indiscernible] continue to grow as the penetration [indiscernible] management platform is still low at only 11% of [indiscernible] banking clients. Into the digital economy, we need to connect seamlessly with other ecosystem. Therefore, we developed API as an open banking platform that facilitate collaboration with third parties. Statistically, BNI is a market leader with 238 number of API, [ the most ] compared to the other domestic bank. Our API also recognized globally and won the Best Overall Dev Portal by Community Prize in 2021. Ladies and gentlemen, globally, e-commerce industry is growing exponentially. To maintain our CASA franchise, we need to grow along the fast-growing e-commerce transaction. Right now, of the commerce payment, Indonesia is still conducted via ATM transfer or cash payment on delivery. We understand the pain point of customer journey where they are reluctant to submit their debit card or credit card details to the commerce platform. Learning from this, we come up with innovative solution in our mobile apps where customer could create a virtual account with a preset limit for 1 of e-commerce transaction. During first quarter 2021, we processed 160,000 e-commerce transaction per day through BNI mobile apps growing by 69% year-on-year. The majority of this transaction are used in the virtual account, which we explained just now. Furthermore, to support the government program to develop a standardized QR payment, we added QR payment feature in BNI mobile apps. This feature will be potentially used in 1.5 million merchants spread across Indonesia. Detail on our digital initiative will be explained by Managing Director of IT and Operation by Y.B. Hariantono. Please, Mr. Y.B.

Thank you, [Foreign Language] Susi. Good afternoon, ladies and gentlemen. In anticipation of changing business landscape, BNI continues to innovate to provide digital banking solutions. But unlike fintech, which only have digital platforms to provide to the customers, as a bank, we have both platform and our own products. We keep upgrading our platforms. In addition to our existing brick-and-mortar, we develop also branchless agent banking in suburban and rural areas as an economical way to distribute our products and services. BNI is a universal bank with a majority of our business comes from wholesale banking. Hence, our digital initiative has to cover both retail banking or consumer banking mainly through our mobile apps and wholesale banking as well mainly through our cash management system, which we call it as BNI Direct. We will discuss about them in more detail in the next pages. To collaborate with other ecosystems, digital ecosystems in the country, we developed API services since 2018. As for the enablers, we strengthened the technology and operational capabilities by developing cloud-based infrastructures, big data and analytics, improving our cybersecurity systems and supported by human resources with a digital mindset. BNI is a leading bank in terms of open banking or open API world, which we have developed since 2018, and now we already have 238 plus-plus services, which is the most in the country compared with our peers. Through BNI open API, we make it possible for businesses, businesses owner to connect with their business with various services we provide, especially on the payment and banking services. Now our collaboration is quite widespread across various ecosystems such as e-commerce like Tokopedia, Bukalapak, Shopee, to name a few; ride-hailing services with Gojek and Grab; traveling with Agoda or Traveloka; and many other ecosystems, digital company fintechs that is available in Indonesia. Our goal is to enlarge the customer base on the platform itself by increasing attractiveness and building excellence through quality and service differentiation and also by reaching out and collaborating with other digital ecosystem to enlarge the market share of our banking products. The number of BNI mobile banking customers continues to grow by 85% year-on-year, reaching 8.6 million users. Completeness of the features is our competitive advantage over our peers. The number of transactions made through BNI mobile banking was 95 million in first quarter of 2021, an increase of 50.4% compared to first quarter 2020. BNI mobile banking users are getting more engaged with our apps, thanks to a series of new features launched recently such as a biometric login, digital account opening with facial -- face recognition features, preapproved personal loans, credit card bills management and QR payment for retail merchant transactions. For the next improvement, our mobile banking users will be able to have omnichannel experience, personal finance management and SME solutions integration. Beside retail or consumers -- customers, we keep improving our product and services for business banking clients through our digital platform as well. For business banking clients, BNI offers its cash management flagship product called BNI Direct available both in mobile apps and web-based solutions. One example of our key features often getting compliment by our clients is in the creative taxation management platform within the BNI Direct itself. Ladies and gentlemen, to facilitate transactions of our wholesale clients, we also developed an integrated portal called bnitbs.id, where customers can do various type of transactions as payment management, collections management, value chain management and open banking solutions. Number-wise, we still see strong momentum of our wholesale cash management platform with 24% year-on-year growth in the number of users. More importantly, the room for growth is still ample as the penetration rate of our clients is still only 11%. We already explained in details regarding our effort to upgrade digital offerings to our client. And ultimately, the question is, what's the impact to us in this area? In this slide, we show that other than fee income, better customer experience in doing transactions ultimately brings [ PK ] CASA, which enables us to maintain or even expand our margin. Now with this, 47% of our savings balance comes from mobile banking app users. This percentage, it must improve as compared to only 35% a year ago. For current accounts, 90% of it comes from the cash management users. These current accounts stay with us because of the convenience to do transactions and not sensitive to the interest rate we are offering. As a result, cost of fund for current account is only 1.4% in first quarter 2021 as compared to 2.2% a year ago. Overall, more than 70% of our CASA are either from mobile apps or cash management users, and the proportion is still growing. This should help our bank to maintain leadership in low cost funding. The next presentation is about our financial highlight by our CFO, [Foreign Language] Novita Widya Anggraini. [Foreign Language] Novi, please go ahead. Thank you.

Thank you, [Foreign Language] Y.B. Ladies and gentlemen, allow me to explain about our financial highlight. During this pandemic time, we carefully managed risk as reflected by loan growth at only 2.2% year-on-year, mainly contributed by lower risk segment, namely top-tier corporate client, subsidized micro loan and payroll-based loan. On the funding side, third-party fund grew by 8.1%, predominantly from CASA, which rose 13%. This is another evidence of our strong CASA franchise. Our net interest income [ minutes ] to increase by 7.6% year-on-year, thanks to 120 bps reduction in third-party fund funding costs that was more than enough to cover the impact of pandemic to loan yield. Noninterest income grew by 41% year-on-year, mainly from the trade finance transaction, realized gain from marketable securities and syndication fee as well as fee from ATM and e-channel. We maintained OpEx growth at single digit by 8% year-on-year with strong cost control on nonpersonnel expense. As a result, our PPOP grew by 5.9% year-on-year. Based on asset quality review in February, we saw an improving trend of asset quality. However, in line with management front-loading strategy in provisioning policy, we still book provision charges in line with our initial guidance. Our strategy to focus on low cost of fund was reflected in CASA ratio at 67.9%, almost a 300 basis point increase compared to last year. As a result, cost of fund could be reduced to the level of 1.7% and contributed to 4.9% NIM or stable as compared to prepandemic level in quarter 1 last year. ROE and ROA are at 9.7% and 1.5%, respectively, keep improving on quarterly basis. Loan at risk stood at 26.9%, improved by 180 basis point as compared to December 2020 position. This was contributed by a reduction in both NPL and collectibility 1 on restructured loan as some clients start to resume normal business operation and no longer need restructuring support from us. NPL ratio and credit cards are at 4.1% and 3.5%, respectively, better than in the previous quarter. Our liquidity position was quite good with LCR at 2.2x and NSFR at 1.4x, way higher than regulatory requirement. Loan-to-deposit ratio was maintained at a healthy level of 87.2%. As a result of Tier 2 issuance last month and recovery in profitability, our total CAR increased to 18.1%. On the previous slide, we have conveyed highlight of our balance sheet. I would like to add information related to our effort in optimizing earning asset mix in first quarter 2021. One of our strategies was being more active in purchasing government bond, which grew 11.5% Q-on-Q and 29.2% year-on-year in order to gain higher return of earning asset. Ladies and gentlemen, during the pandemic time, we are fine-tuning loan mix composition toward low risk portfolio. Hence, we -- you could see that lower loan growth was dominated by corporate segment, subsidized micro loan, our KUR part of small business loan as well as secure consumer loan. Loan to private sector corporation grew by 2.1% year-on-year and 4.3% Q-on-Q, driven by key industry player in FMCG, gold mining, infrastructure and manufacturing sector. Meanwhile, loan to [ step on ] enterprise was contracting by 4% year-on-year due to business cycle repayment from SOE, aligned with their subsidy payment from government. In line with our strategy to improve asset quality, we selectively let go some client in medium segment and built new good portfolio. During the process, it resulted in 6.1% portfolio contraction year-on-year. As anticipated, blended loan yield decreased slightly from 8% in fourth quarter 2022, 7.8% in first quarter 2021. Note that a yield pickup in corporate banking was because several client are no longer in restructuring flag and their yield back to normal level. As of first quarter of 2021, third-party fund grew by 8.1% year-on-year. With strong CASA growth at 13% year-on-year, we had an opportunity to keep improving CASA ratio and cost of fund by reducing time deposit portion. In first quarter '21, our cost of fund was only 1.74%, the lowest level we ever had. We are still seeing room to improve it further as we cut our TD rate again starting on April. We will always focus on sustainable growth of low cost of funding. In wholesale, it will be driven by our effort to cross-sell cash management solution to client. In retail, we are going to keep investing in mobile banking feature and reliability. We continue to see PPOP recovery, with first quarter PPOP grew by 5.9% year-on-year to IDR 7.8 trillion. PPOP growth was driven mainly by lower cost of fund, resulting in net interest income to grow by 7.6% year-on-year. Cash recovery is also showing a strong trend, 53% higher year-on-year as we did a lot of write-off last year. As we guided in the previous earnings call, the management has had intention to build higher provision when we have good PPOP in order to minimize profit volatility in the future. As a result, our provision charges increased by 128% year-on-year. Looking from the quarterly trend provisioning charges start to become smaller, in line with general trend of asset quality improvement. We continue to manage our operational expenses in an efficient way without disrupting business activity. OpEx grew by 8% year-on-year with personnel expense as growth driver, while G&A expense was still contracting by 5% year-on-year. The increase in personnel expense was mainly due to accrual variable remuneration to reward our employee for their collective effort delivering strong business recovery. In the past 5 year, we have been lowering our cost to asset from 2.9% to 2.5%. Our next presentation on asset quality, risk management and loan restructuring update will be delivered by our MD of Risk Management, [Foreign Language] David Pirzada. Please, [Foreign Language] David.

Okay. Thank you, [Foreign Language] Novita. Ladies and gentlemen, as of March, the outstanding COVID restructured portfolio was IDR 84.3 trillion or 15.1% of total loans. This amount was 17.7% smaller than that in December 2020, mostly contributed by the reduction in restructuring COVID in corporate segment. Some corporate clients started to do repayment in first quarter 2021, and their flagging for COVID restru have been lifted. Despite regulatory relaxation where banks are allowed to classify all COVID restructured loan under collectibility 1, we choose to assign classification as much as possible to reflect the clients' underlying situation. By doing this, we also could assign higher loan loss reserve accordingly. Out of all COVID restructured portfolio, 2.1% is already NPL, 6.4% is collectibility 2 and the remaining 91.5% is collectibility 1. Overall, asset quality data showed a gradual improvement trend. Loan at risk was at 26.9% of total portfolio, which is 180 bps lower than December position. Now looking into the component of loan at risk one by one. I may explain that the restructured loan collectibility 1 has improved to 17.2% of total loan from 19.4% in December 2020 or 220 basis points decrease. Collectibility 2 ratio increased by 50 bps year-on-year, triggered mainly by an exposure in textile manufacturing company. For this one, we already built more than 20% provisioning book in first quarter 2021. NPL improved by 20 bps quarter-on-quarter to 4.1%. All of these movements have been in line with our expectation. Despite the general improvement in loan at risk ratio, we still consistently built provision coverage. NPL coverage was at 201% and LaR coverage at 31%, higher than the December position. Overall, loan loss reserve ratio to total loan has been gradually increasing from 7.8% in December 2020 to 8.3% on March 2021. We assigned a conservative provision coverage of 75% on average for those in NPL category, which we deem sufficient considering that LGD rate of around 60%. For those in collectibility 2, the provision coverage was 44%, much more conservative than regulatory suggestion. Provision coverage for current restructured loan was 7.5% as we believe only a small portion of this bucket of around 16% is having high risk of downgrade to collectibility 2. We have carried out assessment of our portfolio twice, first in October 2020, and the second review was conducted in February 2021. Overall, we see an improvement in the customer risk profile with higher risk classification declined from 14% to 9.6%, while low risk classification increased from 53.3% to 59% of the portfolio being assessed. We believe this is due to the ongoing economic recovery, where vaccination program has been running, people started to adapt better to the pandemic situation and started resuming their activity in a responsible manner. Based on this assessment, we identify around IDR 39 trillion of our book as a shadow NPL, comprising of loan book currently in collectibility 2 and current restru non-COVID with medium to high risk of collectibility downgrade. From this IDR 39 trillion, IDR 23 trillion is considered as higher-risk shadow NPL, which have higher probability to fall into stage 3, and the remaining IDR 16 trillion is considered as lower-risk 0 NPL that might survive in stage 2 with some remedial steps. This survey is very useful in helping management to decide on the key accident plan for each debtors, including its provisioning strategy. Table on the bottom right shows the percentage of loan loss reserve assigned to each risk bucket. 2 scenarios is prepared. If we book only IDR 9.2 trillion ECL this year, the specific cumulative provisioning assigned to shadow NPL bucket will be IDR 20 trillion or around 50% coverage of the IDR 39 trillion shadow NPL. Looking from the bank-wide basis, it will translate to NPL coverage of 1.8x or 180%. While if we stay with our plan to book IDR 20 trillion this year, in line with our 2021 guidance of 3.3% to 3.6% cost of credit, the specific cumulative provisioning assigned to shadow NPL bucket will be IDR 31 trillion or around 75% coverage of the IDR 39 trillion shadow NPL. Looking from the bank-wide basis, it will translate to NPL coverage of 240%. This is more than enough to cover risky part of our book. With stringent underwriting standards being applied from now on, our provisioning charges in subsequent years should be materially lower than this year as is in our scenario. So next, Managing Director of Corporate Banking, [Foreign Language] Silvano Rumantir, will present about our corporate and consumer segment highlight. Please, [Foreign Language] Silvano.

Thank you, [Foreign Language] David. Ladies and gentlemen, as [Foreign Language] Royke shared earlier, in wholesale segment, we want to improve our portfolio mix to top industry players, especially within the preferred industry sectors. The result is reflected in our Q1 sectoral expansion and contraction, as you can see on the slide. Within the corporate segment, the top 3 sectors in terms of loan exposure expansion during Q1 were manufacturing, business services, and to be more specific, it refers to real estate and telcos. On the other hand, we gradually reduced our exposure in agriculture, trading, restaurants and hotels and construction. The changes in industry sector mix was aligned with our mid-term strategy to have a more diversified and resilient industry exposures. Next, to add to what [Foreign Language] Royke shared earlier about shifting our relationship managers mindset as a banker, not lender, we execute this strategy by modifying their KPI to encourage cross-sell with other products to generate fee income, healthy fee income and low-cost funding. We see this as a low-hanging fruit where cross-sell rate is still considered suboptimal. Since we've fine-tuned the KPI, we are starting to see favorable result, early days, but favorable results. For example, CASA to loan ratio in medium segment increased to 10.6% in March of 2021 as compared to 7.3% a year ago. Our goal is to double this ratio within the next 1 to 2 years. In our consumer business, in Q1, despite lingering impact from pandemic to purchasing power and consumer confidence, we managed to grow our consumer loan by 6.7% year-on-year, mainly from secured consumer loan. Payroll loans grew by 16.4% year-on-year and currently represents about 35% of our total consumer portfolio. Mortgages also grew by 4.3% year-on-year, dominated by small ticket size loans. Our mortgages business has the biggest portion in consumer portfolio, about 51%. On the other hand, unsecured book such as credit card showed a contraction of negative 6.2% year-on-year. We remain ahead of the competition. Currently, we are within the top 3 players in mortgages, credit cards and payroll-based loans. We envision that consumer market in the future will still grow nicely as the middle class continue to rise. And then within the consumer book, we see a very promising positive prospect in payroll loans, which has an attractive risk reward profile. I will end our presentation here and give it back to the moderator for Q&A session. Thank you.

Thank you, [Foreign Language], for the presentation. [Operator Instructions] I'd like to start with precollected questions. Thank you for all participants who have sent questions through online registration form. We have 3 first questions from Cheryl Chau, CICC Hong Kong Asset Management. Let's discuss it one by one. The first question is about the capitalization pipeline. For example, is there any plan of corporate action to increase AT1 or conduct rights issue? [Foreign Language] Novita, would you please answer this question?

Thank you, moderator. Thank you, Cheryl Chau. Our Tier 1 capital level right now is 15.8%, with total CAR at 18.1% compared to 16.8% as December 2020. During the previous analyst meeting, we mentioned that we aim for a couple percentage point of higher capital to support our business growth. As for the execution, we did the issuance of sub debt qualified as Tier 2 capital on last March amounted to USD 500 million. It has impacted to increase our Tier 2 capital by 120 basis point. There is no confirmed further capital rise from this point. Some media already reported that government is planning to inject capital to several SOEs, including BNI. If it may realize, it will be great to support our strategy to tap into top-tier corporate in Indonesia. Right now, there is no fixed detail on this in term of amount and timing. Thank you, moderator.

Thank you, [Foreign Language] Novita. The second question from Cheryl Chau related to asset quality. What is the size of the restructured loans? And how many percent of high-risk loans that might turn into NPL? And could you please explain the expected NPL peak and when? [Foreign Language] David, could you please give us some insight on this? Thank you.

Okay. Thank you, Cheryl. I assume your question refers to the COVID restructured book. So as of March 2021, total restructured loan due to COVID reached IDR 84.3 trillion or equivalent to 15.1% of total loans. This amount was actually 18% smaller than that in December 2020. Some clients mostly in corporate segment started to do repayment in first quarter 2021, and the reflagging for COVID restru have been lifted. Based on our assessment early this year, 10% of the COVID restru book belongs to high-risk category. Then what we did was we tried to assign collectibility classification as [indiscernible] as possible to reflect the client's underlying situation. For your information, this is a conservative approach as a regulator actually allows bank to classify all COVID restructured loan under collectibility 1. As a result of our conservative stance, Out of the COVID restructured portfolio, 2.1% is already NPL, 6.4% is collectibility 2 and the remaining 91.5% is collectibility 1. In other words, 8.5% of the COVID restructured book is either SML, special mention or NPL, very close to our initial assessment that 10% of COVID restru book is high risk and prone to downgrade. On your second question regarding the NPL peak. As explained earlier in the presentation, to get a holistic view of our loan portfolio, we have carried out asset quality assessment twice, first in October 2020, and the second review was conducted in February 2021. Overall, we see an improvement in the customer risk profile with high-risk classification declined from previously 14% to 9.6%, while low-risk classification increased from 53.3% to 59% of the total portfolio being assessed. We believe this is due to the ongoing economic recovery where vaccination program has been running. People started to adapt better to the pandemic situation and started resuming directivity in a responsible manner. From the survey, we also identify IDR 23 trillion loan book is considered as high risk [indiscernible] payout and might be downgraded over 2 years. If we net off with write-off budget with this IDR 23 trillion NPL formation estimate over 2 years, we expect NPL ratio will continue to trend lower. This year, it should be below 4%, which means the peak of NPL ratio is already behind us on December last year. Equally important as cleaning up the legacy bad book is the management team commitment to implement stronger underwriting process to replace our portfolio with good quality new loan booking going forward. Thank you, Cheryl.

Thank you, [Foreign Language] David. And the third question regarding cost of risk target of this year. I think [Foreign Language] Novita would answer this question, please.

Yes. Our cost of credit guidance, between 3.3% to 3.6%. This is lower as compared to previous year cost of credit of 4.1%. The cost of credit guidance, we believe it is conservative and already factor in sufficient room for management overlay and margin of error, considering that the world is still fighting against the pandemic. Thank you.

Thank you, [Foreign Language] Novita and [Foreign Language] David, for the comprehensive explanation. I will continue with the question from Lim Ruiwen, DBS Bank Ltd. How many percent of restructured loans have been extended post 31st of March 2021? [Foreign Language] David, would you like to explain?

Okay. Thank you, Rui. From the IDR 84.3 trillion COVID-19 restructured loans as of March 2021, IDR 64 trillion or 75.4% has been extended with the following breakdown. For medium, small and consumer segment, 90% has been extended. The remaining 10% is still under review. For corporate segment, 75% has been extended with various restructuring scheme, and the remaining 25% or around IDR 8.5 trillion will be unflagged from restru book as the clients are -- no longer need relaxation. The extension of this loan restructuring program is conducted prudently in compliance with OJK Regulation No. 48/2020. Okay. Thank you, Rui.

Thank you, [Foreign Language] David. The next question from Felicia Budiman, Eastspring. Following February 2021 asset quality review, will there be any revision to full year '21 guidance, especially on cost of credit and NPL unit? [Foreign Language] Novita, would you please give us some color?

Thank you, Felicia. We guided between 3.3% until 3.6% COC in 2021 or translated to around IDR 20 trillion provisioning. From the second asset quality survey on February 2021, we won a gradual improvement in a client risk profile. Based on this, the required provisioning is only around INR 9 trillion until IDR 10 trillion. On top of this, there will be a management overlay to build more loan reserve for COVID restructured loan, just to be conservative. Right now, as you could see from our quarter 1 '21 results, we still book provision in line with full year COC guidance of 3.3% until 3.6%. We believe this is the right thing to do during this highly uncertain environment. Well, we are confident not to miss our full year guidance. We think it is more prudent to wait for a couple of months before we decide on the new direction. Thank you.

Thank you, [Foreign Language] Novita. The following questions came from Robertus Hardy, Henan Putihrai Sekuritas. What is the guidance for gross loan growth this year? [Foreign Language] Novita, please?

Okay. We guide between 6% until 9% loan growth. Our corporate segment should drive the loan growth with high single-digit growth rate as we want to tap into top-tier corporates. Payroll-based loans should grow by more than 10% due to low penetration to existing customer base. We conservatively assume low single-digit growth for middle and SME as we want to focus on asset quality as well as optimizing fee income and low cost funding potential. The management team will always focus on long-term sustainable profit. We are going to keep monitoring the progress of economic recovery. We are not limiting ourselves to deliver 1 target at the expense of other financial indicator. We will be flexible in fine-tuning between growth and margin and asset quality. Thank you.

Thank you, [Foreign Language] Novita. The next question still from Robertus Hardy. What is loan impairment value this year? [Foreign Language] David, could you please explain? Thank you.

Thank you, Robert. This year, we estimate new NPL formation ranging around IDR 13 trillion to IDR 15 trillion, significantly lower than last year of IDR 22 trillion. Combined with write-off upgrade and downsizing, we are seeing NPL ratio of below 4% this year. So far, 3 months entering 2021, the progress of asset quality are on general in line and in some areas are better than our expectation. Thank you, Robert.

Thank you, [Foreign Language] David. The third question from Robert, what is the outlook of third-party fund? Maybe [Foreign Language] Susi would explain. Thank you.

Thank you. Thank you, Robertus. I would like to respond the question about third-party funds outlook. As our first quarter 2021, our CASA grew by 13% year-on-year. We're still enjoying the benefit of being one of the strongest funding franchise in the country. Strong CASA growth allowed us to be less spending on time deposit, with us slightly rotating year-on-year. Judging from current liquidity environment, we believe the momentum to improve CASA ratio and cost of fund is still there. On April, we just cut our time deposit rate again by 30 to 40 basis point. Our focus is on sustainable growth of cost funding. In wholesale, it will be driven by our effort to cross-sell cash management solution to clients. And in retail, we are going to keep investing in mobile banking feature and reliability. Thank you.

Thank you, [Foreign Language] Susi. And the last question from Robert. What is your digital initiatives to tap the mass market? [Foreign Language] Y.B., would you please answer this question?

Thank you, Robertus Hardy. Yes. First of all, I think BNI is a universal bank with a maturity of our business come from the wholesale banking. Hence, our digital initiative has to cover both consumer banking and wholesale banking as well as shared in the previous presentation. For retail or consumer banking, we focus on strengthening our mobile banking applications, our platforms. Some of the key highlights we launched recently were biometric login, digital account opening with a face recognition feature, preapproved personal loan offered as a pop-up in the mobile banking apps, credit card billing integration, investment in bonds and mutual funds as well as QR payments, which is accepted in all retail merchants that already adopt a standardized national QR system. This series of innovation has received appreciations from users as well, as it is being reflected in the rating improvement of BNI mobile banking application on our Android Play Store from 3.6 in August 2020 to 4.9 in March 2021. Our apps now is enjoying the highest customer rating among all BUKU IV banks. For the next improvement, our mobile banking users will be able to have an omnichannel experience, personal finance management and SME solutions integration. Thank you.

Thank you, [Foreign Language] Y.B., for the explanation. And next, we have a question from Jovent, Indo Premier. Provision -- what is your provision strategy and coverage target for debtors such as Waskita, Garuda and Sritex? [Foreign Language] David, would you please share the answer? Thank you.

Okay. Thank you, Jovent. So although the second asset quality survey in February 2021 indicated a gradual improvement in clients' risk profile and the required provisioning is only around IDR 9 trillion, but still, there will be a management overlay to build more loan loss reserve, particularly for COVID restructured loan just for being conservative. We see that some sectors tend to be laggard to recover from the pandemic such as construction, airline and some manufacturing companies. Hence, we also conservatively add the provisioning to certain debtors in these sectors. And right now, as you could see from our first quarter 2021 result, we still book provision in line with full year COC guidance at 3.3% to until 3.6%. And we believe this is the right thing to do during this highly uncertain environment. For Waskita, Garuda and Sritex, we were indeed at their loan loss reserve. Garuda has been increased to 41%, the [indiscernible] compared to 8% in December 2020. Sritex Group was increased to 23% compared to 10% in previous December '20. And Waskita Group also increased to 16.4% compared to just below 10% in December 2020. And specific to Waskita parent company, the loan loss reserve is actually already 25%. Okay. Thank you, Jovent.

Thank you, [Foreign Language] David. The next question came from Ferry Wong. Recently, we heard some noise regarding deterioration on loan quality of textile company. I think this question would be answered by [Foreign Language] Silvano. Could you please explain, [Foreign Language], the latest update on exposure for Sritex Group?

Okay. Thank you. Thanks for the question, Ferry. Our exposure to Sritex Group is not to [indiscernible], it's mainly to the rayon manufacturing business, around IDR 1.8 trillion of exposure. We understand that due to the prolonged pandemic, textile industries is hugely under pressure. In the case of our debtor, due to pandemic, there has been a delay due to pandemic and a few other reasons. There has been a delay in the construction of the rayon manufacturing facility. However, the good news is that it's now already running with 2 lines. They do need to have the waste treatment facility up and running. So it's not fully optimum yet, but it's already running with 2 lines. But yes, because of the ongoing development in terms of issues with [indiscernible], there is a cash flow mismatch at the moment. And because of this, we've already downgraded our exposure to the company to special mention. And we've also increased its loan loss reserves to 23% as of March of this year.

Thanks, [Foreign Language] Vano. Last but not least, still questions from [Foreign Language] Ferry. Is there any update on the impact of KUR increase to 100 million and MSME exposure to 30%? [Foreign Language] Iqbal, would you answer the question?

Thank you, Ferry Wong, for your question. This year, we are getting more involved with KUR, targeting the channel more than IDR 32 trillion or about 50% higher compared to last year. A bigger portion of our KUR got reinforced under retail KUR. And the other [indiscernible] size is below INR 100 million. Hence, if micro KUR limit is increased to IDR 100 million, the impact will be positive for us as micro KUR has higher interest subsidy. And SME segment is quite potential as it is the backbone of -- in this economy. Currently, all state-owned banks or Himbara contributes to more than 50% of total MSME loan in the system. So for BNI, this segment will be one of our future growth engine with focus on MSME with export orientation and MSME which are part of our corporate customer value chain. To do this, from now, we intend to expand the number of top corporate clients we have relationship with. So that in the next 1 year or 2, we'll have better MSME customer base. Hope this answered your question, Ferry. Thank you.

Thank you, [Foreign Language] Iqbal. Ladies and gentlemen, I think we have covered everything on this meeting. And if anyone still have any questions about anything we discussed today, please feel free to contact Investor Relations team. You may now sign out from webinar room. Really appreciate your participation in today's session. Stay safe, stay healthy.