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

Welcome you to Bank Negara Indonesia Earnings Call for the first half of 2024 financial results. Good afternoon as well for analysts and investors who are joining on Zoom. Thank you for your participation on such a wonderful day. First of all, we would like to emphasize that, usually, the first half result is announced on July, but given that we had a limited review, the first half of 2024 results had to be delayed to August. But overall, we remain happy and confident with our results. So much things going on from July to August, BNI 78th anniversary and the launch of wondr by BNI. Please give a round of applause. [Foreign Language] Thank you so much. This is such a wonderful milestone for all of us, but I will let the Boards get into the details of wondr by BNI later on. Before we discuss our latest performance, please allow me to introduce BNI directors who are here with us. First, Baba Royke Tumilaar, President Director; Baba Putrama Wahju Setyawan, Vice President Director; Ibu Novita Widya Anggraini, Finance Director; Baba Agung Prabowo, Wholesale and International Banking Director; Ibu Corina Leyla Karnalies, Retail Banking Director; Baba David Pirzada, Risk Management Director; and the rest of directors and senior executives are here as well. Ladies and gentlemen, if you would like to see our most recent corporate presentation, you may do so by downloading it from the chatroom or by visiting our website, on www.bni.co.id, and click the Investor Relations icon. You can also find financial statements and other official obligations. [Operator Instructions] And if you have any trouble, please reach out to our team through our e-mail address, [email protected]. Our CEO, Ba Royke, will begin the session by discussing our management highlights and continued by Bu Corina and Ba Agung. And after that, Bu Novita will proceed with our financial performance and Ba David will conclude the session with our asset quality update. And since today's earnings call is hybrid, we have several guests joining here with us face to face. We have Mas Kresna from Mandiri Sekuritas, Mas [indiscernible] from BNI Securities. [indiscernible], Ba Joshua from UBS, Mas Handy Noverdanius from CGS. And also we have almost 150 participants joining on Zoom. After the sharing session from our BOD, we will have a Q&A, both from the audience here or for those who are joining on Zoom. And to begin the sharing session, please, Ba Royke, the floor is yours.

Thank you. Good afternoon, everyone. Thank you for your time to attend BNI earnings call. Normally, we start every earnings call session by elaborating our financial results. This time, I want to start by introducing wondr by BNI, our new mobile banking app that was launched just last month. This project is quite ambitious as we create a totally new mobile apps within a very short time frame of only 1 year, thanks to the strong collaboration from various division in supporting our IT and digital team. The previous mobile app was already outdated as it used technology platform available 8 years ago on 2016. Since then, we only did 2 minor improvements, on 2019, 2021, mainly on the front-end interface. As the platform was already out, there were only so much we could change. The current app, wondr by BNI, is built using the latest technology available in the market, is safer, faster and more reliable. More importantly, the platform allow us to very agile in meeting ever changing the customer needs. If we want to improve the apps or add new feature, the time to market of the new idea could be done in a much shorter time frame. Within a month of its launching, wondr by BNI has been used by 1.2 million users. One encouraging indicator is the active user rate were 65% of the registered users are actively using the apps for financial transaction. This active user rate is double than our old apps. Now we live in digital era, where a good mobile apps is hygiene factors for banks, aside from the hygiene factors such as fast, safe, reliable, basic features, wondr by BNI offer unique value proposition with 3 financial dimension, namely insight, transaction and growth. The apps will help users to do better financial planning. This includes insight of users in coming and spending in given period or recap in wondr. Then the user will be able to stop their future financial goals and choose what the investment products are most suitable to meet their goals. In simple world, wondr helps to improve users' overall financial literacy. The features in Wondr will continue evolve and will be exciting. We plan to add more key features every quarter to improve user stickiness with the apps. We believe a superior retail banking app will translate to the customer stickiness that result in stronger growth for low-cost fund for the bank. In addition, it also could contribute the fee income as well as better efficiency ratio in the long term as we could streamline our business process once retail customers switch their interaction with the banks more through wondr apps. Now we enter into the serious topic, our second quarter results highlights. Overall, we feel that operating environment of our business got better in the last quarter, especially on loan growth and funding costs. Loan growth momentum was the strongest since pandemic where we delivered almost 12% loan growth higher than our guidance. Cost of fund data show inflection point peaking on May and, since then, gradually declined starting from June. As a result, cost of fund during the second quarter was 7 basis points lower than that for first quarter. With stable asset yield and improving funding costs, our net interest income and PPO base started to grow again after 2 quarters of contraction, starting from mid last year. However, we also acknowledge that not all segments are doing well. We pay close attention to SME segment, which is still struggling on asset quality, even though SME only represents 11% of BNI portfolio, continued weakness in asset quality makes the segment to drag down overall growth of BNI business. Bu Corina, our Director of Retail Banking, will elaborate more on this issue.

Thank you, Ba Royke. We want to stay transparent with the challenge. We or probably a lot of other banks, too, are facing in SME segment as well as elaborating our action plan to reassure the situation is under control and will be solved sooner than later. As a result of our conservative growth strategy, loan at risk has been under control, improving by 1.1 percentage point to now at 15.8% there was waterfall downgrade from the strat loan into SML and then NPL within LAR group. Our latest assessment shows that around 1% of our SME book is considered high risk to downgrade to NPL note that we use a very conservative scenario for this assessment to minimize risk of surprise down grade. There are 2 interesting observations from the assessment. First, 45% of the high-risk bucket is poor, product which covered by insurance team. Hence, our loss will be minimal. Second, majority of the high-risk bucket, around 73%, came from loan origination before 2022, where underwriting standard was not updated and also some impact from pandemic. We have taken into account the provisioning requirement for the high-risk bucket into our COC guidance, which remains low at 1% bank-wide COC as the rest of the other segments are performing well. We have taken several steps to improve SME segment performance. Temporarily, we turn to be fairly selective on loan approval, as reflected by 11.2% year-on-year loan construction. This will not be forever as we won SME to contribute to Bank-wide loan growth again. The transformation in SME segment are focusing on several key areas. First, the implementation of credit scoring for a small ticket size loan below IDR 1 billion has been done in October 2023. Ticket size IDR 5 billion in February 2024 and allowed by IDR 10 million ticket size also done in February 2024. Our fintech data shows that credit scoring has been instrumental in lowering NPL formation in SME book. Second, we are developing LMS loan management system for retail banking to improve relationship manager productivity, provide better monitoring tools and minimize human error. Implementation schedule is targeted on fourth quarter next year. We also restructured our organization structure to enhance risk unit independency and segregation of duties. Lastly, on the human capital area. We are working on building risk culture among employees, not only by training, but more importantly, by sharpening the KPI with emphasis on quality growth as well as setting reward and punishment system. With this initiative in place, we aspire to grow in SME segment again starting on next year. While we are working on reviving healthy growth in SME segment, we are proud with the progress of the consumer segment, now becoming the second growth pillar after corporate. The consumer segment has been growing by almost 12% CAGR since 2020, higher than bank-wide growth at 8% CAGR. Within Consumer segment, payroll loan and mortgage have been the biggest growth contributor. We currently have strong positioning in the industry with mortgage and credit card rank #3 and personal loan rank #4. The spirit of transformation in BNI Group is also executed in consumer loan. For mortgage business, we are improving risk profile of mortgage customers and developers partners. Mortgage customers are shifting into higher income segment, as reflected by average mortgage ticket size with increase around IDR 500,000,000 2 years ago to now almost IDR 800 million ticket size. We also save our partnership into top tier developers, growing by almost 60% CAGR since 2021 versus non-top tier developer, which grew by only 5% CAGR. Similar story of customer profile shift also happened in payroll loan product. The majority of payroll loan borrowers are from well-established institution as a result of cross-sell with our large corporate segments. I would like also to highlight BNI recent initiative where we organized the very first major consumer expo earlier this month. The expo was supported by 22 top real estate developers, 14 travel agents, 5 airlines and more than 70 retailers. We managed to bring more than 70,000 customers for this expo. We believe this export in the long run will solidify BNI positioning in retail banking. Next update on liquidity will be confide by wholesale and International Banking Director, Ba Agung. [Foreign Language]

Thank you, Bu Corina. So, earlier, Ba Royke mentioned about the favorable and less favorable things about our second quarter performance. I think one of the major positive recent developments is on the funding cost improvement. So from macro side, we noticed that the money supply growth started to rebound with the latest data of June showing 7.8% year-on-year growth. It is picking up from its bottom level at the end of last year at only 3.5% year-on-year growth, and risk deposit competition from the Central Bank's SRBI instrument has also gradually subsided. Central Bank has been lowering the yield of SRBI starting from June followed by the reduction in issuance size and, lately, by less option frequency. Probably the biggest catalyst for banking system liquidity came from Central Bank's incentive of the reserve requirement ratio. It was effective on June. Now we enjoy about 3.1% incentive. This allows us to optimize our loan-to-deposit ratio. Our average LDR on month-to-date June was 92%, meaningfully higher than month-to-date average in previous months that typically hovered around 88%. Aside from the tailwind from macroeconomic policy, BNI also proactively improves our funding structure. One of the recent initiatives is shifting term deposit customers from institutions to retail, as retail deposits are generally cheaper and more stable. For the performance management purposes, we shift ending balance to average daily balance of each third-party fund type. So with improvement in macro liquidity environment and our internal initiatives to boost more savings, we started to see savings growth outstripping the overall third-party funds growth in the last quarter. As a result, the cost of funds gradually improved from its peak on May at 2.88% to now at around 2.6%. This is still far from our cost of funds 2 years ago at only 1.4%, but we are encouraged with the recent positive development, which may continue, taking into account more clarity from the fab late direction and idea exchange rate stability. So next, our Finance Director, Bu Novita, will elaborate our financial performance. Please, Bu Novita.

Thank you, Ba Agung. With all the progress of our first half performance, now we want to share and we are seeing for the rest of the year, as reflected by changes in guidance. We increased our loan growth guidance by 1 percentage point with full year target at 10% up to 12%, largely driven by strong growth in Corporate and Consumer segment that offset weakness in SME segment. Net interest margin seemed to have stabilized in the past 2 quarters at 4%. Recent development on cost of fund, especially June and July month to date has been quite encouraging. However, we prefer to conservatively set full year NIM at least 4%, similar with the first half realization. Credit cost has been consistently low at only 1% in the first half. Corporate and Consumer segment, which are 75% of book have performed consistently well. We don't see any major surprise in middle segment. However, we need to stay conservative, given continued weakness in SME segment, which represented 11% of our book. We set our COC guidance at plus/minus 1% for full year 2024. Now we will discuss more detail on financial performance. Loan growth was 11.7% year-on-year with strong momentum on second quarter. First quarter was a bit soft period for loan growth, flat Q-on-Q. On second quarter, it grew by 4.6% Q-on-Q bringing year-to-date loan growth also at 4.6%. On funding, aligned with signal on liquidity improvement, we are seeing interesting trends where this time funding growth come from retail savings. Saving account grew by 4.3% year-on-year higher than current account growth at 1.1%, our total CASA growth at 2.5% year-on-year. Reserve requirement at RRR incentive effective on June 1, has allowed us to manage out expensive funding in the last month of second quarter, bringing down term deposits to decline by 2.6% year-on-year or 4.3% Q-on-Q. Our first half 2024 P&L on year-on-year basis still look weak because of NIM compression that resulted in PPOP contraction by 5% year-on-year. However, if we took -- if we look at the latest quarterly trend, net interest margin has been stabilizing. Loan growth start to pick up, resulting in positive indicator for all P&L lines. Net interest income grew by 3.1% Q-on-Q. As we develop and launch wondr by BNI, our new mobile app's operating expense grew by 3.8% Q-on-Q bringing PPOP growth at 1% Q-on-Q. This is positive reversal trend after multiple quarters of PPOP contraction since the middle of last year. Next topic will be presented again by Ba Agung. Please, Ba.

Thank you, Bu Novita. Earlier, Bu Novita mentioned about our loan book grew by almost 12% year-on-year and almost 5% Q-on-Q. So corporate segment remained the biggest growth contributor. It is increasing by 19% year-on-year. Loan demand has been particularly strong in general trading, energy and natural resources. Consumer segment has been our second growth pillar, where it increased 15% year-on-year, driven by mortgages and personal loans. Medium segment still posted a bit of contraction, minus 2.2% year-on-year. The good thing is we no longer see major negative surprise in asset quality. However, considering the economic growth is not that strong and competition in this segment is quite intense, we remain selective on loan origination for the time being. Small segment issue has been addressed by Ibu Corina earlier. As of June, the loan book contracted by 11.2% year-on-year as we focus on fixing asset quality first. Loan yield remained relatively stable across most segments, except for SME as high loan risk at risk ratio translated to lower asset yield. I'd like to highlight here that a small 10 to 20 bps pressure in corporate segment yield is due to the currency mix shift where ForEx loan grew very strong at 29% year-on-year, double the growth rate of IDR loan portfolio within Corporate segment. If we exclude this currency mix shift, corporate loan yield has been stable. For the third-party funds, our third-party funds growth has been -- was driven by savings account. It grew by 2.8% Q-on-Q and 4.3% year-on-year. As we got benefited from the reserve requirement ratio incentive, we optimize our LDR by managing out expensive funding both term deposits and some portion of our special rate current account. Time deposit contracted by 4.3% Q-on-Q and current account was also reduced by 1.4% Q-on-Q. Quarterly cost of funds started to improve from its peak at 2.79% on Q1, down to 2.72% on Q2, and this trend so far persists on month-to-date July with cost of fund at 2.6%. Last quarter, the biggest improvement in funding costs came from cost of current account, which declined by 34 bps Q-on-Q, thanks to less intense bidding for special rate among SOE banks. This happened particularly in the month of June after banks received reserve requirement incentive. So Ba David now, our Risk Management Director, is going to convey on our asset quality update. Please, Ba David.

Thank you, Ba Agung. Ladies and gentlemen, total loan-at-risk portfolio in BNI as of June was equivalent to 12.3% of total loan, which is a significant improvement from 16.1% a year ago. Current risk weighted loan as a percentage of total loan also declined from 9.3% to 5.4%, and the ratio also declined from 2.5% a year ago to now at 2%. The only increase in ratio on a year-on-year basis came from slight increase in special mention book. This is from downgrade of SOE construction that happened at the end of last year and remain in collectibility to until now. looking into LaR by segment. All segments showed some improvement with most notable improvement came from Medium segment for SME or Small segment. While overall LaR ratio has been improving on a year-on-year basis, the segment experienced waterfall downgrade from current risk-weighed classification, down into SML and then into NPL. This is shown by some pickup on SML and NPL ratio. We continue to assess our SME debtor situation post the end of COVID restructuring realization, which ended in March this year. For those debtors with lower visibility of business recovery, we chose not to offer multiple restructuring, but we'd rather downgrade them into SML and NPL. As we want to speed up the cleanup of our balance sheet, we also increased our write-off this year. During first half of 2024, write-off amounted to INR 10.8 trillion, which is a 61% increase year-on-year. Most of this written-off loan have been adequately provisioned. Therefore, our COC remained low at 1% to date. And loan demand this year is stronger than expected and provision coverage that we have been building since pandemic has been quite elevated, so we think we could use these situations to clean up balance sheet from legacy book without hurting loan growth and credit cost target. New NPL formation and write-offs are higher this year. This is by design. We downgrade around IDR 10.2 trillion loan into NPL and write-off IDR 10.8 trillion during first half of this year, around 91% of NPL formation and 79% of write-off coming from client origination before year of 2021. By segment, SME segment contributed to the biggest downgrade relative to its size. With consistent improvement in NPL and loan-at-risk ratio, as well as management's strong conviction on the asset quality outlook, we gradually lowered the provision coverage. LaR coverage now stands at 48% and NPL coverage at around 300%. However, this level of provision coverage are considered quite ample if we compare with 3-year average before pandemic, where LaR coverage was at 34% and NPL coverage was at 145%. I will stop here and give it back to the moderator for a Q&A session. Thank you.

[Operator Instructions] [Foreign Language] Okay. Now I'm going to read several questions from our Zoom audience. And I believe the first questions will be best if Ba Royke can give us some color on this topic. The question is from Grow Investment Indonesia, Andrew Handaya, and also from [indiscernible] Investment Partners [indiscernible]. The question is regarding our net interest margin and loan growth outlook in the second half of 2024, Ba Royke. Given that there is a potential fed and BI rate cut and also the expectation of the benefits to our cost of funds, let's say, if or when BI cater it, please, Ba Royke, give us some color for this topic, Ba.

We see the BI could cut the policy rate, I think, around 25 to 50 basis points in the fourth quarter under several conditions, one is one rate minimum by 50 basis points; second, stable rupia, at least 16,000 stronger; and oil price also consistent below $90 per barrel. So lower rate environment is generally positive for the banks margin as deposit repricing is faster than more meaningful than loan repricing. The rate cut also potentially followed by Central Bank policy to system liquidity such as policy related to RRR and policy instrument. In this case, SRBI. We expect a cost of fund could improve further towards fourth quarter in this year from a combination of RRR incentives, diversification of time deposit into the retail clients with cheaper rate and less SRBI issuance, which translate to a better liquidity environment. There is a likelihood for NIM in second half '24 is to be higher than first half, which was only at 4%. Despite the potential rate cut, we see continued strong loan demand, particularly from the wholesale segment. The loan growth rate around 11.7% year-on-year in the first half of 2024 exceeded the initial guidance, 9% to 11%, mostly driven by corporate, 18.7% year-on-year, and consumer segment, 15.1%, consistent with our healthy growth strategy focus on blue chip companies, while capturing consumer business from the corporate value chain. With the business CapEx cycle to move better and stronger macro program backdrop, we have new aspiration to reaccelerate loan growth to 10 to 11 range -- 10 to 12 range. Note that this adjustment already considers our elevated write-off of IDR 18 trillion or equal to around 2.5% of FX loan book.