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

Good afternoon, ladies and gentlemen. Welcome to Bank Negara Indonesia or BBNI Analyst Meeting for the third quarter of 2022. Thank you for your participation, and we believe you are in such good health. Before we head to the presentation, please allow me to introduce all of our Board of Directors who are here with us. First, we have Mr.Royke Tumilaar, our President Director or CEO; Adi Sulistyowati, Vice President Director; Novita Anggraini, Finance Director; Mr. David Pirzada, Risk Management Director; Mr. Muhammad Iqbal, Enterprise and Commercial Banking Director; Mr. Ronny Venir, Services and Network Director; Corina Leyla Karnalies, Consumer Banking Director. Mr. [indiscernible] treasury Director; Mr. Muharram, Human Capital and Compliance Director; and Mr. Toto Prasetio, Technology and Operations Director. Ladies and gentlemen, our presentation for today will be started by Mr. Royke with several management highlights. Iqbal will proceed with B&I growth strategy, focusing on risk-adjusted net interest margin, loan [indiscernible] at improvement and our strategy on building new string continued by Ibu Novita with our corporate guidance and financial performance -- and to conclude the presentation, Mr. David, will present our asset quality update. Ladies and gentlemen, our corporate presentation can be downloaded through the link we provide in the chat room or you may access our corporate presentation and other official publication on our website, www.bni.co.id. If you have any issues, please kindly reach out to our Investor Relations team at [email protected]. Any questions are appreciated. Please turn your question to our e-mail address, or you can simply send your question in the Q&A box on your Zoom apps during the Q&A session. [Operator Instructions] And now to begin the presentation, please welcome our CEO, Mr. Royke Tumilaar.

Thank you, , moderator. Good afternoon for all analysts, shareholders and letting agencies. I really appreciate your attendance here in B&I third quarter 2022 earnings calls. Allow me to open the discussion by highlighting a summary of our performance. As of September 2022, our loan book grew by 9.1% year-on-year, in line with our guidance. CASA grew by 4.3% year-on-year as we are in the process of building transaction-based CASA. CASA ratio for the very first time reached above 70%. Year-on-year, cost of third-party funds improved by 23 basis points as we expected, cost of fund was already reached its bottom level and may start to increase fourth quarter 2022. PPOP grew by 9.7% year-on-year, supported by net interest income growth of 5.2% and fee income growth of 7.8% year-on-year. Loan at least improved further to 19.3% of total loan and credit costs on third quarter was only 1.6% as we feel that provision coverage level is already sufficient. Net profit at IDR 13.7 trillion is 77% higher year-on-year. We are on track to meet consensus profit estimate, which now stand at IDR 16.7 trillion. Entering last quarter of this year, -- and looking forward 2023, we are anticipating a more challenging time ahead. with rising global uncertainties triggered by China Zero COVID policy, Europe geopolitical tension and unprecedented monetary tightening in various countries. Fortunately, we still see domestic economy outlook is fairly healthy relative to the other countries. During this global economic turbulence, we are consistently adopting conservative growth strategy, focusing on segments with attractive risk-adjusted margin -- we believe, in the long term, it will translate to superior and sustainable return to our shareholders. We are in a strong capital position with Tier 1 CAR at 17%, not that there will be a change in operational risk calculation that will increase our Tier 1 CAR by 100 to 150 basis points on January next year. Strong capital position and gradual improvement in ROE gives us some room to increase dividend payout next year, subject to AGM approval. As we are entering a rising interest rate environment, we expect to see higher cost of funds starting on fourth quarter this year. Margins will be impacted as we need sometimes to adjust lending rate, taking into account our customer condition as well as competitive environment. This month we start to do loan repricing, and we will carefully monitor the progress in the next few quarters. Liquidity position remains solid with LDR, LCR, NSFR ratio better than regulatory requirements. Asset quality continue to be our focus. We want to make sure our growth level and margin trends are balanced with asset quality improvement. Taking into account the end of [ Ojea ] restructuring realization next month -- we still expect our NPL ratio to decline around 2.5% from currently at 3%. Even though domestic economic outlook may not be as rosy as -- what we have seen on the first half of this year, we still see the macroeconomic indicators will be fairly healthy, relatively the other countries. There are only very few countries that are projected to have GDP growth at 5% or above. And Indonesia is one of them. As of September 2022, headline inflation was still manageable at 6%, which is not extraordinarily high for emerging economies. Despite global slowdown, Indonesia economy is relatively stable as export contribution to GDP is only 22% -- the biggest contribution to GDP is still household consumption. We appreciate well coordinated government policies aimed to maintaining economic stability. Central Bank has started to do mandatory tightening to control core inflation next year to be within their target of below 4%. Ministry of Finance has maintained their discipline in bringing budget deficit back to be below 3% of the GDP. Government has launched very support scheme for funerable segment, such as kartu prakerja and village funds. To support MSME businesses government continues their subsidized micro loan program and launch procurement policy focusing on product met in Indonesia. Lastly, we believe that Indonesia external sustainability indicators have improved, especially from strong FX reserve and low-level foreign debt exposure. Next, Mr. Iqbal, Commercial Banking Director will highlight our growth that they give for posting on risk-adjusted name. Please Mr. Iqbal.

Okay. Thank you, Royke. Our ladies and gentlemen, in this occasion, we would like to emphasize that we are looking at lease adjusted NIM to monitor the execution of our portfolio strategy, which focuses on lower segments. If we continue to be disciplined in doing portfolio de-risking, moderate level of headline NIM will be compensated by consistent low cost of credit. This also means that our profitability will be less volatile in the long term. And we believe -- this is the right thing to do in order to deliver optimum return to our shareholders. As you may aware, during the first 9 months of this year, our loan growth was coming from lower segments such as blue chip corporates and its value chain in large commercial segments as well as subsidies micro loan and Parallon. All of them have been growing by more than 20% year-on-year as compared to 9.1% Benguet loan growth. Specific on wholesale segment, its overgrowth may look moderate at 8.2% year-on-year. However, the biggest growth came from top-tier clients and key industry players, which grew by 36% versus the rest of the clients, which was relatively flat. We have elaborated several times that the size of loan at risk continues to decline. What is new in today's presentation is the fact that only the dollar volume is declining -- sorry, the fact that not only dollar value is declining, but the yield of large profile is also improving. Our data show that yield or are was at 4.4% or 60 basis points higher than last year. This is an encouraging development that more and more of large customers are recovering. This will also provide some support for our NIM in the next couple of years. As you may already aware, that B&I is in the process of doing 5-year corporate transformation. The [ type ] measure that the group also involves our subsidiaries, which have their own specific strategy grow within the group. BNI securities initial led by Agoda a veteran investment banker from UBS has delivered solid progress in building in rebuilding wholesale banking business for BNI. One of the proxy is loan syndication fee income, which almost doubled year-on-year. While BNI Multi-finance also gets new leadership under Ardyanto, who is a Board member at MPM Finance, one of the leading multi-finance companies in the country. The aim is to transform itself to be market leader in consumer finance, equipping product offerings from BNI consumer loan. BNI Securities Singapore, led by an experienced [indiscernible], Singapore will act as an offshore hub BNI International capital market activities. Lastly, we just recently established venture capital subsidiary to accelerate innovation and digital transformation in BNI Group. BNI Venture Capital is led by Eddi Danusaputro, who previously was CEO at Mandiri Capital Indonesia. Year-to-date, the cumulative profit from all subsidiaries have grown more -- by more than 2x from last year. It is only the beginning. We expect more in upcoming years. Next, Ibu Novita, our Finance Director, will continue the presentation on our financial performance highlights. Please, Ibu Novi.

Thank you, Iqbal. As we are approaching the end of the year and global economy is facing bigger asset than this, it may be a good time for us to provide what we envision for next year. Loan growth target for 2023 is 7% to 9%, taking into account moderate deceleration in GDP growth due to global slowdown and weaker commodity prices. We believe focusing on quality of our quantity is the right thing to do during the situation. Net interest margin is estimated between 4.5% to 4.7%. The low end of the guidance is assuming tough competitive environment in which we only reprice a small fraction of the loan book and tough competition on funding costs. . The upper end of the guidance is assuming more rational behavior from key players in banking industry in which bank altogether are doing loan repricing and not too aggressive on loan growth. We are still on progress to build a better loan portfolio consisting of top-tier clients and key industry players. During the process, our margin will continue to face headwinds. However, in the long term, the strategy will result in much stronger funding profile consisting mainly of transaction basis, base CASA. Credit cost is one of area in which we have high confidence level. 2 years of conservative growth strategy finally bears fruit, where we expect credit cost to fall below 1.5% in 2023. This is also coming with NPL improvement from 3% to around 2.5%. Consequently [indiscernible] NIM, as we highlighted before, as our focus also get better in 2023. We are fully aware that the economic situation will still have room for big swing in the short term. So that's why we will -- we will revisit the guidance from time to time. Now we move into financial performance presentation. Year-on-year, we grew our loan book by 9.1%, in line with our guidance. CASA growth was 4.3% year-on-year in which we are focusing on transaction with CASA. Time deposit by design was contracting by 1.6% year-on-year and 6.2% quarter-on-quarter as we are pushing for higher CASA ratio to optimize our cost of fund and prop up our margin. Net interest income grew by 5.2% year-on-year and 2% Q-on-Q. The quarter and -- quarter-on-quarter growth was driven by loan repricing in our floating loan portfolio as both LIBOR and SOFR referenced got higher during third quarter. Noninterest income grew by 7.8% year-on-year, driven by strong growth in loan syndication part of wholesale banking fee income, aligned with our strategy to cross-sell between loan and loan product in order to compensate for loan for -- low loan yield when we tap into blue chip corporate clients. Quarter-on-quarter, we saw a bit of weakness in fee income coming from slow foreign exchange trading fees. Operating expense as anticipated, grew by 7.8% as we continue to invest in human capital and digitalization. Bottom line profit grew by 77% year-on-year. Thanks to 9.7% PPOP growth and 35% contraction in provisioning charges. BNI's CASA ratio in September 2022 reached above 70% level. And cost of third-party fund as expected, we was bottoming on third quarter 2022 and may start to pick up on fourth quarter 2022. Net interest margin on third quarter was higher at 10 basis points quarter-on-quarter, reaching 5% due to higher LIBOR and SOFR benchmark rep that put up loan yield in floating rate portfolio. Cumulative 9 months margin was at 4.8% at the upper end of our guidance Accounting ROE was at 15.2%, bringing us closer towards our long-term target of 18%. Asset quality indicators are showing improvement trend. More detail will be elaborated to it our Chief Risk Officer. Liquidity ratio were at minimum optimum level with LDR at 91%. LCR and NSFR are well above regulatory requirement. We continue to maintain ample capital position with Tier 1 CAR at 70% and total CAR at 18.9%. Consistent with our strategy to do portfolio de-risking, our loan growth was coming from blue-chip corporates, growing by 20% year-on-year. Their blue chain in large commercial segment growing by 22% year-on-year. Subsidized micro loan grew by 24% and payroll loan grew by 21%. And we see ample room for growth in payroll loan product as we have 3.8 million barrel account, out of which only 8% took payroll loan from us. Loan yields, so 8 basis point pickup on quarter-on-quarter, thanks to repricing in floating loan book -- loan book from LIBOR and SOFR rate increase. Year-on-year, we grew CASA by 4.3%, mostly coming from saving account, growing by 8.2% year-on-year. time deposit. On the other hand, was contracted by 1.6%, bringing our CASA ratio to 70.9%. As we anticipated, CASA fund is already bottoming and my start may start to increase in our fourth quarter. Cost of third-party fund during this quarter was 1.4%. We want to position ourselves as a top of mind transaction banking for our clients. the more transaction than via our platform will translate to sticky CASA in the bank. Mobile banking application and BNI direct appraisal role in building transaction CASA. More than 60% of retail saving comes from mobile banking and 94% of demand deposit comes from BNI Direct. We closely monitor the growth of transaction in both platform where until September 2022, Mobile Banking and BNI direct transaction grew by 27% and 38% year-on-year. Risk Management Director, David Pirzada, will proceed the presentation with our asset quality update. Please continue David.

Okay. Thank you, Ibu Novita. Ladies and gentlemen, I will now give regular updates on our asset quality. As expected, the total amount of COVID restructured loans continued to decline. One of the indicators of improvement in our underlying asset quality is the continued decline of COVID restructured loan amount, which currently stands at below 10% or at 9.6% of total loan. And we always maintain our conservatism in terms of collectability classification. While OJK relaxation period still valid until March next year, we already classified the nonpaying loan as both NPL and collectibility too as they represented 17% of the COVID restructured loan. On the [ donut ] charge in the upper right corner, we can see that 64% of the coffee restructured loan is paying at above base lending rate. Which means there are good candidates for unflagging in the near term. For those who are paying at below base lending rate, this represents 1/3 of the COVID restructured loan which we already set aside 21% of the provision coverage, and we will add more for the rest of this year. We hope this explanation could bring confidence among analysts that we have a good understanding of the risk profile of our coffee restructured book. Despite the positive trend in asset quality, we consistently maintain an elevated level of provision coverage at 2.7x and loan at risk coverage at 43% as of September 2022, combined with expectation of gradual reduction in loan at risk -- this should translate to material reduction in credit cost this year. And we continue to assign a conservative provision coverage of 81% on average for those in NPL category, which we deem sufficient, considering LGD rate of around 60% to 70%. For those in collectibility 2, the provision coverage was 64% and which is much more conservative than regulatory suggestion and provision coverage for current resected loan, which is 18.4%. As we believe only a small portion of this bucket having high risk of downgrade to collectability 2. Ladies and gentlemen, this is the end of third quarter of 2022 result presentation. Next moderator will coordinate for the Q&A session. Thank you.

Thank you, Bapa and ibu , for the inside for presentation. Ladies and gentlemen, we are now entering the Q&A session.[Operator Instructions] We received several questions for various topics from liquidity in the market, our capital outlook, asset quality and loan growth outlook. Let's begin with the first question. This is from [ Hannover Daniels ] from [ CGI IMB ], specifically to Royke. The question is, -- how BNI see the current liquidity on the market, should we expect the time deposit rate to return to pre-pandemic and how BNI positions our strategy to reprice the lending yield Please, Royke?

Again, Thank you. [ Marada ]. Average daily market liquidity for Rupeya in the past 3 months, we're still around IDR 125 trillion. However, we see that liquidity could be leadering concern for the bank since the new regulation of higher reserve requirement takes into the effect. On the ground, we noticed that pricing competition for special let funding is getting more intense as banks are trying to deliver the loan growth target this year. As for deposit rate, there is a possibility -- comes back to the pre-pandemic level. . Since all the banks are still aggressive in credit growth in the next year. Our loan book consists 15% fixed rate, 20% floating rate and 65% benefits. The floating rate part has already automatically adjusted aligned with the rising [ given ] SOFR benchmark it. Now the focus is on managed rate part. [ Contour ] already started to pick up and we start to reprice a small portion of managed book in quarter 4. We expect some pressure on margin in the short term as there will be some time lag for the loan repricing. We should not trust when doing loan repricing as we want to make sure that it will not come to the expense of asset quality. Note that we are also still in progress replacing our legacy book with top-tier clients and key industry players, pricing it to remain competitive. As for now, loan repricing in U.S. dollar book is higher than in rupee above, considering the FX LDR, which is already quite high.

Thank you so much, Royke. The next question came from [ Jayden andrakis ] from [ Macquarie ]. This is about B&I capital outlook. And given the nature of this question, I believe Ibu Novi will give a comprehensive answer for this question. The question is, please update us on the outlook for capital Tier 1 ratio with upcoming operation risk-weighted asset changes and a higher potential dividend next year. Please Ibu Novi?

Thank you, [ Jade ]. Our Tier 1 capital ratio right now is at 70%. And the factor that will strengthen our Tier 1 CAR is combine all of the strategy of the ROE improvement. One, we consistent doing portfolio de-risking by taking aggressive growth strategy. We improved our profitability through fee noninterest income fee and be consistent to do some efficiency on the cost of fund. On top of that, on January 2023, there will there will be a new methodology in operational risk weighting calculation from basic indicator approach to standardized approach. This is to confirm with Basel III reform one-off adjustment is estimated to add around 100 up to 150 basis points to our Tier 1 CAR. And current regulation for us now to have Tier 1 CAR, at least 11.8%. So our CAR ratio 70%, our Tier 1 capital ratio, 70%, is comply with the regulator. And the management team of B&I prefer to have Tier 1 CAR between 16% up to 17% in the long term. We currently see a storm to increase dividend on a gradual basis starting on next year. We currently factor in 30% up to 40% payout ratio from 2022 profit. This is subject to AGM approval.

Next question comes from Ryan [ Li ] from Goldman Asset Management. The question is, please explain about B&I asset quality outlook, like issuance plan and loan growth outlook. I believe David and Ibu Novi will give a clear answer for this one. Please David.

Thank you, Ryan. Despite the challenging global macro condition, we think that Indonesian domestic economies should perform better than most other countries. Thanks to moderate inflation rate, strong household consumption, low dependency on export market and also a healthy level of foreign debt exposure. Specific in B&I, we are comfortable with asset quality outlook, where NPL is estimated to improve from currently 3% to be around 2.5% by the end of 2023. . We also believe that the NPL coverage of 270% is already quite sufficient. So with the improvement in the asset quality, the implication is next year credit costs also to improve materially estimated to be below 1.5% from currently at 2%. All these estimates have also already taken into account the relapse rate of COVID restructured loan as we assume OJKs no longer extend the realization on COVID restructuring policy that will expire on March 2023. Further, Ibu Novita will add related to capital planning and loan growth.

Thank you, David. -- for right issue plan and loan growth out low. As I mentioned before, that management team right now comfortable with our current Tier 1 capital ratio at 70% and we are optimistic with its outlook in the near future, mainly due to consistent improvement in profitability metric. Instead of capitalizing, what we have in mind is to propose higher dividend payout in upcoming AGM early next year. Loan growth target for 2022 is set at 7% up to 9%. We are consistent in adopting conservative growth strategy. focusing on our growth on segment with high risk-adjusted margin. This includes a blue-chip corporate and its value chain payroll loan within consumer segment as well as subsidized [ Maroon ]. Thank you, Moderator.

Next question came from Talia adi from IndoPremier Investment Management. The question is, what is the worst scenario for NPL for next year, given the high inflation fee and also recession possibility given the main topic of Talya's question, which is NPL, I believe it will be best if David could respond to Talya. Please David.

Okay. Thank you, Taliya. We estimate next year NPL to improve to around 2.5% from currently at 3%. This is taking into account the end of COVID restructuring and realization policy, our macro view for next year is already factoring in global and domestic economic slowdown. GDP growth between 4.8% to 5.2% down from this year of 5.1% to 5.3%. Inflation next year at 3.5% to 4% and benchmark grade at 5.25% and Idea [ excess ] rate at just above 15,000. So we believe this is the most likely scenario to happen for next year. We still see there will be continuity in asset quality improvement in B&I as we are making consistent progress in replacing our legacy book with top quality new loan portfolio. Thank you, Taliya. .

Thank you so much, David. We will save several questions from a Q&A box from all the attendees. I believe the next question will be from -- from [ Linda ] from B&I Securities, specifically to Ibu Novita. The question is about LDR assumption for end of 2023. And also for a benchmark rate assumption for 2023. Please, Ibu Novi?

Thank you, [ Linda ]. We assume the by 2023 is around 87% as we want to maintain slightly more liquidity during this economic situation. Our assumption for [ 7 ] rate next year is 5.25%, 50 basis points higher than current level, taking into account moderating inflation level due to oil price normalization as a result of global economic slowdown.

Next question, this is regarding -- about our CASA ratio and also time deposit rate. The question coming from [ Adi Babu ] from [ Trimac ] Securities. The first question is are there an internal target for our CASA ratio? And has the bank had any major efficience in time deposit rate given the recent Bank Indonesia rate increase? And the next question, on loan repricing, are this just the hedge loans? How many percent of the loans has been repriced? And is it in line with Bank Indonesia rate increase? I believe Ibu Novi will give a clear answer to [ Matadi ]. Please, Ibu Novi. Thank you.

Thank you, Adi. We want to maintain our CASA ratio is around 70% -- up to 70% and maybe higher than 70% in the short term and sorry. In the short term, up to 70% and higher in the long term, higher than 20%, 70% in the long term. Because we want to consistent to change our strategy to more focus on the transaction, CASA. Right now, we recently adjusted [ up ] time deposit rate 25 basis points for short tenure of 3 months and 50 basis points for long tenure of 12 months or longer. This adjustment is effective on November 2022. For U.S. dollar funding, we did adjustment for both current account and time deposit around 15 basis point adjustment for U.S. dollar current account since September 2022, around 5 basis point adjustment for U.S. dollar time deposit tenor 1 month and 3 months since October 2022. And the question on loan repricing -- so far, repricing happened in floating rate book, in line with [ Tibor ]. On top of that, also a small fraction of managed red book as first at repricing. Focusing on this client with small transaction with us. We still continue to do not reprice our loan rate if the debtor is doing transaction with us and is classified as our Blue chip company.

Thank you, Ibu Novi and we hope that can clear things out. The next question from Ferry Wong, still regarding on time deposit. The question is maybe on LDR, B&I LDR is on the high side and it looks like you need to increase time deposit composition. Could you comment on that? And what is the cost of fund increase going to be in the first quarter of 2023. I believe Ibu Novita can respond to Ferry. Please Ibu Novi.

As I mentioned before, LDR, we want to maintain 87% or below the 90% by 2023. And we expect conservative on the cost of fund during full year 2023 may increase to be 1.7% up to 1.8% for currently 1.4% only.

Thank you, Ibu Novi. And Ferry, we hope that can to things out for you. We have another question. This is from Edward still specifically to Ibu Novita, our cost-to-income ratio increased to 43% in the third quarter of 2022 how much portion of this increase coming from digital bank marketing campaign? Do you see that B&I cost-to-income ratio to continue to be at this level for next year, Ibu Novi?Please.

Cost-to-income ratio increase will continue in this level next year. So I think we want to maintain our cost of -- our cost-to-income ratio is around 42%, up to 43%. And the most portion proposition of this cost to income ratio is our strategy to strengthen our human capability. We raised our budget to doing training program for our talent, Both of digital talent, data analytic talent as well as transaction to upscale the competency on the transaction. And next year, we want to maintain this. So the focus on the cost portion is digital section and on the human capital. .

You -- that was the last question for today. Thank you to all of our directors for the presentation and also for the Q&A session. Ladies and gentlemen, as we are reaching the end of our analyst meeting for the third quarter of 2022, we hope that we have delivered our third quarter of 2022 financial results to all of you. Any questions that have not been answered. Our Investor Relations team will happily accommodate the answer for you. Or if we like to have a face-to-face discussion of free to all meetings, please, you may reach us through our e-mail address, [email protected]. We would like to express our gratitude for your participation, and we hope things are getting better, and we will be able to see you as soon as possible. You may not leave the web in a room. Thank you, and stay safe.