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

Good morning, ladies and gentlemen. Welcome to PT Bank Negara Indonesia Virtual Analyst Meeting for the first quarter of 2022. Thank you for your participation, and we believe you are well during this difficult time. We will proudly introduce the members of our Board of Directors who are here with us virtually or live in our head office building. First, we have Mr. Royke Tumilaar, our President Director; Mrs. Adi Sulistyowati, Vice President Director; Mrs. Novita Anggraini, Managing Director of Finance; Mr. YB Hariantono, Managing Director of IT and Operations; Mr. Muhammad Iqbal, Managing Director of Micro, Small and Medium Enterprise; Mr. David Pirzada, Managing Director of Risk Management; Mr. Henry Panjaitan, Managing Director of Treasury and International Banking; Mr. Silvano Rumantir, Managing Director of Corporate Banking; Mrs. Corina Leyla Karnalies, Managing Director of Consumer Banking; Mr. Bob Tyasika Ananta, Managing Director of Human Capital and Compliance; Mr. Sis Apik Wijayanto, Managing Director of Institutional Relations; Mr. Ronny Venir, Managing Director of Service and Network. Ladies and gentlemen, Mr. Royke Tumilaar will begin the presentation with several management highlights. And then Mrs. Novita Anggraini will proceed the presentation with the detail of our first quarter results. And then Mr. Muhammad Iqbal will continue the presentation with loan growth and liquidity update. Next, Mr. David Pirzada will describe the bank's approach to loan quality and risk management strategy. And last but not least, YB Hariantono will wrap the presentation with our digital initiatives and also performances. Ladies and gentlemen, our corporate presentation can be downloaded through the link that we provide in the chat room. Should you have any issues, please kindly reach us via our e-mail address, [email protected]. Any questions are appreciated. Please send your question to our e-mail address or you can simply send your question to the Q&A box on your Zoom apps during the Q&A session. Please remain silent during the presentation, which will last around 30 to 45 minutes. For today's event, we provide the interpreter button or a translator feature for you. However, all the presentations will begin in English. Therefore, all attendees do not have to click the interpreter button during the presentation. The interpreter button will work during the Q&A session if the answer delivered in Bahasa Indonesia. And now to begin the presentation, please welcome our CEO, Mr. Royke Tumilaar.

Thank you, moderator. Good morning for all analysts, shareholders and rating agencies. I really appreciate your attendance here in BNI Q1 earnings call. Allow me to open the discussion by highlighting a summary of our performance in the first 3 months of this year. We grew our loan book by 5.8% and party funds by 8.4%. Liquidity situation was good, where we managed to maintain funding costs at low level below 1.5%. Noninterest income was strong and operating expense was within our control, so that our core profit or PPOP grew by 7.3% year-on-year, reaching IDR 8.5 trillion, which is the higher ever nominal PPOP in BNI. Asset quality continued to improve, where loan at risk declined to 22.1% of total loans and cost of credit improved to 2.5%. This strong operational metric translates to bottom line profit of $4 trillion or 63.2% increase year-on-year. We may have started a bit slow at the beginning of this year, partly due to -- regarding the impact of Omicron as well as geopolitical turbulence. We are still optimistic to maintain our full year guidance. On loan growth, we have a strong pipeline in corporate segment, mainly from mineral resources and manufacturing sectors. Our loan disbursement during Q1 this year was reaching CNY 61.3 trillion, higher than pre-pandemic level at INR 51.6 trillion in Q1 2020%. The strong loan disbursement has enabled us to reshuffle our client mix in a better quality one. For example, by not adding exposure or even letting go several clients, which might not fit with our overall portfolio strategy. Along with stronger loan growth in the upcoming quarters as well as expectation on lower NPL, we still believe our net interest margin will be within our range, conservatively speaking, at the lower end of our guidance. Credit costs on January and February was a bit high than declining on March due to the gradual economic reopening. We expect credit costs to be lower in the subsequent quarters. This is also supported by our recent client survey regarding their financial situation that we conducted on February this year. On this occasion, I want to highlight again that corporate segment will continue to be BNI main growth driver in the short term and midterm -- to midterm. We believe there are 2 advantages from our growth strategy. First, in terms of asset quality, Corporate segment has been proven as the best and the most resilient among all segments of various economic cycles since early 2000. We understand that there are 2 challenges this year related to macro economy: inflation and reversal in interest rate trend. Our data shows that there are moderate level of correlation between high inflation rate and banking sector NPL. However, Corporate segment asset quality remains the most resilient from the time to time. The second advantage of focusing on Corporate segment is cross-sell opportunity to grow noninterest income and to build a solid customer base in the retail banking. During first quarter 2022, relationship with 38 top-tier clients, which we internally call Diamond client resulted more than 25,000 additional payroll accounts, 14,000 payroll loan accounts and 2,000 mortgages [ well over ] from the employee of our Corporate clients. While Corporate segment will be BNI growth driver in the short term to midterm, parallel, we are preparing for our long-term growth engine, which is SME segment. SME segment, it's a huge market and currently not well served by existing financial players. We believe we could solve this issue by digitizing banking services in SME segment. Our ambition to establish a profitable and scalable digital bank started with an acquisition of Mayora Bank -- Bank Mayora in quarter 1 this year. We invested IDR 3.5 trillion to acquire around 64% of ownership, equivalent 1.3x post-money price-to-book multiple. Latest update on the digital bank journey is, at the moment, we are closely working with the SEA Limited to become technology partner. Their reputation speaks for itself. They have extensive experience in setting up customer friendly and nimble digital business, which could be leveraged by -- to our digital banking. We believe there are at least 3 distinctive characteristic, our digital bank. First, active contribution from BNI, Mayora Group and SEA Limited should be enable the bank to get the best from each of us and synergize it to produce superior results. Secondly, the target market is unique, various type of SME across Indonesia. And lastly, technological expertise leveraging from our partner. The details of our financial results for the first quarter 2022 will be presented by our CFO, Bu Novita Widya Anggraini. Please go, Bu Novi.

Thank you, Pak Royke. Ladies and gentlemen, looking more into detail on our financial, loan growth was 5.8% year-on-year, supported by ample liquidity, where CASA grew by 10.6% year-on-year, which allow us to be less reliant on time deposits, growing by 3.8% year-on-year. Net interest income declined by 4.6% year-on-year due to NIM contraction, which was the industry trend during last year. However, we also want to highlight that this came along with better asset quality due to desirable saving loan portfolio mix into Lower Risk segment in the past 1 year. Noninterest income grew by 25.6% year-on-year, mainly from gain in bonds and mutual funds as well as fees from ForEx trading. In addition to that, fee income from Retail Banking also grew by 5.6% year-on-year. We continue to be disciplined in managing operating expense growing by 6.4% year-on-year. Cost-to-income ratio at bank-only level was only 39.7%. As highlighted by our CEO, our core profit, PPOP, during first quarter 2022 was at all-time high, growing by 7.3% year-on-year. Provision expense declined by 26.1% year-on-year as asset quality improved. As a result, consolidated net profit reached around IDR 4 trillion or increasing by 63.2% year-on-year. Now let's deep dive into our key financial ratio. CASA ratio improved by 1.4 percentage points year-on-year to 69.2%, which resulted in cost of third-party fund declined to 1.5% year-on-year. Net interest margin slightly contracted due to loan mix shift to lower risk client. However, latest trend show that our NIM has been stabilizing quarter-on-quarter. ROE, return on equity was 15.2%, significantly higher than a year ago at sub 10%. Most indicators related to asset quality continued to improve as compared to December position. Our LaR now is at 22.1% and NPL at 3.5%. As some part of the country was still grappling with the impact of Omicron variant, especially on January, February, we conservatively built credit cost charges at 2.5% during first quarter this year. This has resulted into higher NPL coverage at 2.5x and LaR coverage at 40.3%. Liquidity position remained healthy with LDR at 85%, LCR and NSFR were well above regulatory requirements. Tier 1 CAR was at 17.3%, which is at the comfortable level for the management team risk appetite and risk tolerant. As we believe the bank profitability trend is improving in the next few years, we decided to cancel that issue plan. This is also considering constructive feedback from our minority shareholder. Next presentation on loan growth and third-party fund will be delivered by our Managing Director of Middle and SME, Muhammad Iqbal.

Thank you, Bu Novi. Ladies and gentlemen, the slide here shows that Lower Risk segment continued to drive BNI's loan growth. Private sector corporates grew by 9.9% year-on-year, large commercial growth at 24.5%, subsidized micro loan at 31% and payroll loan at 18.8%. It is worth to highlight that Large Commercial segment continued to grow strongly on the back of asset quality, getting more stable as well as strong demand from agriculture and manufacturing sectors, backed by strong commodity prices. Loan growth in this segment quarter-on-quarter was mainly in palm oil, cinnamon, cacao and exporting industries like fertilizers. The management team is still working on strengthening the bank's risk culture, cascading it down into every layer of the organization before we grew loan book at Mid Commercial and Small Business segment. Loan pricing was relatively stable quarter-on-quarter. As shared by Bu Novita earlier, the growth in low-cost funding was higher than loan growth. This has enabled us to cut pricing for time deposit starting on January this year by roughly 30 basis points, as you can see on the bottom right of the slide. Our cost of third-party funds remained low at 1.46%. Next presentation on our asset quality and risk management strategy will be delivered by our Risk Management Director, Pak David Pirzada.

Thank you, Pak Iqbal. Ladies and gentlemen, as part of our regular update, COVID-19 restructured loan declined further to IDR 69.6 trillion, or equivalent to 11.8% of total loan with 90.8% of these borrowers have actually already made payment and 9.2% are under grace period scheme. All segments together contributed to the improvement. Despite the realization from OJK to classify all of these loans as collectibility 1, we continue to be conservative and disciplined where almost 15% of these loans were already classified as either NPL or collectibility 2. And we assign sufficient provision coverage accordingly. The remaining 85% were in collectibility 1 because of consistent repayment on every due date. From its peak on December 2020, total loan at risk has been declining now at 22.1% of total loan. Year-to-date improvement mainly came from current structure, which declined by 130 bps as well as NPL, which declined by 20 bps year-to-date. We also saw a 30 bps increase in collectibility 2 ratio during the past quarter. This is from clients in chemical manufacturing sector. However, this is an isolated company-specific issue. We are still optimistic with the asset quality trend for the rest of the year. Provision coverage as a percentage of total loans increased to 8.7%. We believe this is a conservative stance as it reflects 80% provisioning for NPL bucket and 54% provisioning for collectibility 2. NPL coverage was at 2.5x and loan at risk coverage at 39%. Looking at loan at-risk trajectory, if we stick with our credit cost guidance, LaR coverage may moderately increase from current level. We believe maintaining an elevated level of LaR coverage until the end of OJK restructuring realization which is in March next year, this is -- should be a prudent action for us. Afterwards, if relapse rate is proven to be low, as suggested by our data so far, we may start relaxing the provision coverage level on a gradual basis. Our Director of IT, Pak YB Hariantono will continue the presentation with our digital initiatives and performances.

Thank you, Pak David. Ladies and gentlemen, nowadays discussion about banking service digitalization usually only centers around mobile banking apps. The slide that we show here highlights the importance of having various customer touch points as each of them meets different customer needs. Indonesia is a geographically dispersed country with a wide variety of population profiles. If we want to be the Nation Champion Bank, we have to cater to most of the population needs. In addition to mobile banking apps, we have other e-channels, including wide network of ATMs across Indonesia and the ubiquitous presence of our ATMs provide convenience for customers who prefers to do cash transactions. This kind of customers still represents the bulk of Indonesia populations. We also have more than 150,000 branchless banking agents. Agent banking is an effective way to improve financial inclusions in an efficient manner. We also equipped our service offerings by adding QR payments. These features in our merchant network EDCs to help them digitize part of their business process. In terms of open banking ecosystems, BNI is the domestic leaders in terms of the number of API surface and the institutions connected to it. Our TapCash product empowers cashless transactions in transportations, F&B, mini markets and other sectors. Lastly, for business banking clients, BNI offers its cash management flagship products called BNI Direct, available in both mobile apps and web-based applications. BNI mobile banking apps currently has 11.9 million number of registered users, growing by 34% year-on-year. Transaction frequency at the same time, also grew by 35% year-on-year. As of March, our apps enjoys one of the highest customer rating in Google Play Store. We will continue to improve user experience in order to boost customer transactions that will lead to sticky CASA balance in BNI. Through BNI Mobile Banking, we continue to expand our services, leveraging on BNI Group's ecosystems. We aim to help customer progress from only conducting transactions to achieving their financial goals. This year, we have set several pipelines in terms of new features for the apps. In terms of wealth management services, we want to integrate foreign exchange transactions with BNI Securities and BNI Life products into the apps. To meet retail borrower needs, we want to improve customer journey when applying for loan digitally, including some ancillary services such as digital signature. We want customers to be -- find our apps as a one-stop solution to them. Hence, we want to offer some lifestyle feature, such as by collaborating with taxi provider, airline operator and travel agent companies. Improving cost efficiency ratio is one of our financial goals. We try to gradually move activities normally conducted in brands office into mobile banking apps. This concludes our presentations, and I will give it back to moderator to lead the Q&A session. Thank you.

Thank you, Pak, for the insightful presentation. Ladies and gentlemen, we are now entering the Q&A session. If you have any questions, please send it to our e-mail address, [email protected] or you may send your questions in the Q&A box on your Zoom apps. Ladies and gentlemen, if our directors answer in Bahasa Indonesia, you still can listen to the English version. Please click the interpretation button on your Zoom apps on the bottom right and choose English and then click mute original audio. [Foreign Language] The first question that we have received is, we can say the trending topic in the market recently related to our digital bank development. And I suppose it will be best if Pak Royke could give us the insightful explanation for this answer. The question is from Angus Mackintosh from Smartkarma and from Handy Noverdanius from Bahana Sekuritas. The question is Pak Royke, could you share the strategy and also the target customer base for BNI stand-alone digital bank and is there any color of the units for the economics for Bank Mayora as digital bank. Please, Pak Royke?

Thank you. Our digital bank will focus on SME segment as well as serving the personal financing needs of the SME owners, including retail customers of these SMEs. SME segment is a huge market and currently not well served by existing financial players. We believe we could solve this issue by digitizing banking services in SME segment by establishing a profitable and scalable digital bank, started with acquisition of Bank Mayora in the first quarter this year. We are now intensively working with the SEA Limited to become technology partner. Their reputation speaks on for itself. They have extensive experience in setting up customer-friendly and nimble digital business, which could be leveraged to our digital banking. We believe our digital bank will be different with the rest of digital banks in Indonesia so far in several aspects. Firstly, active contribution from BNI, Mayora and SEA Limited should be -- should enable the bank to get the best from each of us and synergize to produce superior result. Secondly, the target market is unique. Various types of SME across Indonesia. Thirdly, in terms of servicing channel, we have flexibility to combine between digital and physical channel we currently already have, including agents. This will translate to a wider base of addressable customer universe instead of pure digital channel. And lastly, the technological expertise leveraging from our partner. We are still on early stage regarding the digital bank. As time goes by, we should be able to share more detail on the financial targets. We believe the digital bank concept works in a country with demographic and geographic profile like Indonesia, use young population, which easily adapt to technology, rising middle income class to support strong consumption growth, improving telecommunication infrastructure as an enabler. And lack of banking penetration, we feel a huge opportunity for new digital bank concept. Several digital banks, which have been successful in other countries are able to generate a superior ROE driven by exponential growth, very attractive risk-adjusted margin and high efficiency in business process. Roughly speaking, these are our goals as well.

Thank you so much, Pak Royke. The next question is from Sangameswar Iyer from Consilium Investment Management and Handy from Bahana and also Jayden from Macquarie. The question is, what will be BNI loan growth driver in 2022? And also please provide update on the recent corporate account wins and how this will support BNI ROE improvements. Pak Silvano, would you kindly respond to this question, Pak? Thank you so much. [Audio Gap] Thank you, Pak Silvano. The next question still comes from Jayden Vantarakis from Macquarie. This is about right issue. The question is whether the right issue plan for 2022 has been officially postponed or declined. Can management confirm whether the common equity Tier 1 is sufficient even without the rights? Pak Royke, would you like to take this one, Pak? Thank you.

Thank you, Jayden, for the question. Right issue plan was elaborated during Delta outbreak when we are cautious regarding the impact of pandemic. And we believe having a world class balance sheet is a plus point and prudent way of doing business sustainably in the long term. Starting Q4, conditions improved with stronger profitability, and we also successfully issued AT1 capital securities last year. We are not seeing near-term risk of having inadequate capital as our profitabilities should improve over the next few years. We also received feedbacks from investors that they prefer lower dividends instead of right issue. And from rating agencies that BNI is close to being overly conservative. Our Tier 1 CAR was at 17.3%, which is a comfortable level for the management team risk appetite and risk tolerance. As we believe that banks' profitability trend is improving in the next few years, we decided to cancel right issue plan. And our policy is that we maintain Tier 1 capital at 17% or minimum 16%.

Thank you, Pak Royke. The next question is from Jayden Vantarakis from Macquarie. The question is, what is the road map in achieving 18% ROE in 2025, particularly for 2022 and 2023. I believe Bu Novi will give the clear answer for this. Please, Bu Novi?

Thank you, Sigit. Thank you, Jayden, for the question. Looking at our current economic situation and short-term outlook until next year, we believe it is reasonable to expect low to mid-teens ROE level this year and mid- to high teens by next year. And the assumption are -- the main assumption, one, high single-digit loan growth and we continue to make mix shift to low-risk customer and promote beyond lending that generate superior fee income, and we expect a stable margin, slight improvement in our efficiency ratio and meaningfully lower credit costs, starting with 2 -- up to 0.3% this year and below 2% for next year. Thank you, Sigit.

Thank you so much, Bu Novi. The next question is from Bhisham Mirchandani from JPMorgan Asset Management. The question is regarding interest on perpetual capital securities, will you account for it in interest expense? Or is it below the line adjustment? Bu Novita would you please answer this question, Bu?

Thank you, Bhisham. Last year, we issued $60 million perpetual bond and -- $600 million perpetual bond qualifies as AT1 capital securities. And according to Indonesia accounting standard, our AT1 capital securities is categorized as liabilities. The interest is reported as part of interest expense, a deduction from interest income when calculating net interest income in our P&L. This one was one of the reason for slight pressure on our NIM year-on-year. Thank you.

Thank you, Bu Novi. The next question is from Raymond [indiscernible] and Ferry from Citigroup. The question is, has SEA Limited committed to invest in Mayora Bank? To what percentage and to what extent SEA will give access to its ecosystem? And how will SEA differentiate SeaBank Indonesia and Mayora Bank. Pak Royke, would you please check this? Thank you.

Thank you, Raymond and Ferry. This is the question from Raymond and Ferry, right? Regarding BNI and SEA, we'll be partnering very closely to develop the banks. In the course of the partnership, SEA will act in the common interest and effectively function with the mindset of a vested partner. When appropriate, SEA will take an equity stake in the bank. From our standpoint, we have some flexibility to dilute our ownership in from -- in the bank from currently 64% to be just above 50% if they -- this could bring a strategic shareholder that will benefit the bank in the long term. Right now, our focus to set up the foundation of the bank such as preparing for IT infrastructure and technology as well as appointing key management team of the digital bank. It is still too early to discuss about many possible scenarios that may happen in the future. To our understanding, SeaBank's focus right now primarily on Shopee Pay Later or SPL. The SPL transactions are growing rapidly and what BNI can take at [indiscernible] Limited by BNI processing capacity. The digital will expand that capacity and enable BNI to capture significantly more. At the same time, SeaBank's business with SPL will also grow as the buyer is expanding fairly rapidly and some point will be beyond their funding. In conclusion, the presence of digital bank may help to solve existing limitation faced by both BNI and SeaBank in capturing the potential of Pay Later business in Indonesia. BNI will continue to run its existing SME segment to customer who prefer conventional banking services. This is considering wide spectrum of SME clients in Indonesia. Some of them may fit better with conventional banking and the rest with digital services. In the latter case, the customer may prefer to go with Mayora. Right now, we don't know -- we don't have an imminent plan for IPO. Further fund rising should mainly involve the existing shareholders.

Thank you so much, Pak Royke. The next question is from Gaurav from JPMorgan. The question is interest expenses were flat Q-on-Q despite deposit declining 5% Q-on-Q. What explains this? And also, when are you expecting cost of fund to be the bottom? Please Bu Novi, would you like to take this one? Thank you so much.

Thank you, Gaurav. The question is why flat Q-on-Q despite deposit declining 5%, yes. Okay. The reason is -- one of the reason is because the issuance of the AT1 capital securities on September 2021, amounting USD 600 million with the interest 3.75%. And in our cost of fund -- third-party fund with cost of funds still remain at the same level. Thank you.

Thank you so much, Bu Novi. The next question still comes from JPMorgan, but this one is from Harsh Modi. The question is what drove the noninterest income other than fees? And how sustainable is that? What is the comfortable range for LDR? And when do you see the bank raising FD rates? And the last question, do you expect loan growth to end up closer to upper end of the guidance or lower end? I believe this one, Bu Novi will give the clear answer for Harsh. Please, Bu Novi?

The main driver for the noninterest income is strong foreign exchange trading fees and marketable security, and we want to maintain this fee strong next quarter. Of course, we're always looking forward the market condition. And how sustainable is that, foreign exchange fees may continue, but marketable securities gain might be challenging given red outlook for the next quarter. And the comfortable range for LDR, we expect around 19%, good liquidity condition in BNI and optimal for NIM. We could stretch it, if necessary, to be slightly above 90%. What is the next question?

When do you see the bank raising our FD rates, Bu?

We don't have -- we have no plan for now, depending on the market situation.

And do you expect loan growth to end up closer to upper end of guidance or lower end of our guidance for the loan growth?

Our guidance, around 7% up to 10%. And we expect just within the range.

Thank you so much, Bu Novi. And we are still waiting for another question. I believe we have several questions regarding the high inflation and impact to our asset quality. And I believe the question will be answered by David Pirzada. Please, Pak David?

Yes, thank you. So about the impact on the expected inflation, if it increased. So we actually have already made a few of stress testing related to the change of the geopolitical situation and also the expected inflation rates, which already increased in several countries. But in Indonesia, based on our stress test, we see there is not much impact -- negative impact to our portfolio. And we can also see that historically, the inflation increase is actually don't have direct related impact to the decline in portfolio. So we are quite confident in this year. And we have also -- have been quite resilient in our quality -- in our portfolio quality, and we have seen also that many of our debtors in our portfolio have been improving. And with these Indonesian economy is also improving. We believe that the impact of inflation will not have a large negative impact to our portfolio.

Thank you, Pak David. We have received another question. This one is from Melissa of Goldman Sachs. The question is, you mentioned in your target of higher ROE that our NIM will be stable. And does this take into consideration about rate hikes? Or we can see further upside? I believe Bu Novi will give the clear answer to Melissa. Please, Bu Novi? Thank you.

For the higher ROE, we not only depends on the NIM ratio. Yes, of course, even though our loan and funding structure is beneficiary of rate hike, we don't have any plan to take advantage rising rate environment to expand our NIM. Beyond NIM, we focus more on the fee-based income. If we focus on the -- to promote our beyond lending service and cross-selling that will be contributed on our fee-based income and our profitability will improve on that and our ROE will higher -- we expect higher ROE from this 2, of course, NIM and, of course, the fee-based income.

Ladies and gentlemen, that concludes our presentation for today. Thank you to our Board of Directors for the presentation and also for the Q&A session. We hope that we delivered our financial results for the first quarter of 2022 for all the attendees. Any questions that have not been answered, our Investor Relations team will happily accommodate you. Please send your question to our e-mail address, [email protected]. We would like to express our gratitude for your participation and for our fellow Muslim, we would like to wish you a happy Eid-ul-Fitr. Thank you so much for your participation. You may now leave the webinar room. Stay safe and stay healthy.