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

Good afternoon, ladies and gentlemen. We are pleased to welcome you to Bank Negara Indonesia Earnings Call for the first quarter of 2024. Good afternoon as well for analysts and investors who are joining on Zoom. Thank you for your participation. Before we dig deep into the BNI latest performance, please allow me to introduce BNI directors who are here with us. First, we have Bapak Royke Tumilaar, our President Director; Bapak Putrama Wahju Setyawan, Vice President Director; Ibu Novita Widya Anggraini, Finance Director; Bapak Agung Prabowo, wholesale and International Banking Director; Bapak David Pirzada, Risk Management Director, and the rest of directors and [ executives ] are here as well. Ladies and gentlemen, our latest corporate presentation is now available. You can download it from the chat room or you can find it in our website, www.bni.co.id, of course, along with other official applications. [Operator Instructions]. If you have any trouble, please reach out to Investor Relations team on our e-mail address [email protected]. Our CEO, Pak Royke, will begin the session by discussing our management highlights and then continued by Pak Agung. And then Bu Novita will proceed with our financial performance update. Pak David will continue with our asset quality update. And since today's earnings call is hybrid, we have around 10 persons joining here with us. And after the presentation, we will have a Q&A session. And to begin the sharing session, please Pak Royke, the floor is yours.

Good afternoon, everyone. Thank you for joining our first quarter earnings call. Allow me to start with -- by highlighting our key performance metric, followed by sharing sessions on key initiatives that we -- the management team are going to focus to execute this year. Overall loan demand environment was good despite challenging macro situation and initial concern about election uncertainties. We grew our loan book by 9.6% year-on-year, in line with our target of 9% to 11% this year. [indiscernible] of growth continue to come from low-risk segment, namely corporate and consumers, consistent with our strategy with focus on asset quality in the first 5 years on our transformation. CASA grew by 6% year-on-year as overall money supply growth in the industry was still not recovered to its normal level. Cost of funds increased by 2.8% or 25 basis points higher compared to previous quarter, mainly driven by a pickup in U.S. dollar funding costs which is a global phenomena in most countries worldwide. Our margin was 4% in the first quarter, down by 35 basis points quarter-on-quarter. The weakness in net interest income due to margin pressure was slightly offset by strong fee income performance, growing by 21% year-on-year. We are actively offering various solutions to our clients to boost fee income generation. We consider this as asset-light strategy that will enable us to deliver better risk-adjusted return to our shareholders. Loan at risk improved by 3 percentage point year-on-year, allowing us to book only 1% credit cost in first quarter. Earnings after tax increased slightly by 2% year-on-year, driven by consistent asset quality improvement and strong fee income performance. All of these are in line with our narrative to become a quality focused bank in the country. Now I would like to share our transformation journey and key focuses in this year. On the first year 2021, we focused on strengthening our capital in order to grab business in top-tier corporates. At the same time, we identify all watch list team and prepared strategy to clean up our balance sheet. On the second year, we focus on improving our internal business process especially related to the credit operation. We also started to fine-tune performance management system in order to shift the bank's employee mindset into the meritocratic system. Lastly, we initiated talent management program to ensure the continuity of our transformation in the long run. On third year 2023, we introduced agile organization structure, which is necessary if we want to be ahead of the competition. We also enhanced underwriting standards in Commercial & SME segment, starting on the second semester of last year. As we evaluate that the improvement in the headquarter has been in place. Now in 2024, we want to emphasize on productivity boost in regional offices, including our commercial banking -- commercial business centers spread across 19 locations in Indonesia. Our growth so far has relied on corporate banking and consumer loan. We want to prepare Commercial & SME segment to boost overall growth in the bank, while keeping in mind the asset quality cannot compromise. Now I want to explain further our key initiatives to boost productivity at regional office and commercial business centers as a result of digitalization and changing customer behavior, we see opportunity to change the role of our frontliners. You may know that -- you may know them as tellers and customer service officers at branch level. Until last year, we had around 6,800 frontliners, around 72% of our frontliners or around 5,000 people are now migrating into sales role. Some of them are dedicated salesperson who spend most of their time outside office, hunting for new customers. And the remaining of them are customer service within our brands, who, at the same time, being a salesperson in their daily work. Not only adding the numbers of salespeople by doing role migration, we also changed the role of our existing direct sales person from specialists into generalists. We have around 1,200 direct salesperson, which will actively cross-sell multiple products such as mortgage, personal loan, credit card and funding products. This massive increase in salespersons and their flexibility to cross-sell are also equipped with sales to upgrade to help them identifying customer needs and proposing the most appropriate products to them. In order to make them stay focused in business expansion we sharpen their KPI by reducing it from initially 10 KPIs to now only max 5 KPIs. On the Commercial Banking segment, we start to actively recruiting experienced RM from market in order to accelerate business growth. As our corporate segment has been growing fast in the past 3 years, we realigned KPI in commercial segment to focus on value chain execution instead of spending too much time on the new-to-bank customers, which we may not have a clear risk profile information. Pipeline management has been successfully implemented in corporate segment, and we replicate this in commercial segment now. Of course, with close collaboration with their corporate banking counterparts. By having a focused target market, which is corporate client value chain and clear pipeline, we expect the turnaround time for loan processing will be reduced towards best-in-class in the industry. We expect our initiatives to boost productivity will translate to stronger growth in upcoming years, while keeping our overall asset quality stable for various economic cycles. Our AGM last month announced several changes in the management team, the changes are part of the majority shareholder commitment to support BNI transformation. Pak Putrama is now Vice President Director. Previously, he was the Retail Banking Director. The Retail Banking Director is filled with Ibu Corina, also not a new face in BNI. The AGM has appointed several new members of the Board, Pak Agung Prabowo as the Director of Wholesale and International Banking. Previously, he was CEO at BNI Sekuritas and long-time investment banking at UBS and Barclays. Pak Munadi Herlambang as Institutional Banking Director. Previously, he was a Board member at Jasa Raharja. Pak Paolo is a new Director of Digital and Integrated Transaction Banking. Previously, he was SEVP corporate transformation in BNI and Mandiri with management consulting experience at McKinsey. Pak Made is new Director of Enterprise and Commercial Banking. He has a well-rounded experience in BNI over the past three decades in various roles of regional office and international office corporate banking as well as special asset Management. Next topic will be presented by Wholesale and International Banking Director. Please Pak Agung.

Thank you, Pak Royke. Ladies and gentlemen, previously, Pak Royke mentioned about margin pressure from higher cost of funds, especially in the FX third-party funds. Just to give you some background on the supply and demand perspective, the growth of FX third-party funds in the banking system has been materially slowing down to only like 5% year-on-year growth by the end of -- end of last year, as you can see in the chart with the yellow dotted line there. On the other hand, the FX loan demand continued to be strong and banks need to be more conservative in FX liquidity management during these global uncertainties. So we lower our FX LDR to below 90% versus in the past, frequently, it was above 100%. So the combinations of strong loan demand and conservative liquidity management translates into strong demand for FX in the system. And as a result, cost of fund for U.S. dollar third-party funds increased to 3.4% in the first quarter this year, even higher than the IDR funding costs at the 2.6%. So breaking down by funding type, the steepest increase happened in time deposits, which touch 6.8% level last quarter. And facing the situations, we timely issued global bonds on early April. When market was still more stable than the situation nowadays, we successfully raised $500 million financing with attractive yield of 5.3% for a 5-year tenor bond. In addition to diversifying our funding sources, we will also be more selective in expanding our U.S. dollar loan portfolio and focusing more on the IDR loan. This is simply to reduce the pressure. This is to reduce the pressure on our margin as well as to minimize risk of exchange rate volatility. So we understand our short-term challenge is funding cost. But aside from that, we also need to keep paying attention on the importance of being ESG-focused bank as our stakeholders put value on this aspect. So this year, we just announced a clear target to achieve Net-zero emission from operational activities by 2028. That's 4 years from now. In terms of Net-zero emissions from lending, our target is aligned with the government which is by 2060 at the latest. It may seem a very long journey, but we have to understand that this is because Indonesian economy is still pretty much commodity based. We export commodities and most Indonesian population still needs affordable energy sources. So what is important is how we fill our commitment along the journey. So we are actively -- one, we are actively introducing sustainability-linked loan to incentivize our clients, improving their ESG practices. We are also providing the pricing incentives for green loan. Just recently, we -- last quarter, we supported a big group Barito Renewable with the IDR 1.6 trillion loan to acquire a wind farm, a 75-megawatt capacity in Sidrap. So from the bigger picture, our green portfolio grew by 23% compounded annual growth rate over 3.5 years, which is almost triple than the loan growth at banking level, bringing the green loan proportion to 14% of our wholesale loan from only 8% in 2020. Now finance director, Ibu Novita, will convey on our financial performance. Please Ibu Novita.

Thank you, Pak Agung. Now we are going to discuss some detail on our financial. Loan growth was 9.6% year-on-year, in line with our target, driven by corporate, consumer and subsidiaries. Third-party funds grew by 4.9%, smaller than loan growth as we are less aggressive on time deposits, which grew by 2.4% year-on-year, while CASA grow was 6% year-on-year. In a bigger picture, we need to minimize net interest margin pressure by having more optimum loan to deposit ratio, which now stands at 89% versus 85% a year ago. Now in our P&L, net interest income decreased by 9.8% year-on-year as cost of fund pressure continue until last quarter. Non interest income increased by 14.6%, driven by fee income growth of 21% year-on-year. while cash recovery income was still lagging, only grew 1.4% year-on-year. OpEx was well managed at 2.3% growth. With cost saving in G&A expense decreased by 4% year-on-year. PPOP declined by 5.4% year-on-year due to cost of fund pressure. Provisioning charges decreased by 19% year-on-year with cost of credit at 1%, bringing our net profit to grow slightly by 2% year-on-year. On loan growth, corporate segment continued to be main driver with 16% growth came from both private sector and SOE. On the SOE segment, net expansion was IDR 19.3 trillion year-on-year, mainly in exposure towards quasi government institution like PLN, Pertamina and [ Bulog ] as well as loan growth from strong SOEs, such as Pegadaian, Jasa Marga and Telkom. Consumer segment also showed consistent growth momentum at 13.6% year-on-year. Driven by payroll loan and mortgage. We want to highlight that 2 of our subsidiaries, BNI Finance and Hibank started to give meaningful contribution to overall growth on a consolidation basis. Out of IDR 61 trillion year-on-year increase in our outstanding loan around IDR 6.2 trillion or 10% of growth came from subsidiaries. The strong growth in both multifinance and HIBANK are also accompanied with improvement in asset quality, as shown by NPL ratio below 2%. MSME still show contraction year-on-year. We are more confident in medium segment where asset quality started to stabilize. On the other hand, SME segment, especially KUR product is still challenging to manage from asset quality perspective. We prefer to extremely selective in KUR disbursement, not to aiming to disburse more than we did last year. Loan yields slightly declined due to competition in consumer segment and low subsidiary payment in KUR within SME segment. As of March, our CASA ratio was maintained at 70%. There is 1 positive development that we rarely see that trading account didn't contract on quarterly basis. We believe this was attributable to more transactional saving account in our balance sheet. We continue to spend effort to grow transactional savings account by increasing the BNI mobile banking application. During Q1, transaction value in BNI mobile banking increased by 36% year-on-year. Looking into cost of fund breakdown, overall cost of fund increased by 25 basis points Q-on-Q with the biggest increase in time deposit rate, 53 basis points higher Q-on-Q U.S. Dollar time deposit was the culprit, hence, we issued [ Global ] bond on early April, with yield of 5.3% cheaper than U.S. dollar time deposit rate of 6.8%. Going forward to avoid further pressure on U.S. dollar funding costs, we want to prioritize IDR loan over USD loan. Our latest asset quality update will be explained by Risk Management Director. Please continue Pak David.

Thank Bu Novita. Ladies and gentlemen, at the core of our transformation strategy is portfolio mix shifting to higher-quality borrowers with disciplined execution of the strategy for the last 3.5 years, we continue to see defensive asset quality. Loan at risk improved year-on-year by 300 bps, now stands at 13.3%. This is driven by NPL reduction by 80 bps year-on-year as well as the upgrade in the current restructured borrowers by 310 bps year-on-year. Collectibility 2 ratio increased from 4.4% March 2023 to 5.5% in March this year. This is primarily driven by Waskita downgrade, which we already set aside provision of above 60%. Quarter-on-quarter, the slight increase in LAR ratio by 40 bps was due to a downgrade of a pharmaceutical company into collectibility 2. Aside from that, we also observed higher collectibility 2 ratio in SME segment. This is a sign of weakness, but we also observed this weakness in the banking industry. However, as SME segment only contribute around 10% of our book, the impact is relatively not material to our overall asset quality picture. Last quarter, we only booked 1% credit cost because based on our review, we find positive development among our corporate clients that have fully recovered post pandemic, Hence, we start to release provisions for these good borrowers, resulting in negative 0.6% credit cost in corporate segment. We also want to highlight that we continue to be conservative in provisioning policy for segments that's still facing a challenge in terms of asset quality like SME segment. We still book elevated level of credit cost as shown on the upper right table on the slide. Despite 1% cost of credit, we maintain sufficient NPL coverage at 330% and LAR coverage at above 50%. Overall coverage for BNI wide portfolio, what we call as loan loss reserve ratio is maintained very conservative at 6.7%. This is shown on the bottom left of the slide. Coverage for Stage 2 loan is 27%. And for Stage 3 is ample at 74%. Now I will give it back to the moderator for a Q&A session. Thank you.