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

Good morning, ladies and gentlemen. On behalf of PT Bank Negara Indonesia, (Persero) Tbk or BBNI, I'm pleased to welcome you to our first quarter of 2025 earnings call. We just completed a particularly dynamic start to the year. The first 3 months of 2025 have brought a fair share of challenges, both globally and domestically. And despite the uncertainties, we're excited to share key updates of BBNI with you, including the introduction of new additions to our leadership team and how BNI faced the macroeconomic and liquidity trends, along with regular updates on our financial performance and also asset quality. We hope today's session will be both insightful and engaging. This call is not only a platform to share updates, but also a space for open dialogue. So we invite you to actively participate. Please feel free to submit your questions into the Q&A box on your Zoom apps following the presentation. We've lined up a compelling agenda and speakers ready to provide favorable perspectives. So let's get started. First, I'd like to introduce our Board of Directors who are here with us, our President Director, Pak Putrama Wahju Setyawan.

Good morning, Hello, analysts and investors. Thank you for joining BNI's earnings call today. Let me begin by introducing our new addition to the leadership team appointed at last month's AGM. Most of us are familiar faces within BNI and the investment community, myself included. I've spent the majority of my 3 decades career at this bank with latest position before AGM as Deputy CEO. Bu Alexandra, our current Deputy CEO, will be a strong addition to the team with her deep experience in wholesale banking and was also a Deputy CEO at Bank Mandiri. Bu Rian now serves as Director of Network and Retail Funding, a new role reflecting our integrated approach to branch transformation with a focus on retail funding. Her previous leadership in retail digital, including our wondr application, will be key in strengthening our branch network capabilities. Pak Eko, institutional BNI banker with deep experience in regional operations, now leads institutional banking. His team will manage relationship with government institutions and strengthen our public sector business. Pak Iqbal, our Director of Commercial Banking, brings a long track record in SME, commercial banking, retail funding and institutional banking from leading banks like Citi, Mandiri, VNI and BTN. Finally, Pak Abu, our new Director of Treasury and International Banking; has extensive expertise in treasury and global banking, having worked in both domestic and foreign institutions. This AGM brings together a leadership team with the right mix of skills and experience, all highly respected professionals in Indonesia banking sector. We are fully committed to driving BNI's transformation forward, building on the new progress that has brought us to where we are today. Now let's turn to how BNI sees current global and domestic situation as well as our strategic priorities. As we reflect on the first quarter, it's clear that the global economic landscape is becoming increasingly complex. The evolving U.S. trade policies, particularly around tariffs, have introduced new uncertainties that could reshape international trade flows and dampen growth across many economies. However, Indonesia economic structure provides meaningful insulation against the most direct impacts of these developments. Let me share our perspective on how this dynamic may affect our market. First, it's important to recognize that Indonesia's economy remain primarily domestically driven with export accounting for only about 20% of GDP. Our exposure to U.S. market is relatively limited, representing just 10% of total exports, which helps cushion the immediate effects. In fact, our analysis suggested a 1 percentage point slowdown in U.S. growth would translate to only a 5 to 6 basis point reduction in Indonesia GDP's growth. That said, we are paying particularly close attention to potential indirect effects through our key trading partners, especially China and Japan. The economic linkage here are more substantial with every 1 percentage point movement in China's growth rate potentially affecting Indonesia by 11 to 17 basis points. We are actively monitoring demand patterns and supply chain adjustment in these critical markets. The financial markets have already responded to these uncertainties with the rupiah experiencing greater pressure than many regional peers so far this year. While our fundamentals remain sound, prolonged currency volatility could begin to weigh on business and consumer confidence, factors we are watching carefully. Considering all these elements, our base case projection for Indonesia 2025 GDP growth remain at 5%. However, we acknowledge that the ultimate outcome will depend heavily on how trade tension evolves in the coming months. More severe scenario such as a U.S. recession or stagflation environment could create additional headwinds for global trade and investment flows. Let me now address how BNI is positioned to navigate the current macroeconomic uncertainties. Since the pandemic, we have built a stronger loan portfolio, sharpening our underwriting standards and reallocating capital to more profitable segments. This disciplined approach has resulted in corporate and consumer segment now represent 75% of our total loan book. Historical trends show that corporate and consumer loans tend to demonstrate greater asset quality stability during crisis. Our current mix positions us well for potential macro challenges ahead. The improving risk profile of our loan book is further supported by our risk weight density, which declined to 70% as of March 2025, down from 82% 5 years ago. In our assessment, our current loan portfolio is in a good shape, and there is no need to do cleanup or what analysts normally refer as kitchen sinking. We remain conservative in our provisioning approach, maintaining a loan loss coverage ratio of 5.2% above the Indonesian banking sector average. This prudence assures we are well buffered against potential stress. Equally critical as our fortress balance sheet, our capital adequacy ratio stood at 22% in March, significantly above the 13.95% regulatory minimum. Even after adjusting for dividend payouts, our pro forma CAR remained strong at 20%. In summary, BNI has higher quality loan composition, 25% corporates and consumers, lower risk weight density, 20% versus 82% in 2020. Conservative provisioning, 5.2% coverage, exceptional capital strength, 20% pro forma CAR. These pillars ensure BNI enters this period of uncertainty from a position of strength. With that, I will now hand over to our Director of Treasury to discuss liquidity situation.

Thank you, Pak Putrama. Liquidity environment keeps evolving and BNI is responding it conservatively. On the macro liquidity trends, since 2022, we have observed a structural slowdown in system-wide money supply growth or M2 growth, which decelerated to 5.7% as of February 2025, remaining a single-digit territory. Given the historical correlation between M2 growth and NIM compression, this trend has contributed to the decline in our net interest margin from 4.8% in 2022 to 4.2% in 2024. SRBI and BI policy impact in first quarter, SRBI yields softened from 7.25% in December 2024 to 6.4% last month, accompanied by limited issuance volumes, supporting banking system liquidity. However, with recent IDR volatility, Bank Indonesia has adopted a more cautious stance to stabilize the currency. We have seen SRBI yields begin to tick up this month, though issuance remains contained. On the BNI's liquidity strategy, earlier this year, we targeted an LDR above 95% for 2025. However, given rising macroeconomic uncertainties, we have taken a more conservative approach. LDR improved to 93.1% in March as we prioritized liquidity buffer building. While loan growth remained strong in first quarter, we proactively increased current account and term deposit promotions to strengthen our funding base. As a result, our cost of funds for third-party deposits adds up to 2.75% in first quarter versus 2.65% in fourth quarter 2024, a measured trade-off for greater resilience. So looking ahead, we remain vigilant on liquidity management, ensuring BNI is well positioned for potential market stresses while maintaining balanced growth. With that, I'll now pass to our CFO, Pak Paolo.

Thank you, Pak Abu. Let me now take you through our first quarter results, which reflect both the continued momentum in our core business and areas that we are monitoring carefully in this evolving environment. I'm pleased to report that our net interest income grew 4.7% year-on-year, extending the positive trend we established in the fourth quarter of last year. This represents an important milestone in our multiyear journey to rebalance the loan portfolio, with healthy 10.1% loan growth and a particularly encouraging 10.2% expansion in savings deposits, clear evidence that our focus on low-cost funding is delivering results. On the noninterest income side, we saw some softness with fee income up 2.6% and recovery income down 7.5%. While part of this reflects timing factors like fewer working days in March, we are mindful that continued macroeconomic uncertainty could prolong this pressure, particularly in trade-related activities. We are taking proactive steps to diversify our fee income streams, but at the same time, remain realistic about the potential for ongoing challenges if market conditions persist. That said, our asset quality metrics continue to strengthen with the NPL ratio improving to 1.96% and credit costs declining to just 0.9%. This disciplined approach to risk management helped deliver 1% growth in both pre-provision operating profit or PPOP and net income, demonstrating the underlying resilience of our banking model even amid revenue mix challenges. Looking ahead, we are focused on what we can control, maintaining a strong credit discipline, optimizing our funding mix and carefully managing costs. While we are encouraged by our core performance, we remain vigilant given the uncertain macroeconomic backdrop. In other words, some problematic debtors in our LAR book might fall to NPL. But as we have put them into the watch list and assigned ample coverage, the impact to credit costs will be very manageable. Let me take a moment to discuss how we are building a more sustainable funding model through digital transformation, particularly important in this environment where liquidity pressures are affecting the entire banking sector. While we have seen our overall cost of funds increase quarter-on-quarter due to seasonality and industry-wide challenges, I am encouraged by the underlying progress we are making in reshaping our deposit base through digital engagement. Our corporate digital platform, BNI Direct, continues to gain traction with a 7% growth in active users and a 16.4% increase in transaction frequency. This engagement is translating into real results. We have grown current accounts by 3.4% year-on-year, while actually improving current account cost by 20 basis points compared to the first quarter of last year. Building on this success, we will be expanding BNI Direct to small businesses starting this quarter, which should further diversify our funding sources. On the retail side, the wondr app we launched last July now serves 6.8 million registered users with transaction frequency up 58% year-on-year. This growing digital engagement is directly contributing to our 10% year-on-year savings deposit growth, a momentum that has been maintained since late last year. Now I want to be clear-eyed about where we are. While these digital initiatives are showing promising early results in specific segments like savings, we are still navigating a period where overall funding costs remain elevated compared to the end of 2024. The progress we are seeing gives us confidence in our strategy, but we recognize it will take time for these digital investments to fully offset the broader market pressures. What is important is that we are laying the foundation for a more stable, cost-effective funding in the future. By deepening customer engagement through our digital platforms, we are not just chasing short-term fixes, we are building lasting relationships that should reduce our funding cost volatility over time. This quarter, we are focused on executing the small business rollout of BNI Direct while continuing to enhance features as well as usability across all our digital platforms to drive further adoption. We view this digital transformation as a multiyear journey, but one that is absolutely critical to achieving our longer-term financial objectives. I'm pleased to report that our Q1 results were generally tracking in line with our aspirations for the full year of 2025. We saw loan growth come in slightly ahead of our initial projections and credit costs were marginally better than target. On the margin front, while NIMs was somewhat softer than we had anticipated, this primarily reflects industry-wide funding pressures we have seen -- we have been navigating as well as lower SOFR rate trend. That said, we recognize the operating landscape has become increasingly fluid since we first established our 2025 guidance. The escalating global trade tensions and currency volatility introduced new variables that could impact our key business drivers, particularly loan demand and net interest margins. Bank Indonesia's policy response to these developments will also be an important factor. In this environment, we are taking several precautionary measures. We are building additional liquidity buffers, becoming more selective in our lending and conducting more frequent stress testing to ensure we are well positioned for various scenarios. While we are maintaining our original full year 2025 guidance for now, we believe it would be prudent to revisit these targets once we have better visibility into how these macro factors will evolve. We plan to provide a formal update to our full year outlook when we report Q2 results in July. At that point, we will also have a clearer read on the trade policy impacts, Bank Indonesia's policy trajectory as well as the combined effect on our business. For now, I would characterize our position as one of cautious execution. With our start to the year, we are pleased but mindful of the growing uncertainties ahead. We are focused on controlling what we can control, but also preparing to adjust as needed when the picture becomes clearer by midyear. This balanced approach reflects our commitment to both performance discipline and prudent risk management as we navigate these uncertain times. Our loan portfolio developments this quarter reflect careful balance we are striking between growth and risk management in the current environment. Our lending activity continues to be driven by key targeted segments. The corporate portfolio is growing 16% year-on-year and consumer loans expanding by 13%. In the corporate segment, the private and institutions grew by 17% year-on-year, while corporate SOEs grew by 13%, mainly from top-tier SOEs such as Bulog, Pegadaian and PLN. These results demonstrate our ability to capitalize on opportunities in our core markets while maintaining strong underwriting standards. We have maintained a cautious stance in the middle market segment, which contracted by 3.3% as we have been selective in light of competitive pressures as well as higher risk profile that may make profitability challenging in this middle segment. Similarly, our small business segment declined by 10.4% overall, primarily due to our strategic reduction in KUR lending. That said, we are encouraged by the 6% growth in our Non-KUR small business loans following the implementation of our enhanced credit scoring system. We will continue taking a measured approach to this segment while we monitor asset quality trends. On the pricing front, we are seeing competitive pressures with the overall portfolio yields declining by 10 basis points year-on-year, with the middle segment also contributing to this trend. Corporate loan yields have also softened somewhat, reflecting both market competition and the downward trend in reference rates like SOFR as well as JIBOR since late last year. The small business segment, however, saw a 30-basis point yield improvement, a positive development that reflects better credit quality we are achieving with the loan at risk ratio improving from 16% to 12% over the past 12 months. From a product mix perspective, working capital loans continue to dominate our productive lending at 71% of the portfolio, growing at 11.7% year-on-year compared to just 3.9% growth in CapEx loans. This is actually a favorable composition given the uncertain outlook as well as working capital facilities typically carry shorter tenors and lower risk profiles than longer-term investment loans. Let me now share some developments on our funding side, along with how we are navigating the current market environment. We are particularly pleased with the continued strong performance of our savings deposits, which grew 10.2% year-on-year. This marks the third consecutive quarter of accelerating growth since we launched our wondr mobile banking platform and accompanying campaign programs. This is clear evidence that our digital strategy is resonating with our customers. Our current accounts, meanwhile, grew 3.4% and term deposits increased by 2.1%, maintaining a stable CASA ratio of 70.5%. On funding costs, we saw a modest 10 basis point quarter-on-quarter increase in our cost of third-party funds to 2.75%. The seasonal uptick reflects the typical liquidity buildup for March extended holidays and dividend payments. More importantly, on a year-on-year basis, we have actually achieved a 4-basis point improvement when adjusting for the seasonal factors. Given the rising uncertainties in financial markets, we are choosing to take a more conservative approach to liquidity management. While maintaining our LDR below 95% may temporarily slow our reducing funding costs, we believe this is a prudent stance that is appropriate to ensure we are well positioned for any market volatility ahead. Next, Pak David, our Risk Management Director, will explain further on our asset quality. Please, Pak David.

Thank you, Pak Paolo. Now we will share about key highlights of our asset quality this quarter. I'm pleased to report that BNI's overall asset quality remains resilient, supported by meaningful improvements across most segments. Our loan at risk ratio now stands at 10.9%, which is a notable decline from 13.3% a year ago. This is driven primarily by a stronger performance in the corporate, middle and small business segments. Similarly, special mention loans have shown broad-based improvement, reflecting the effectiveness of our risk management strategies. Our NPL ratio remained stable at just under 2%, which underscores the strength of our portfolio. However, when we look across segments, we see a mixed picture. While most segments continue to improve, the consumer segment has held steady in terms of LAR, but saw a slight uptick in NPLs. Drilling deeper into the data, we observed that credit cards and automotive financing were the primary contributors to this increase of NPL in consumer segments. That said, I want to emphasize that the absolute NPL levels in these products, which is 2.5% for credit cards and 1.7% for auto loans are not yet at concerning levels. Nevertheless, this trend serves as clear signal for us to adopt a more conservative approach in these areas. As a result, we have intentionally paused growth in these 2 product lines this quarter compared to our December 2024 position. Moving forward, we remain vigilant in monitoring these exposures while continuing to reinforce underwriting discipline across all segments. Our focus is on maintaining a balanced approach, ensuring sustainable growth without compromising asset quality. Turning now to our leading indicators for asset quality. I'm encouraged to share meaningful progress this quarter. New NPL formation has improved significantly, declining to IDR 2.5 trillion. This is a 22% reduction year-on-year. This improvement in NPL formation has also allowed us to reduce write-offs substantially. This quarter, we recorded IDR 2.8 trillion in write-offs. This is down 30% compared to the same period last year. So based on these trends, we believe write-off formation likely peak last year in 2024 should continue to gradually improve moving forward. Our vintage analysis further supports this positive trajectory. Notably, 2/3 of the downgrades to NPL and write-offs stem from loans underwritten before or during the pandemic. This pattern will be repeated in upcoming quarters NPL formation, where a couple of names from legacy book may need to be downgraded due to general weakness in economy. I just want to reassure that all of these names are already within our watch list and classified as loan at risk, and we have also have a sufficient provision coverage. Hence, our credit cost trajectory remains intact. Post-pandemic underwriting has seen markedly fewer asset quality issues, reinforcing the effectiveness of our enhanced risk controls. This gives us confidence in the resilience of our more recent vintages as we maintain disciplined lending practice. Let me conclude with a clear view of our credit landscape in Q1 2025. BNI maintained an overall credit cost of 0.9%. This is demonstrating stability despite segment-specific dynamics. While our corporate segment continued to show the strongest performance with the lowest credit cost, the small segment remains elevated at 5.3%. This is unchanged from last year's level despite the LAR improvement as we accelerated write-off while maintaining coverage level for the small segment. On the consumer side, credit cost increased to 2.5% this quarter from 2024 full year average of 1.8%, reflecting the NPL movement we discussed earlier. Importantly, our safety buffer remain industry-leading. We have maintained NPL coverage at 263%. This is well above our 200% policy threshold with LAR coverage at 47%. Our total loan loss reserve stands at 5.2% of gross loans, exceeding peer averages with prudent allocations of 69% coverage for Stage 3 loans and 26% for Stage 2. With our loss given default consistently below 70%, these reserves provide meaningful protection. This brings us to the end of our presentation. I will now return the floor to the moderator for Q&A. Thank you.