PT Bank Rakyat Indonesia (Persero) Tbk (BBRI) Earnings Call Transcript & Summary

Good morning. We would like to thank you for joining us for Bank Rakyat Indonesia's First Quarter of 2024 Earnings Call. We would like to begin the meeting now. First, I would like to introduce the members of our Board of Directors who are joining us today. Starting with our CEO, Pak Sunarso; our Vice CEO, Pak Catur; our CFO, Bu Vivi; our Director of Micro, Pak Supari; our Director of Risk, Pak Agus Sudiarto; our Director of Networks, Pak Adrijanto; our Director of Consumer, Ibu Handayani; and our Director of IT and Digital Banking, Pak Arga, our Director of SME, Pak Amam Sukriyanto; our Director of Corporate, Pak Agus Noorsantos; our Director of Compliance, Pak Solichin; our Director of Human Capital, Pak Agus Winardono. I would like to mention a few 2 points before we get started. First, for everyone joining on the Zoom call, I would strongly encourage you to download a copy of our presentation materials. They are currently available on our IR website, which is inside the Bank Rakyat website at ir-bri.co.id or from the link that we sent to most of you this morning. Second, this is a webinar format. For Q&A, when called upon, we will ask you to please unmute your microphone. And then please state your name and the company you work for before asking your questions during the Q&A segment. I would now like to introduce Pak Sunarso, our CEO, to begin the meeting.

Thank you, Bret. Good morning, everyone. Thank you for joining today's conference, this meeting today. I will start this presentation with a macroeconomic situation update. While we believe that the Indonesian macro situation remains stable and the outlook of attractive with our projection of 2024 GDP growth of 4.8% to 5.1%, which is in line with 2023 GDP growth of 5.04%, we do see some near-term headwind that could have an impact on our performance. First, let's begin with the positive that the government is projecting a larger fiscal deficit of 2.29%, representing a sizable increase from 1.65% in 2023. More importantly, for our customer base, subsidiary spending is anticipated to increase by nearly 27% year-on-year, based on the government's target. However, as we can see in the bottom left chart, while reported inflation in first quarter '24 stood at modest 3.05%, we have seen persistent and continued increase in inflation from a volatile items. That is now up over 10% year-on-year, primarily driven by food prices. As we are aware from historical experience, inflation tend to cause challenges for our Micro customer base, and we are cautious as price remain elevated. The impact of El Nino is working through our loan book, but we believe it will start to rescind. For food price inflation, the government was successful in achieving self-sufficiency in rice in recent years. However, the weaker harvest in 2023 lead to the need for import as we enter 2024. We are particularly cautious through the first half of 2024, and hope in second half '24, that prices will decline. Elevated prices have weakened Indonesian domestic consumption through constraining purchasing power, thereby causing challenges among the lower middle class, a key group of our Micro customer base. Indonesian domestic consumption trend has been weakening since 2023, reflected in lower car and motorcycle sales, among other key metrics. Moreover, weaker consumer purchasing power in the economic has supported a much lower core inflation rate of 1.77% as of first quarter '24, compared to the historical average of 3.07%. Additionally, the income kept between lower middle class and upper class has been widening post-pandemic as signified by the [ TMI ] ratio increased from 0.379% in 2021, to 0.383% in 2023. Second, the currency has been under pressure over the last month as we have seen a strengthening dollar and bond investor outflow post election. The rupiah is currently at near IDR 16,200 to the U.S. dollar and has surpassed the Central Bank target likely implying fewer rate cut in 2024 versus previous expectations. And this would impact our liability-sensitive balance sheet as funding costs may not come down as quickly. That said, in first quarter '24, we didn't see pressure on funding costs and deposit growth has been robust versus 2023. Risk debt we are monitoring include persistent U.S. inflation and economic strength supporting the potential of higher for longer, China has not been able to boost its economy despite fiscal's stimulus effort. Based on our economic forecast, Indonesia's economy is highly correlated with China due to key economic activities. Furthermore, the significant increase in geopolitical race that is tied to oil can keep inflation in place and make it challenging for rates to come down globally and in Indonesia. Financially, we feel our first quarter '24, consolidated financials were impacted from the macroeconomic items mentioned, primarily through our asset quality. We booked in line year-on-year loan growth of 10.9% with our consolidated loan reaching IDR 1,308.65 trillion. Our Micro loans stand at 47.6% of total loan, down slightly year-on-year to do our cautious outlook. Despite this current higher-rate environment, we continue to see the resilience of our net interest margin which stand at 7.84%, slightly below our guidance. We are seeing continuous improvement in our earning asset mix and CASA deposit increase in first quarter 2024 by 7.8% year-on-year, while total deposit increased by 12.8% year-on-year. Our cost-to-income ratio improved to 37.4% from 47.9% in the year-ago period. Our cost of credit increased to 3.83%. Net cost of credit was 2.47% and gross NPL ratio was 3.11%. Our profitability metrics remain strong, partly because our dividend payout impact on capital, as our return on assets stood at 3.22%, and our return on equity was 20.56%. Leverage employed increased to from 6.7x from 6. 4x in the years ago period. Finally, our net profit in first quarter 2024 increased by 2.7% to IDR 15.98 trillion, primarily due to strong net interest margin and lower costs. The key strength we note in the quarter were our continuous benefit from the mix shift in our loan portfolio, efficiency gains and increased leverage and strong PPOP growth. Our asset shift is supporting higher yield. This is being led to be -- to buy loan to earning asset increasing to 71.4% from 70% in the year ago period, with a lending yield of 13.6%, plus 68 basis points year-on-year, further supported by portfolio rebalancing in Micro and an increase in managed rates that we implemented earlier this year. Furthermore, our Ultra Micro subsidiaries, Permodalan Nasional Madani, PNM and Pegadaian, have increased by 13.5% year-on-year and now account for 9.3% of total loan and 19.2% of net interest income. The loan mix shift contribute to profitability metric that we believe are positioned to move higher. In 2023, our return on asset increased by 23 basis points to 3.24% year-on-year, and our return on equity increased by 233 -- 232 basis points to 20%. We face challenges on asset quality and a de-risk likelihood of rate cut, which I will discuss on the next slide. I would now like to address our guidance for the remainder of 2024. Although a few of our features are adjusted, they are all a function of the increase in cost of credit that we are anticipating. First, on our loan growth, we are widening the loan growth guidance to 10% to 12% from 11% to 12%, lowering the bottom range of the guidance by 100 basis points as we are forecasting that our Micro loan growth will deliberately slow in 2024 based on our concern on asset quality due to the macroeconomic condition and based on the impact from higher write-off in the segment. We feel it is prudent to slow Micro after the strong growth during the pandemic, particularly in the KUR portfolio, where we added over 5.2 billion net new borrower from 2020 to 2022. We want to closely evaluate each customer before potentially moving them into Kupedes. We would note that under KUR these borrowers have a 70% insurance coverage. We anticipated that we can look at the -- at other lending segment if our loan growth is to reach the higher end of our target. If we land to corporate, we would look at value chain businesses and short-term loan that are uncommitted. As this action is temporarily and our target remains to grow Micro to over 50% of the portfolio after the current situation improved, we have made a view safe in our Micro strategy that Pak Supari, as Micro Director, will discuss in his section. On our net interest margin, we are lowering the bottom range of our guidance to 7.6% from 7.9%. So the range is now 7.6% to 8%. The net interest margin impact will be a function of 2 items. First, while cost of funds have performed well year-to-date, we have less visibility on rate cut in 2024 due to the development of macroeconomic and global situation. And this might potentially impact our targeted cost of fund. Second, the lower Micro group will likely impact our lending yield, implying that net interest margin could be below original guidance. We are adjusting our credit cost to a maximum of 3%. We have experience in an increase in loan-at-risk and write-off across small and micro, some of this is in line with our guidance given the COVID restructured portfolio and some is due to the El Nino and elevated volatile food prices we have experienced in the last 9 months. Our target implies that cost of credit improves to the remainder of 2024 and assume an increase in write-off to IDR 40 trillion from our target of up to IDR 34 trillion. This will be primarily in Micro. So it should imply higher recoveries as well. On our NPL guidance, we anticipate, it is slightly higher at below 3% for the year, based on the above-mentioned asset quality situation. Our cost-to-income ratio should be maintained at 40% to -- 41% to 42% for 2024, in line with our guidance. I would now like to turn the call over to Bu Vivi, our CFO, to discuss our financials in more detail. Bu Vivi, please?

Thank you, Pak Sunarso. Now let's walk through our balance sheet and also our P&L. So year-on-year, our total asset increased by 9.1%, supported by loan growth of 10.9%. This growth has been pushed the compositions of loan-to-earning asset increasing to 71.4% from 70% in the year ago period. And this is very important because our lending yield is at 13.66%. If we compare with 5.52% from our non-loan earning asset yield, overall, our earning asset remained 91.9% of the total asset. At consolidated level, the contributions from PNM and Pegadaian, combining together, stood at 9.3% of total loans, and help to drive the loan growth at the Micro level. Our loan loss reserve decreased by 8% year-on-year as we strategically built the reserve during the pandemic. And now we are using it to offset some of the COVID restructured portfolio and macro-related write-offs. As the earning asset provisions now remain at 6.6% of the total loans from 8.1% last year, we will be very carefully looking to our loan loss reserve before we decrease into pre-pandemic level of 4% until 4.5%. Deposit growth is starting to improve year-on-year, pricing 12.8% and the CASA increased nearly 8%, leading to a decline in our loan-to-deposit ratio around 90 basis points to 83.3% from year-end 2023. I would note that we are modestly increasing our leverage. At the first quarter of 2024, our leverage rose to 6.7x from 6.4x in a year ago period. But this is because, still, first quarter, usually the equity deducted a lot because of the payment of the dividend. If we are looking at our loan portfolio, our loan book in the first quarter was relatively in line with our guidance, growing by 10.9%. From this total loan, basically, Pegadaian grew 5 -- sorry, Pegadaian grew 17%, so the contribution is increasing to 5.47%. And PNM growing 8.78% and the contribution is 3.8%. Please note that the growth in PNM will be slowly a little bit in the next 1 until 2 years because of 2 things: The first one is the result of the product alignment implementations, where the individual loan, that we call ULaMM, will be in stages, right, declined from the PNM portfolio. We will focus in BRI for individual lending; and then the second one is because of we start to review and improving the business process and PNM. Even though our corporate portfolio growth rate in the first quarter was 15.1% year-on-year, our long-term aspirations to have 14% to 15% corporate loan consolidated in our loan portfolio still remains. We see our growth this year in corporate is more towards opportunistic growth, especially coming from the short-term loan. We also financed corporate clients who [ are ] directly supporting our value chains businesses. This quarter, we are seeing drawdowns at BULOG, the State Logistics Agency, around IDR 6 trillion year-on-year. And new customers in FMCG with a significant value chain potential of around -- the total financing that we give to them is around IDR 8 trillion, accounting for half of the growth in the first quarter. As Pak Sunarso stated earlier, we will slow our Micro growth after growing significantly in the last several years, including during the pandemic. We will focus on collections and improving asset quality in the Micro segment, given the impact from higher inflation and COVID restructured downgrades. We do continue to expect that Micro loan growth will be driven by Kupedes as we have seen fintech improvement post first quarter 2023. Next we will talk about our third-party fund, our other deposit. As I mentioned earlier, our overall deposit growth was 12.8% year-on-year and the CASA growth was nearly 8%. Our CASA ratio decreased year-on-year by 280 basis points to 61.7% but remains well above the historic level of below 60%. I would note that we wanted to maintain liquidity through the first quarter or probably the second quarter. And we could let some time deposits roll off the books if liquidity remains well managed. Aligned with our aspirations to strengthen retail banking capabilities, we saw improvement from saving account. Our saving account, both from Micro and retail continue to grow more than 3% level year-on-year. We were able to maintain the cost of CASA at 1.42%, as 59.4% of our CASA is having account with the average interest expense is 0.28%. We are still cautious with the cost of fund given yesterday rate hike, but we feel that the pressure of funding could improve in the second half since most of the liquidity needs or the liquidity events are already behind in the first half. And also like Pak Sunarso mentioned earlier, we are slowing down our loan growth in 2024. We are working on initiatives across the business to increase the CASA growth further, including continuing to improve our merchant businesses -- our merchant business productivity and also BRI mobile penetration. Our capital positions remain elevated with a total CAR of 23.9% and Tier 1 CAR around 23%, following our dividend payout in the first quarter, around IDR 48.1 trillion. Over the medium term, we would like to see our capital adequacy ratio close to 20% through stronger future loan growth and continue to return cash to shareholders. I would like now to discuss our income statement and key impacts -- key items impacting our growth. Our net interest income increased by 9.7% year-on-year. And I think the contributions from bank-only is around 79% decrease, and the contribution from Pegadaian and PNM basically increased. We would note that the interest income continues to benefit from our mix in earning assets and also shifting within the Micro segment. This helped contribute to the increase in interest income of 17.9% year-on-year and helped to offset, basically, the increase in the interest expense of 45.9% due to the rising interest rate and cost of fund. Our noninterest income was up 25.9% year-on-year as we continue to see strong recovery income growth and expect this level of growth could be maintained for the next few years because of our stock of written-off loans is elevated in 2023 and 2024. We have been preparing several initiatives to accelerate recovery income going forward so that this income could become a positive upside to the bottom line. Our costs were well controlled, increasing around 1.7% year-on-year and helping to achieve a consolidated cost-to-income ratio of 37.4%, well below our full year target 41% until 42%. But I do understand that you guys understand that there is a seasonality in the first quarter as always. And we anticipate the full year 2024 costs to increase roughly around 5% to 8%. This led to PPOP increasing of 22.2% year-on-year. However, was primarily offset by the increase in the provisions cost of 91.4% year-on-year and bringing the year-on-year net profit growth to a modest 2.8%. Our consolidated net interest margin stood at 7.84% in the first quarter, while being only, like, 6.6%. As the net interest margin at our PNM and Pegadaian contributed 114 basis points to our consolidated net interest margin, up around 5 basis points from a year ago period. In the first quarter, our lending yield increased to 13.66%, like I mentioned earlier, because of the mix shift and also a contribution from -- it's a one-off basically one recovery, roughly around IDR 650 billion on corporate side because of the resolution of a [ toll road ] that was nonperforming and sold. We also continue to selectively reprice up our managed threat portfolio to help improving the interest income. In terms of cost of fund, we managed our cost of funds very well from the monthly data in December, where our exit cost of funds stood at 3.69%. And through March 2024 with an exit cost of fund is 3.55%. So it's declining, month-on-month basis. However, on a year-on-year basis, our cost of funds did increase to 3.54%, increasing 98 basis points year-on-year. Even as a liability-sensitive bank, we are able to manage the increase in interest expense quite well, as reflected by our reported NIM. Noninterest income continued to report strong growth, while operating expense growth was very well managed. I cannot say it's very well managed because it's still, like, first quarter. The noninterest income increased by 25.9% to IDR 12.6 trillion, supported by very strong recovery, income debt up 48.2% year-on-year to IDR 4.4 trillion. Recoveries of written-off assets now account for 35% of noninterest income compared to only 30% a year ago. On the OpEx side, costs continue to [ be ] well-managed, well-controlled with total OpEx up to 1.7%. There is some seasonality to our OpEx, and we do anticipate the full year growth to, like I mentioned earlier, 5% to 8% year-on-year. So that's why the guidance of 41%, until 42% consolidated cost-to-income ratio still remained. Our reported noninterest income was up 26.1% as fee and commission income was up 6.6% year-on-year. Within fee and commissions income, the 2 biggest contributors remain e-channel and also deposit admin fee. The e-channel continued to grow and were up nearly 12% year-on-year. And these 2 segments basically account for 61% of the fees and commissions in Rakyat. I would now like to turn the presentation over to Pak Agus Sudiarto to discuss asset quality.

Thank you, Bu Vivi. I would like now to discuss on our asset quality and give an update on adjustment to 2024 asset quality. Our NPL ratio increased by 25 basis points to 3.11% year-on-year as we strategically decided to accelerate downgrades of our COVID restructured loan book and are starting to see an impact from high food price inflation and El Nino. The increase was primarily across our micro and small segments, rising 45 basis points and 99 basis points, respectively, while our corporate reported nonperforming loans improving by 86 basis points. The special mention loan increased to 5.68% from 5.20% in the year ago period. The increase was primarily driven by higher downgrades in the micro and small segments, particularly in loans impacted by the pandemic and the impact of El Nino and higher food prices. We are going to be cautious on loan grade rating from KUR to Kupedes as we have seen an increase in downgrades at this segment as well. The provision for loans and financings stood at IDR 87.1 trillion, representing 6.7% of our total loans. From 2015 to 2019, before the pandemic, our loan loss restructured loans never start past 4.4%. And we anticipate that as we work through our COVID restructured portfolio, that this reserve will refer back to a level closer to our pre-pandemic ratio of loan loss restructured loans. Our coverage ratio is starting to move closer to normalized levels as it decreased to 214.25%, and we would expect this can continue to move lower over 2024. Our loan-at-risk ratio increased to 12.7% from 12.5% at December 2023. As the increase is small, special mentioned loan and nonperforming loan impacted the stock. That said, we have seen solid improvement in loan-at-risk in 2020 as our restructured loan continued to decline. Because of credit increased quite aggressively to 3.83% while our net cost of credit is 2.47%. The increase has led to our guidance adjustment for this year, as we have seen a more empathy impact from high volatile food price inflation and also El Nino. Due to the pressure on asset quality, we are increasing our rate of budget to IDR 40 trillion from IDR 34 trillion. However, this will correspond with more recoveries as well. Based on our data today, we do note asset quality deteriorating further. We do believe that cost of credit will remain elevated through the first half of 2024. In the first quarter 2024, we wrote off IDR 10.43 trillion, which represent about 25% of our required rate of budget. We reported recoveries of IDR 4.4 trillion, and we anticipate this figure can increase to more than IDR 22 trillion in this year. At year-end 2023, total outstanding COVID-19 restructured loans decreased to 3.5% of total loans and 2.3% of total borrowers from 4.8% and 3.2%, respectively, at December last year. The COVID-19 restructured portfolio totaled IDR 41.5 trillion, in the first quarter of 2024, representing a decline of 23.9% quarter-on-quarter, mostly driven by improvement in the micro and small segment and write-off of IDR 4.1 trillion. We anticipate the majority of these restructured book will be restored in 2024. Within the COVID restructured portfolio, it is composed primarily of small and micro loan that account of 64% of the total. At March 2024, nearly 43 were current in payment, with 28.2% in special mention and 29.3% in nonperforming loans. We feel the coverage of 32.6% is adequate to absorb any losses as nearly 25% of the loan are corporate restructuring that we do not foresee having impairment issues. I would now like to turn the presentation over to Pak Supari, our Micro Director, to discuss in the Micro segment.

Thank you, Pak Agus. Let's discuss the current situation in Micro and strategic adjustments we are committing to as a mean to improve asset quality and performance. The current situation is a function of 3 issues. This is as usual performance, COVID restructured portfolio to [ increase ] and impact from the macroeconomic situation. Let me clarify this issue. Business as usual tends to result in low NPL below 2% net cost of credit of 1.5% and best-in-class profitability. This is impacted by the well [ telegraphed ] and temporary runoff of the COVID restructured portfolio. Additional spend at IDR 109.4 trillion in Micro and we have noted that we would like write-off over 15% on this remaining segment, primarily in 2023 and 2024. Additionally, the macroeconomic impact of El Nino, particularly affecting our Micro loan portfolio, especially in the agriculture sector with comprises 5.27% of total micro borrower, along with high inflation impacting our borrower and distributor and limited government spending are areas of concern. We continue to see high food price inflation with driving our caution going forward. We have broken down on our strategy response into 3 segments: risk profile with growth strategy, improving business process implementation and human capital enhancement. For risk profile with growth, we are focusing on utilization of our [ flipping ] generate pipeline for loan disbursement. [ Days, lower; don't create ] based on fintech analysis, compared to non-pipeline method by over 300 basis points over 24 months. Under business process implementation, we will implement cap off, refinancing increases for our applying to loan amount and to installment increases. We may, in some cases, restructure agriculture- and El Nino-related business loan. From human capital enhancement perspective, we will offer 1,000 new loan officers and 800 business support assistant to help Micro loan officer and to focus on collection. The adjustment of [ PSI ] through the end of this first quarter has proven effective, managing to contain the declaration of special mention loan 3 by 15%. Now as part of the ongoing progress in developing the Ultra Micro helping ecosystem. The contribution of PNM and Pegadaian to consolidated Micro loan increased to 19.5%. At PNM, the group show to 8.8% as the women group lending business grew 14.1%, while ULaMM decreased by 27.6%. Women group lending is currently over 19% of PNM total loan. Pegadaian grew 17.9% with Pegadaian Non-Pawn Lending is the mine contributor, rising 67.7%, while Pawn Lending to 9.5%. At year-end 2024, we expect Non-Pawn Lending could reach nearly 20% of Pegadaian loan. Our Micro loan grew in the first quarter of 2024. It's driven by Kupedes increasing 30.7% year-on-year as we transition back to our core commercial and more profitable Micro loan. Our such guide for the portfolio, non-KUR is doing 0.5%. We are seeing the number of Kupedes borrower remained flat quarter-on-quarter with 30% graduation rate from KUR to Kupedes. Furthermore, our business process situation reflects strong reach-up through increasing the productivity of Micro upon our research. We expect to meet the due adjustment target of IDR 150 trillion for Micro and Super Micro KUR while continuing to see on subsidized Micro loan increase to 65% or higher of Micro loan. I would now like turn our presentation back to Pak Bret to organize Q&A, please.

Thank you, Pak Supari. [Operator Instructions] We do have a few questions from the Zoom that we will address first. I will read the question and then Bu Vivi can start with the answer and anyone else can contribute. So this is from Harsh Modi at JPMorgan. The 3 questions. "Is this the first guidance cut or the last, as in if we do not get any rate cuts this year, will it lead to even lower NIM and higher cost of credit?" That's question one. Question two, "On the loans outstanding per loan officer, it has almost doubled in the last 6 years. Is that a driver of asset quality issues in Micro? And will the bank need to meaningfully expand the loan officer hiring?" And question three, "Can you reduce the loan growth to below 10% to manage asset quality and cost of funds?"

Okay. Thank you, Bret. Harsh, thank you for the questions. Okay. So the first one, I think it's about rate cuts. If we do not get any further rate cuts, will it lead to lower net interest margin and a higher COC? So basically, based on our sensitivity analysis, every 25 basis point increase in a benchmark rate that will impacting our net interest margin negatively around 4.6 basis points. And I think in the new guidance of NIM, we're already taking into account like that the central bank will increase the benchmark rate twice, right? So we -- in Rakyat, we are expecting another 25 basis points this year coming from the central bank. And I think the cost of credit, in this case, is more related to the macroeconomic conditions. So it's less correlations with the benchmark rate increase, actually. So that's the first one. And the second one, your second question is about the span of control, right, about the asset quality? Yes, yes, yes. So Harsh, I have an illustration here. It's -- because more than 27 of our loan officers basically is in a -- fit in the Micro segment, so we have a study here in the Micro segment that we have been doing calculations that the loan quality, the asset quality is not depend or significantly impacted by the span of control of one loan officer. So now the average account manager at a Micro or a Micro loan officer, roughly is around 498 customers. Within our calculations, the optimal span of control of a Micro loan officer is between 523 until 676. In our model, the factors that affecting the asset quality are the discipline of the pipeline or pipeline management, then the discipline to do the work area. So if probably you recall that I think since last year, we only assigned 2 villages for each Micro loan officer. So if that -- because that's contribute significantly to the asset quality. And while the number of managed customer or the managed customers in a Micro does not have a significant impact on the quality of loan office management. But if you say that, do we want to hire more Micro loan officers? We will, based on Pak Supari's explanations previously. We will hire more, especially to accelerate the recovery income in a micro segment. Yes, we will hire more. We will add more [ mantri ] in Micro segment. And the next question is about the loan growth. Can we reduce the loan growth below 10%? The simple answer is basically, yes, we can, right? Yes, we can. Yes, we can, like, lowering into 9%. But we will not make the same policy for all our segments. In this case, we are cautiously growing our micro and small. So that's why we are kind of slowing down the loan growth in the Micro segment. However, we still open up an opportunity if there is a potential growth coming from the retail segment like consumer, or in a corporate segment, especially for short-term loans and the loans -- I mean the clients that will give us a lot of potential from the value chains business. That's why then the guidance is decreasing from 11% to 12%. Now it's like 10% to 12%. I think we still have one question. I mean, I don't know, is it Harsh or -- the -- is it the last rate guidance cut or something?

There was one more question about time deposits and...

From Harsh?

Separate from Harsh, sorry. The last question from Harsh was, can you reduce the loan growth to below 10% to manage asset quality and cost of funds.

No, I think we still have one question from Harsh. It's about, is this the last cut for the guidance, right?

Yes, that's first one. Yes.

So that's the first one. Harsh, we do hope that we will not revise our guidance for the rest of 2024.

Okay. Now we're going to take a question from the call. Handy, could you please unmute your line?

Can you hear me?

Yes. We can hear you, but if you could speak a little bit louder, it'd be great.

I have 3 questions. The first one is regarding the new credit cost guidance, which is now at maximum 3% level. Could you share with us under what kind of scanner you based on your stress test that could hit the 3% level? And then my second question regarding the increase of the Micro SML. How much of the increase was due to the COVID related? And how much from the un-COVID? And my final question is on the asset quality from the graduation of customer from KUR to Kupedes? Any color on this that you could share with us? That's all from me.

Okay. So for the COC guidance, basically, there are 2 things. The first one is we are looking at the macroeconomic. I think if we are talking about the current credit costs, we are already taking into account the current conditions like inflation and then also the currency and also the last one is the interest rate. But I think most importantly, it's coming from the assumptions of the -- coming from internal. So the cost of credit of 3%, it is based on assumptions that there will be additional write-offs this year. So initially, the guidance for the write-off for 2024 is roughly IDR 34 trillion. But now I think we see that this number will increase roughly to IDR 38 million until IDR 40 trillion write-off. And then the second assumption, I think it's very important, is also the downgrades from -- especially coming from micro and small. In the first quarter, the net downgrade in Rakyat around IDR 12.4 trillion, driven by Micro, IDR 7.3 trillion; and small, IDR 4 trillion. So going forward, the cost of credit 3% is assuming that the Micro will be roughly around until IDR 1.6 until IDR 1.9 trillion. And I think small is like probably around 101 -- sorry, like, IDR 1 trillion probably. So that's the assumption, Handy. And then for the Micro special mentions, well, if we are talking about special mentions, in the Micro segment, I think it's like a 50-50 from the COVID-19 and non-COVID-19. And then the last one, your question is the asset quality coming from the graduations. If we are looking at the 2023 fintech analysis, I think the fintech were getting worse from 9 months of the book, above. It means that we saw that the graduations that happens in the first quarter of 2023 play a very significant role in the downgrades. If you remember in the first quarter 2023, there was no KUR. It's only Kupedes. So everyone basically, like, will get a Kupedes. We think we have, like, some improvement. I mean, we think we have, like, probably some loopholes at that times, but we start to improve the weakness in the first quarter 2023 by applying a new underwriting methodology in October 2024. So hopefully, that will help to improve the asset quality. So like Pak Supari mentioned earlier, to mitigate this, we will applying a new criteria for graduations, for example, like limiting the increase of the top-up or ticket size and probably also the tenure as well.

Thank you, Bu Vivi. So we have a number of questions in the actual queue. What we're going to do is take one more question from the Zoom and then we're going to take a question from the hands that are raised, and then we'll go back later and we will respond to the questions that you've sent into us. We'll send them individually just because there's a number of them here. The next question comes from Yuli at BNI Securities. There's a multiple part question here. One on recoveries. You mentioned that recovery shall improve. Can you share the budget, if possible for this year? Maybe I can just take that one. We were originally targeting about IDR 20 trillion in recoveries. We feel that with the additional write-offs in Micro, particularly, that the recoveries would be higher and our recovery rate can be probably somewhere between IDR 22 billion to IDR 24 trillion for recoveries this year. Question two, "What's your Kupedes growth rate this year?" In previous analyst meetings, I think the latest guidance was around 30% to 35% year-on-year. "What's your NPL coverage target? What -- seeing that the consumer segment NPL is also up a little bit on a quarter-on-quarter basis, a trend that we've seen in other banks, is it coming from the auto segment or other parts? And five, will Pegadaian benefit from higher gold prices?? So maybe Bu Vivi can answer questions 2 and 3, and then Ibu Handayani can answer question 4 on the asset quality and consumer. And then Bu Vivi can also maybe hit question 5 on Pegadaian on the gold prices.

Okay. Thank you, Bret. So for the Kupedes, I think this year, we start to disperse KUR since January, basically. It's fairly different with last year where we start to disperse KUR on March. So the Kupedes basically will grow until December 2024, roughly around '25 until 30% year-on-year. That's already taking -- basically, that's declining, I mean, decreasing from the budget, the previous budget. And for the coverage, we have an aspiration or our comfortable level basically is roughly around 200. But I think this year, we are -- because we have to use our provisions to do the write-offs, so 190% to 200% probably will be our comfortable level for this year.

Ibu Handayani, do you want to take the question on the consumer asset quality?

Thank you, Bret. Based on the data for Q1, actually, the driver of growth on the consumer segment, driven by mortgage, while in terms of asset quality, mortgage also shows bit downgrade on the SML and also on the NPL. But then in these situations, in this current situations, we are going to more focus into the first homeowner to make sure that our penetration in second quarter gives the better impact into the loan quality. As well as we also are more focused into the first year developer in an urban city with average ticket size around IDR 750 million to IDR 1 billion. So hopefully, with the specific target market segment in second quarter, we are going to maintain the asset quality better. While on the other loan products, such as salary-based loan, we are still optimist to grow, because we still have potential throughout the penetrations of our payrolls. Thank you.

Oh, I think we still have one, sorry. Okay, but really sorry. So it's like about the Pegadaian and the increase in the gold price. Of course, Pegadaian will get benefit because, basically, with the increase in the gold price, Pegadaian can increase the maximum amount of loan that can be dispersed to our customers. But I think they also will maintain the loan-to-value as well. And I think that's the end of it. Thank you, Bret.

We're going to take the next call -- question from the dial-in. Selvie from Morgan Stanley, could you please ask your question?

I have 2 questions. So first thing on the asset quality, I think it's like a follow-up question. I'm just trying to seek a bit more clarity just in terms of regulation in the Micro loans. And I think just now Bu Vivi also mentioned about the loopholes during like the KUR growth was a bit slow last year first quarter, and therefore, the Kupedes growth was stronger. Just in terms of, like, the asset quality deterioration that you are seeing, I think at the beginning remark, there was also some mention about the deceleration in the KUR. So -- but just to get things right, in terms of the micro loans KUR deterioration, where is it from? The KUR or the Kupedes? And what do you actually seeing? So effectively, is it like they just come, make payment? Or, like, the payment was delayed? I'm trying to get clarity from on that front. And then the second question is on more, like, the movement between the recovery as well as the write-off. I guess, like, the KUR loans is 70% guaranteed. Is that like you required to write it off first before you can get the guarantee? Or how does it work? Yes. So those are my 2 questions. Thank you.

Okay. Thank you, Selvie. So it's about the asset quality and micro. I think one thing that's very important, the graduations from KUR to Kupedes, when we, by intentions, try to normalize our asset mix in a Micro back to Kupedes, I do hope that you guys basically expect that the cost of credit will increase in Micro. Because the cost of credit in Kupedes is roughly round 7%. The cost of credit of KUR is roughly around 5.9%. So we are moving to basically the higher cost of credit product, but of course, with a higher yield as well. So that is very important. And to answer your questions, whether this is coming from KUR or Kupedes, Selvie, basically, some of it coming from the core debt graduated to Kupedes in the first quarter 2023. And that's basically impacting the asset quality. And based on our review, most of them, because of their repayment capacity, because of the macro environment conditions, and based on our last research, the BRI MSME Index survey, the rentability of MSME or rentability MSME Index basically is declining. And because of this rentability's decline, it will impacting their debt surface, I mean, the capability to pay their loan. Of course, we also saw weakness coming from internal factors, but I think that's a common. I mean, common is -- we have been doing Micro business for years, I mean, hundreds of years. Not all of the times, it's always good. There is a time that we need to slowing down, reviewing things, reviewing infrastructure, reviewing the risk, reviewing the people and then start to grow again. Now Micro has been growing significantly for several years, including during the pandemic. So from a business strategy perspective, I think it's fair for the -- to just slowing a bit, reviewing their infrastructure, including people, underwriting methodology to be better going forward. So I think that's a common business cycle that we see here. And last one, I think that KUR ensuring about the SOP, right? Usually, the credit insurance basically cover 70% of the total outstanding. When the KUR customers downgraded into NPL, basically, Rakyat can propose to the credit insurance. So the credit insurance then pay the claim. Usually, or based on the agreement, it will need 30 business days. However, if we are looking at the facts, it will take longer than 30 days. Usually, like, 4 to 6 months before they are able to pay. And this is not because of the capability of the credit insurance, but more on the working papers, the administration, because it's not 100% automatic claim yet. Thank you.

Thank you for the question, Selvie. We're going to take one more question from the Zoom. And this one is from [ Chung Ki Yong ] from JPMorgan. "On KUR migration to Kupedes, do maturing KUR loans that can no longer be renewed as KUR automatically qualify as Kupedes? If yes, does that mean the new Kupedes loan will eventually see the same asset quality issues as current KUR? If no, how much of these maturing KUR loans qualify for Kupedes? How much of those that don't qualify for Kupedes fail to repay?"

Yes. Very good questions. Thank you. So it's not -- that's not the way how we play on the graduations. It doesn't mean that if I am KUR customers, then I am no longer eligible for KUR, then automatically, I can be customers of Kupedes. No. That's still -- because Kupedes is commercial base. We need to review again the capacity, the capability, especially the repayment and then the collateral that they have, because Kupedes is collateralized business. So it's not automatically become Kupedes customers. And one more thing, I think the most important thing, when we want to graduate from KUR to Kupedes, is about looking at the consistency of the behavior of KUR customers before they are able, basically, to become a Kupedes borrowers. That's also important.

Thank you, Bu Vivi. And I think Pak Sunarso has some final words.

Thank you. We have to transform in terms of our business model, I think in micro and small. And also, I think we have to transform maybe in terms of Micro loan officers, more smaller -- sorry, so more small relationship manager, I think. And then also confer about their coverage; and business model, their coverage. And also, we have to aware that actually, as Bu Vivi mentioned, that in shifting for KUR clients to be Kupedes, it is not so easy. Because I think, for a long time, KUR client is hampered by subsidies. That's not only maybe a part of our effort to importing people, but also creating a new habit for customer. So I think because maybe so long -- for a long time, they're pampered by the subsidy, I think now I think we have to start. Commercial base lending is -- fully commercial base lending started from 0, not from shifting the walls, shifting from the KUR client. Because it's already creating habit, not only importing people, but already creating habit. So I think we have to respond through strategic -- more and more strict strategic through transformation primarily in Micro and also small. I think that's -- we have to respond that.

Thank you, Pak Sunarso, for the final thoughts. And thank you all for joining. Thank you to our Board of Directors for being a part of the call. And also for all the investors and analysts, we will be having some post-call -- post earnings call follow-up calls. So we look forward to speaking with you on that. Thank you.