TMBThanachart Bank Public Company Limited (TTB-R.BK) Earnings Call Transcript & Summary

[Foreign Language] Good afternoon, everyone, and welcome you to TTB, our second quarter '21 performance. Today, we have 2 key speaker: our CEO, Khun Piti Tantakasem and Khun Prapasiri Kositthanakorn. So first, Khun Piti, our CEO, will walk you through integration update and also the debt relief program status. After that, Khun Prapasiri will walk you through the second quarter performance. So I would like to turn it over to Khun Piti Tan.

[Foreign Language] Good afternoon, everyone. Thank you for sharing your time with us. To save the time, let me start by sharing the good news about our successful entire business transfer. It is a very high risk activity, and we're very glad to share with you that we accomplished exactly per the time line that we target internally. In fact, we built a 3-month cushion that if we cannot make it happen by July, we have the third quarter as a backup plan, but things has gone as planned -- exactly as planned. And the plan is about -- and I said it's high risk because it's involved half of thousand of system, right, 1 million of customers and more than 10,000 employees that we have to integrate and move within very short time line. So the first step that we can achieve through the 3 types of synergies that I always mention about, the balance sheet synergy, the cost synergy and the third thing is revenue synergy. I think now we are ready for pushing for the third type synergy, which is revenue synergy, where I can update to you the balance sheet synergy and cost synergy that we achieved so far. However, it's quite unfortunate that in Thailand, we are faced by the biggest wave of COVID so far. So the revenue synergy would be a big challenge, given the situation that we are facing right now in Thailand. However, we believe that we have very unique opportunity that we can leverage from this integration. So maybe if the team can move to the next page, yes. In the past, those who live in Thailand may see that we start to have branch called TMBThanachart all over the place. In fact, this is just a very initial way of merging the 2 bank together because it's simply putting 2 bank in one location. It still run as a 2 separate bank. It's just a way to help us save costs and transfer knowledge between the 2 bank employees and have them learn about the 2 different products and get customer familiarized with what will be happening. But today, we become one legal entity under the name of TTB, as you see on this page. What we have achieved so far is, as of July 5, we managed to transfer all the loan deposit customer to the merged bank. We managed to have 664 branches up and run under one system. On very first week, we managed to move close to 400,000 mobile banking customer where we have the target to move at least 0.5 million in the first month because that is the number that customer usually log in to mobile banking within 1 month, I mean the TBANK customer. And the last thing is the people and the system. We managed to move 8,000 people from TBANK to merged bank and managed to merge the application of more than 600 application of the 2 banks combined to become less than 300 and which will result in IT cost saving in the future and increase -- help reduce complexity in the future as well. Then move to next page. This is the part of balance sheet synergy, right? We have been building up hybrid and low-cost CASA during the past 18 months so that we can eliminate the high-cost deposit mainly from Thanachart Bank side. And also, we running down the low-yield asset on TMB side and shrink the balance sheet a bit, which you would see on the financial report section, which CFO will explain to you more about that. But on the deposit alone, you can see that we are the only bank in Thailand that can manage to bring down deposit cost this much and this fast within the past 18 months because of this balance sheet synergy that I always chat with you about. On the next page. On the cost synergy, I think we achieved much faster than planned and partly it's a blessing in disguise, COVID allowed us to speed this up. Customer have more willingness to adopt mobile banking. Attrition. The fear that we would lose good people is less because competition to hunt for good people is less. The chance that we rationalize organization and bring down branches is faster, much faster than planned. So we can rationalize branch organization design. And at the same time, we can bring down marketing expense because -- partly because of the synergy that we do not need to market the product that will be off-shelf and also the COVID situation. It does not make sense for us to spend too much on the marketing anyway, right? So you can see on this page that the branch footprint coming down. The branch number come down, but the footprint remain the same because we can cut branch that is overlap in the same or close location. We can manage to bring down staff, mainly from branch banking area because of the closing down of overlap branch. So on the right-hand side, you can see that initially, we estimate that we can bring down THB 10 billion to THB 12 billion in term of operating expense or cost synergy based on revised synergy that we should be able to achieve. The good news is it can go up to THB 15 billion. So this is over achievement in term of cost synergy so far. But the bad news is instead of that saving go direct to bottom line, we end up -- that we need to use this saving not only to fund for integration costs, as I promised to you that integration costs will be funded by cost saving, but we can save more than it is required for integration costs. But most of the money has to be spent on risk cost because of COVID, which I will walk you through that how we manage risk cost during this difficult time and why we want to play very conservative on this. On the next one, which is something to be realized, which is the revenue synergy. It does not mean that we will wait until EBT start doing something. In fact, we already communicate to the merged bank customer our proposition, our product suite. Starting from left to right, we call a flagship product from transactional product and simple saving product that allow customer to use our All Free, which is the flagship [ transactional ] banking product. It's #1 in the market in term of debit card and no fee proposition product in the market and also #1 in the market in term of high saving, the product called No Fixed. On the [ transactional ] side, we create the new credit card proposition. And it's not just a credit card, it is a loyalty proposition that build on the credit card platform. The next thing is smart port, which CFO will also walk you through in detail what it is and why it is another key flagship for us. And last but not least, the consumer lending, which the flagship is cash your car on top of normal hire purchase auto loan. With this flagship, there are 3 -- at least 3 things that we will shift gear and do more after COVID, debt consolidation. As you may know, Thai people have consumer debt issues. They pay a very high rate, and it will be never ending loan because of high interest rate. What we already pilot, introduced to market is debt consolidation, meaning that they can move their high-cost borrowing clean loan to the asset that they already have with us or maybe even with other banks. Through debt consolidation program, they can move their clean loan to become secure by using car or home that they have with the banks. The next one is reserved proposition, which is new allotted platform built on the new credit card system that we built for EBT purpose and for this new proposition as well. Basically, customer would get points right away. No need to spend. If you leave asset through mutual fund or deposit with bank, you will get point right away. And you will get more point if you spend on things that are important for your life, like hospital or life insurance. That is the earn fast proposition. You even earn without spending anything. You can earn if you leave AUM, asset under management, with the bank. And for burning, yes, you can burn normally through spending. But if you burn by buying insurance product or investment product with the bank, you will get higher gearing. And lastly, the younger segment that cannot have credit card, we build through the ALL Free and mobile banking proposition that they can have digital card that they don't have to pay a fee. And for online shopping, they would get point, do other things, they can get point and this is loyalty program on debit card that never have before in this country. So this is something that we will shift gear so that we can start to benefit from revenue synergy on top of the balance sheet and cost synergy that we have shown the good impact so far. Next page, please. On this one, I think you are already familiar with the structure of TTB. What I would like to elaborate a bit more is on PAMCO. PAMCO is a newly setup wholly-owned subsidiary to deal with bad asset, written-off asset. And not only we can manage to have good people dedicated to this task, we can also enjoy the benefit of asset [ quality ] management and funding cost management. In Thailand, if bank raised funding through deposit or bonds, you still need to pay deposit guarantee. The total cost of deposit protection and guarantee is up to 47 basis points. Today, because of COVID, Central Bank cut it down to 24 basis point, but still is very expensive. However, if bank raised fund through subsidiary, it will not be subject to that charge. So by moving bad asset or written-off asset to subsidiary and have the subsidiary issue bonds and have the bank guarantee, we can achieve funding costs similar to bank level because the paper would be guaranteed by the bank. You can manage ALM, and you can save the deposit guarantee fee, this 47 basis points under normal term. So this is something that is happening right now. So that we will have vehicle to focus on bad asset management, and that would be something that the whole industry would be facing at least during this year and next year because of COVID. Next page, please. Would like to touch a bit on the strategy at least for the next 6 month. My thinking is it's still a big uncertainty, big risk ahead. The vaccination rollout in Thailand is getting faster, but it's still far away from the level that Thai people can go out and start doing business activity or live normal life. Today, government continue to order more and more lockdown, meaning that SME will suffer -- small business will suffer and more -- even business -- big business may start to suffer because they may be forced to shut down factory because of the rapid spread of infection to industrial side. Banks. Commercial bank are not [ fit ] banks, right? We should not try to expand balance sheet during the crisis time. We are not government. So here at TTB, we play very conservative. We cannot increase revenue by expand balance sheet and try to increase yield because it will come with risk and risk return would not be justified under this situation. So what we must do is to continue to optimize balance sheet, push down the cost of deposit so that we can retain NIM and net interest income. On the fee side, as mentioned, banks -- as of yesterday, the government order the bank to even close down their branches in shopping complex to help reduce the chance of COVID infection. So in order to protect the bottom line, we have to manage costs very well. And so far, it has shown that with good cost discipline, we can still manage to have a decent bottom line without taking risk. I think that is the key. And with that cost saving, we can use the money that we saved to continue to strengthen our balance sheet through write-off NPL sale and putting more overlay on to our portfolio. And by doing that, I hope that we will be one of the very few banks that would be ready to run right away after the crisis because we don't have to worry about the policy cliff or whatsoever. I can say that today, even with -- not trying to be arrogant or something, but I don't want to live on the hope that Central Bank will continue to extend the forbearance time after time. It would be a much more pleasant life that we can continue to run the bank without worrying about when Central Bank will change the policy. So what we do at this point is we put the provision as if the policy cliff will happen tomorrow. Let's move to the next page. Today, you can see that last year, when there's a big debt relief program that government and Central Bank offered to all SME and consumer loans like home loan, personal loan and auto loan, 40% of portfolio seek for requests. Today, only 1% of the original one remained in the portfolio. And mainly, those are the hotel operators, the shopping mall in the -- to a recent provinces that we need to give them long skip payment because they don't have revenue, right. But majority, we already turned into the second phase of relief, meaning that we offer something that fit more on to their new cash flow. And with that, both interim or permanent restructure, we must have to skip. That would ensure that customer can live with that. And if not, we put enough provision on to those customer. So we should not give too much, and we should not be -- must not kick the can down the road. So we create different scheme, where [indiscernible] scheme, the scheme that we feel comfortable because it shows that customers can still pay. Let's move to the next page. Scheme 1 basically, customer have to pay everything. Only the actual interest during previous year lockdown have to be gradually run down. So this is the strongest one. Scheme 2. The interest remains the same, but the principal will be reduced, and the logic [ for all ] to deploy of Scheme 5, where they pay nothing and they seek for skip payment. In fact, Central Bank even allowed we to [ commence ] Stage 1, we will downgrade to the minimum of Stage 2 or even 3. For Scheme 7, if customer seek for skip payment for more than a year, we would downgrade them to Stage 3 as minimum. And for all customers, that need -- that seek for debt relief, in fact, today, Central Bank does not require that SICR, or significant increase in credit risk, must be kick in. We did that. We achieved the PD up based on the severity of help that customer need. So with this structure, we can assign proper ECL and proper mechanism to downgrade customer when needed. And as I mentioned earlier, 85% of the gray part or that 14% that I mentioned on the earlier pages, fall under Scheme 1 to 3, meaning that they still at least pay interest punctually. So would you move, yes, this page. You may have interest to know that where those customer are. Today, mainly they are in hire purchase loan and mortgage loan. That's why we feel quite comfortable about that because they are secure loan customer. While the corporate is down to 8% and up again to 9% because of the lockdown, the part that we always worry the most is SME because they are the most sensitive group of our customer and for the overall economy, they are small. They do not have much reserve on hand. Whatever happened for a very short period, they will suffer badly. So this the group that we continue to shrink the port and put more and more provision. And last group is unsecured. I think this seems to be healthier than it really looked like because BOT allow customer to pay very minimum, and they shift out the minimum in the past to a much lower level. This is clearly kicking the can down the road. Because if we lift the minimum payment up after the COVID, this part, we will start to suffer. That's why we do not expand unsecured loan at this very moment, given the fact that customer are allowed to pay much less than they should pay in normal situation. So this is the loan and the relief in a nutshell where they are, and we are -- how we're managing that. Next page. This is the trend. Every time we have the lockdown, customer will seek for relief requests. And again, this time, the third wave, the partial lockdown and so-called the fourth wave, which is happening right now. Please move to the next page. This is the BOT work together with Thai Bank Association. The whole industry will offer the 2-month skip payment, and BOT will allow banks to keep it under stage 1. The key difference between the previous skip last year are 2 things. Last time around, for the auto loan, when customers seek for skip payment, the interest during skip payment period will be stopped, meaning that the burden go to the bank. So moral hazard happened because it's a free lunch. Second thing, the burden of proof stays with the bank. The bank has to prove that customer do not have impact. They are not supposed to get help because they still get job fully -- full salary, so why request for skip payment. That burden of proof stayed with the bank. That's why 40% of the port seek for debt relief because it is a potential huge moral hazard. Free money, burden of proof stay with the bank. So this time around, we learned from that -- Central Bank together with Thai Bank Association agree that this time around, the interest will continue to run, meaning that customer have to come back and pay for the interest, even they don't have to pay anything during these 2 months. Secondly, burden of proof go to customer. They have to prove that they are the industry -- they are in the industry -- they are in the province that get impact from government instruction. So I hope that with these major changes, the level will not go up to like 40% just like last year because of this key change in the concept. Next page, please. So before taking Q&A, I would like CFO to help walk through the numbers and the details on the product that we offer and on the -- how we set aside and why we're quite comfortable to deploy that -- I may sound a bit arrogant that even tomorrow, Central Bank decide to change the policy back to normal, we would be all right. So please allow our CFO to walk you through the detailed numbers. Thank you, and I'll come back again for Q&A.

Thank you, CEO. So maybe I'll start. Let's move on to -- okay, yes. I will start with this loan portfolio. As CEO has reemphasized that in these terms of uncertainty, we select to do the selective lending. As a result, the loan balance year-to-date declined 2.5%, and this is on strategic direction. And in the details, if we were to exclude the short-term government loan repayment from the corporate commercial sector, I am happy to share that commercial sector loan balance also grew at 2.5% Q-on-Q to -- this is mainly for the working capital and the trade finance, and we have healthy pipeline for the term loan in the commercial sector. In terms of the home loan, we are on moderate growth. The increase year-to-date is 1.5%. In terms of the hire purchase portfolio, the balance declined slightly. This is largely from the repayment of a customer who are in -- of their first relief program, so they came back and pay. And the amount of their repayment is out beat our new booking. And the other thing on the HP portfolio is that as we focus mainly in the new car sector, what we faced in this quarter is the delay of the new car delivery, though customer wants to book and wants to lend for their new car. But the delay -- the production of the new car has been impacted by the shortage of the electronic supplies. So that is things that I would like to share here. In terms of the loan mix, we maintained 57% retail. And in that 57% retail, 90% of them are collateralized loans, and the rest 43% is commercial loan portfolio. Move on to the deposit strategy. As we -- we know the size of the loan portfolio that you would like to have, so we focus on the liquidity management and leveraging on the other alternative source of funding that CEO has briefly shared on using the PAMCO, our subsidiary, to do the fundraising to have a lower cost of deposit. As a result, for knowing this ahead of time, and the PAMCO bond issuance is in the process of being [ roadshow ] right now. The deposit Q-on-Q declines by 4.3%. If you zoom in, in terms of the deposit product, I would have to say that with the focus on increasing the CASA balance, our current account balance increased 15% year-to-date and the flagship All Free, which we pay 0% interest, the number of the account, the balance and the digital transaction that we see from the customer using the All Free card is increased. And qualifying medical benefits that we offer on these All Free products also increased. Hence, this collectively increased the deposit balance with low cost for us. If you're talking about the No Fixed balance, we're also seeing the year-to-date balance increased by 9.8%. And we observed that our customer treated this No Fixed account as one of the investment product because it offer the flexibility so that they can move on to the better return mutual fund or bancassurance product as it fits with the environment. Lastly, on this slide, I would like to share that because of the completion of the EBT, the regulatory obstacle on the PDPA, et cetera, has now been removed. Hence, we can move on to our revenue synergy kick off. So we are waiting for the good time when the COVID impact has subdued. We have already products on the shelf to offer and business activities on the promotions and introducing these new product features will be on board. So let's move on. This, as I've mentioned, that we use leverage and [ the gearing ]. So you'll be seeing that the LDR has uptick to 103%, but that is by strategic decisions. But if you're looking to -- into the LDR plus the borrowing, it's only 97%. And if you look into the LCR, the liquidity ratio, even though this is the March figures, I can share the June figures, the LCR still stands at 180% somewhat. Yes. Okay. Move on. On this slide, I would like to share on the middle line graph that the cost of deposit Q-on-Q has been declining. Now our cost of deposit stands at 0.76%. And liquid -- the net interbank liquidity position still very strong. Please move on. So on this, I mentioned that the cost of deposits Q-on-Q decreased 4 basis point. Now we focus on the loan yield in the middle graph. Loan yield of second quarter is 4.52%, is negative 8 basis points Q-on-Q. But if you're looking into the orange dot there, the yield, excluding the PPA, it's 4.64%. The yield compression comes mainly because of the repayment and then repricing gap, the repayment of the high-yield loan and the lower yield on the new booking. And on top of this, if you would remember, we have reviewed the accounting assumption on the EIR on home loans and on various product. So we believe that this is the better way of recognizing. So this has impacts on the loan yields as well. And on just -- the last review took place a couple of weeks ago, we confirmed that there is no significant changes in the accounting estimates that we need to be refining further. On the -- as a result, net NIM is negative 2 basis points Q-on-Q. So in this slide, the net interest income Q-on-Q is negative of 0.7%, year-on-year negative of 5.2%. This is due to the [ conservatism between ] on the accounting estimates when compared with last year. So next slide, please. On this, the non-NII for second quarter is at THB 3.1 billion, it's declining Q-on-Q and year-on-year. This is mainly due from the lower net fee and service income from the COVID pandemic and the lockdowns in April of this year. So we have limited customer-facing spend. Non NII year-on-year negative of minus 8%, that is largely from the lower gain from investment. But if you look into the net fee and service income year-on-year, there's a 5% growth. So the next slide. If you look from the bottom up, we will be seeing that BA fee Q-on-Q showed a slight decline of 12%. But if looking at year-on-year compared with the second quarter of last year, we have grown our BA business by 17%. Up next is the mutual fund. In the first quarter because of market sentiment, we have done a very good job in bringing new product on shelf. But in the second quarter, this has been impacted from COVID. We do have good product, but we need to wait and see when it is the suitable time to offer to the customer. Last but not least on this slide, we are showing the growing in terms of the trade finance and FX fee as the export on the first 6 months is increasing. Let me move on to the next slide. On this, because of the volatility in the investment domain, what we have done is that we believe that the asset allocation portfolio would be good for our customer. So we revamped and relaunched the smart portfolio. Amundi continues to be our adviser, but we add on having Thanachart Eastspring as an adviser in selecting the fund. And we expand the fund choice to our customer. So the choices now cover 30 billion -- 30,000 global funds and 2,000 local fund. And we change also the way we invest. We turn into the direct investment in the master fund because it will be cost saving for the customer who making investment in this smart portfolio. This portfolio is ideally for everybody. If you are in the middle income range, you can make investments here also because the minimum requirement for making investment is just THB 1. And this will be a perfect match for those who are freelancer, who may want to have the, like a provident fund per se for themselves because this portfolio will be rebalanced automatically. And so anybody can invest in this and for the long-term investment. And we also improved the settlement process. So this would be easier and better profile for the customer. What TTB will get is that in the first 2 weeks of the new launch in June, we have acquired a new balance of almost THB 14 billion. And for us, this growing asset AUM in the smart portfolio will give us a steady recurring income because in these product features, we are not charging the front-end fee, we are charging the management fee based on the asset that they make investment with us. We did charge the exit fee because this is to incentivize the investor or the customer to keep the investment longer term. So that is the product feature that we believe that with this, and we have internal target on where we would like to grow this smart portfolio, and this will become the key features and helping to reduce the volatility in terms of our fee-based income in the future. Next is on the operating income. Year-on-year, it's a negative 6%, but let's move -- look into the operating expenses, year-on-year for the first half is a negative 5%. In this first half, we incurred expenses of THB 15 billion. And in this THB 15 billion is already include of THB 1.5 billion integration expenses in there. Means that we technically have done a very good job in terms of the cost management discipline. We reduced unnecessary cost as we reviewed the business operating model, the IT operating models. This is on top of what CEO has mentioned on the branch rationalization and people management. So on the next slide, we'll see that the cost/income ratio in terms of the second quarter is reducing to be 45% and year-on-year is also flat 45%. Nevertheless, we are seeing a little bit increase in the expenses, particularly in terms of the employee care because with this COVID pandemic and the health of our employee is very important because they need to meet and service the customer. So we will be self-funded in terms of buying the vaccinations for all our staff ahead of the government provision because I think this is things that we can control. So we made that decision to make this investment. And the integration expense, particularly the marketing, the rebranding has been delayed from this quarter because I think that -- we think that the customer are more focusing on their health and their wealth as they are having right now. So we shift the business activity more into the third and fourth quarter when it's a suitable time to relaunch the marketing activities again. So in terms of the PPOP year-on-year, it's a negative 7% based on what I have shared previously. Maybe it's time to move on to the asset quality slide. In terms of the asset quality, I would like to share a few things before I get into the figures. First thing, we did a thorough portfolio review that says that we look at it as when we play the Rubik, we turned every corner to understand the portfolio thoroughly as both TTB and TBANK now we're [ in the same port ]. So we need to understand the customer behaviors and the factors. Secondly, on the ECL model parameter, we did review and again, align all the model, the policies. And based on the 2 activities and also what CEO has mentioned that in our ECL model, we have engineered with the forward-looking with the ticker, with the PD shift and with the updated customer payment behavior through the first and the second wave, I would say, we are seeing the possible of releasing the provisions. Nevertheless, in Q2, we put in THB 5.5 billion credit cost. It's the same level as the first quarter. This means that whatever we see as potential release of the ECL model parameter and fine-tuning, we keep them all as a management overlay to prepare for the uncertainty which we see is coming in the second half of this year. So the credit cost is 160 each in first and second quarter. And so it's a 6-month annualized basis. As a result, net profit of the second quarter is THB 2.5 billion. It's slightly down from the first quarter of THB 2.7 billion based on the strategic action that I have shared with you. And for the first half, it's THB 3.5 billion. Maybe we move on to give more details in the asset quality. If you see on this slide, you will see that the ECL at June is THB 54.4 billion. This is slightly increased from last quarter, and the LLR ratio now stands at 125%, 1% better than last quarter. But you may have questions on the coverage by the stage. Let me explain it this way. TTB, we continue to adopt the policy of clean and clear staging. If we see customers are unhealthy in terms of the PD or indicators, we would do the qualitative downgrade of unhealthy customers. As a result, the stage 2 will be downgraded to stage 3. And we did in stage 3 doing the write-off of THB 4.9 billion and the sales of THB 1.3 billion in this quarter. So the coverage would seem to be slightly decreased, but this is as a result of we are clearing this nonperforming customer out of our door. And in terms of the stage 1, we -- because we have mentioned we have management overlay put in reserve, and so it is not that we are seeing that stage 1 quality is deteriorating. But it's a way of how do we allocate the management overlay. So we decided to give more to the stage 1. So it's -- now it's 1% coverage. Next slide, please. Okay. Last thing on the previous slide, but you can keep on to this slide, I would like to emphasize that the accrued interest has been declining because of the pre -- repayment from customer, and I emphasize again the accrued interest for the stage 3 customer as well as those customers in the relief program scheme 4, 5 and 6, with the skip payment, we provide provision 100% on them. Okay. So on this slide, you will see that if you look into the absolute amount of the stage 3, it's THB 43.3 billion, THB 43.3 billion each in Q1 and Q2. But in terms of the stage 2, the amount -- the balance declined on Q-on-Q. But if we look into the percentage, we will simply see that the percentage increase, stage 3 now is 2.89% compared with 2.75%. This is largely due to the reduction in the aggregate portfolio. But as I mentioned, we are very careful in terms of the quality and the staging for this customer. So maybe I will take the last slide that we believe that we have a strong capitalized capital, and this will enable TTB to withstand the uncertainty ahead and as we are having the CAR ratio of 19.6% and Tier 1 of 15.5%. And so that would end my sharing of the Q2 performance. Over to you, Khun Dararat.

Thank you, Khun Prapasiri. Thank you, Khun Piti, for the presentation. So now we start for a Q&A session. [Operator Instructions] I already received set of questions from China Capital, [ Naka Sheryl ]. The first question from [ Ms. Sheryl ] about the debt -- NPL ratio. So she mentioned that what would be the stage 3 ratio? Do you expect that, assuming all relief measure in now and other relief loan needs to be recognized as normal, adding up to accrual interest, the estimated figure could be way above 3.6 stage 3 ratio guidance?

I think it's very difficult to say because of this current fourth wave, right, but let's say a snapshot and take out the forbearance, what would happen to their balance sheet, meaning that any customer that should have been called stage 3 and now being kept as stage 2 and 1, only small group, those who operate in hotel industry, that 1%, right, which is coming down, those under the real situation, it should be called stage 3 because they cannot pay principal, interest. And not all of those is totally a skip, right? So what need to be done is take them through asset warehousing program, meaning that it would turn from NPL to NPA. So it will move from today stage 1 that cannot be considered under normal circumstance. In fact, what happened today is most of the exposure under those group already caused stage 2. So instead of falling from 2 to 3 -- put this way, let me slow down a bit. Under normal circumstance, those who cannot pay should be called stage 3. But because of BOT forbearance scheme, to the extreme, they can be kept at stage 1. What happened at TTB is we give them long-term skip because hotels still need to shut down, no tourists coming in. Majority of the exposure now with the upgrade to stage 2 already, even it is not required. What's next? Those who cannot survive, we will help them with asset warehousing, meaning that it will move from stage 2 and stage 1, not to stage 3, but go into NPA right away, right. And the rest that do not fall into this group will already be called stage 3. So there will not be additional stage 3 if Central Bank lift the policy that you can no longer call weak customers stage 1 tomorrow, except the small group customer that I already mentioned, which we already have solution at hand that we will not tie this one behind forbearance package. We will deal with it and turn this into NPA. Now speaking of the upcoming wave, we would do the same. So every month, every quarter goes by, you would start to see stage 3 rising up due to the customer that we believe that we should not call them stage 1 by giving them skip payment or interest only or even tighter interest and put the rest as accrued interest and show uprising interest income through EIR and uprising accrual interest in the balance sheet. So by using this strategy, you can see that our net interest income would come down because we do not count imaginary income as our income. We put provision against what IFRS 9 requires that even NPL or stage 3, you must recognize through EIR because you will someway, somehow get some of that back. We play conservative by putting 100% provision against those accrual interest. So I cannot answer you exact number. I can only tell you the concept and try to convert our numbers into the world without forbearance package. With, I would say, that every snapshot that you see TTB, P&L and balance sheet, it will be very close or exactly similar to world without forbearance package.

Thank you, Khun Piti. I guess I'll try to group the questions all together, the same area -- for the same area. The next question actually Piti already touched upon on the accrual interest. So this may be attached to that area as well from Melissa Kuang, Goldman Sachs. For the accrual interest, can you able to share why the number is flat Q-on-Q when you still have some loan debt under the restructured term?

You expect that it should come down or it should go up. I'm not sure. Let me explain this way. The product should go up because the more we give customer helping hands, right, under restructure, let's say, on the cash basis and on the accrual basis. So the accrual would go up the more we give them restructure that, okay, you pay early this and the rest you will pay to us after COVID is gone. On that one, it does not go up because we provide provision against the future interest income that we may receive. If it is in stage 3, we put 100%. If it is a stage 2, we put a high default probability on that accrual interest. So that part would not go up. Then the customer that already came out of relief package, the accrual should come down, right. Yes, it does come down. But it would offset by housing loan debt relief because under today, forbearance and relief scheme, what BOT requests is during skip payment, customer do not need to pay anything. When they've come back and pay nominally, the interest that occur during that skip period, let's say, 3 months and, let's say, it is maybe THB 20,000, right, you must keep that THB 20,000 to be repaid by the customer. After the last installment of that particular home loan, let's say, you have 20 years home loan and you pay -- maybe THB 30,000 a month, you will seek for skip payment for 3 months. So you save your cash flow by THB 90,000, THB 30,000 a month rent. But during that period, it occurred to you THB 10,000 worth of interest. That THB 10,000 will be repaid at the end of 20 years. So the more we provide skip payment, the larger the accrual interest will stay in our book. But I consider that one as a healthy accrual because at least it's against the current loan, which is their home. By the time that they repay or refinance a home loan, they have to pay to us that accrual interest. The accrual that I don't like is the accrual that comes from stage 3, stage 2, those we have to clean it out. We should not create the imaginary interest income on our book through I9 that may be the effective interest rate and the real cash basis have big gap between the 2. I think that is scary because the gap go to accrual interest. We have to be able to explain to ourselves and believe that, that accrual will be able to collect. If not, we provide 100% provision. And that's why at the end net-net, our accrual does not go up even we give customer more relief on the home loan.

Thank you, Khun Piti. The next question is quite a long question from China Capital again. If the COVID situations get worse and proceeds through the end of this year, is there any contingency measures for your bank? Do you foresee government will continue to give soft loan to customers and your bank will run relief program way over of this year? I mean there will be more and more business going out of the business. So that accrual interest is not translating into cash for your further loan disbursement. I just want to understand better what are your bullets to tackle a worsening situation? How much of your loans are secured with the asset? And what would be the recovery value of -- for those?

Okay. Maybe I will not answer one by one, but I share you that the strategy of coping this. First of all, you are right, the weaker part of economy is SME, which is the group that Central Bank keep coming out with all the rescue, the relief package, right. Our thinking is we cannot throw good money after bad money. To that, we have to bite the bullet, small bullet every day, not one big bullet. We have to admit that the whole balance sheet has been hit by the tidal wave, the tsunami. So we cannot pretend that there is no damage, meaning that we have to take damage on to our risk cost, our P&L, and that's what we have done so far. So when the whole balance sheet or the whole country is hit by another tsunami, we can deal with that because we already cleaned out what was hit by the first tsunami, right. So you have to continue to clean it [Audio Gap] third wave or fourth wave. But if you hide your wound and say that I'm fine, don't call the previous damage as a wound, then your wound will get bigger every time. That's why we continue to clean it this way. And when speaking of the special loan or soft loan, our thinking is you cannot substitute the loss of revenue by giving them loan. Loan is for a company that still can survive. So we will not give more loans to business that we will not survive. So the special loan would go to the blue part, not the gray part or the gray part that we believe it will fall into stage 3 at the end. So we will not let the zombies continue to be zombies forever and put more money in [Audio Gap] [indiscernible] write-off in the full provision with those type of customer. So the help we give to them would be restructure with other term [ giving them still ] and once we give that, we also take provision onto our book.

Thank you, Khun Piti. Actually, we received one request from analyst to ask you in person. [indiscernible]

I have a couple of question. [indiscernible] the previous quarter, understand like maybe last quarter there was like a strong market sentiment. But if you look at the fee income, it's actually essentially the mutual fund [indiscernible] second quarter low. And I guess like my question is on the fact that you probably could have [ sought ] a little bit more TBANK customer, even though maybe your [ PPP ] is only [ about ] effective -- I mean like you -- now you are merged, you could probably sell it like [indiscernible]. But is there a reason why that number was [ like weak ] in second quarter?

Sure. Let me answer this one first. We [indiscernible]we push very hard to turn our bank into a more digital bank. The success comes only on the part of transaction banking, meaning that we have moved a lot of deposit and withdrawal transaction of the branch. But when it comes to fee generation, we still rely very much on selling that happen at the branch person to person, not through digital. That is the majority of the fee that we generate. Speaking of mutual fund, number of transaction of mutual fund, buy and sell, majority happen at digital, number of transaction. But in term of value, majority happen at branch, particularly the [ on the buy ] purchase transaction on so-called type E Fund, meaning high risk fund. It happened when people talk to people, and that would generate front-end fee. So the fee that we receive on mutual fund today, more than 60% or for a certain period where the market sentiment is very good could be up to 70% to 80%. That is coming from front-end fee. We would like to see, first, the future income start to come more and more from digital customer purchase, not through branch, but more through digital. And secondly, more through recurring, not front end. Q1, we get very good fee income because customer jump into take fund, China funds, because they believe that COVID will be gone, things will come back very normally. So they jump on to that. And the bank achieve a lot of front-end fee and also the low hold stock fund as well because they believe that, okay, things will get better. But when come to second quarter, everything went upside down. People will not come to branch. The sentiment is bad. So we have to fix this. That's why we create the second version of smart port. We push customer to move more into building the core port based on their risk appetite, based on their investment horizon and do not buy and sell oftenly. Let we do the asset allocation for you. And what you have to do is dollar cost average, pick the fund that match with your risk profile. And the concept is very much well received. Today smart port stand at around THB 15 billion, is still growing and the return is very promising. So by educating customer that you choose stock buy and sell, fund by fund and trade light stock, you should buy the actively managed portfolio that we will tap into global fund house and by using Amundi as a fund manager, right. You will save costs, you will get a better return or possibly, we will not receive front-end fee, but we will get more and more in term of recurring fee. It is a transformation journey. So the revenue will not come fast. But when the market is back, it would be the mix between this cohort and theme fund, right. But we will educate customers that you should move more and more of your money into core fund, not the theme fund. That would be the sustainable way of you building your high-quality portfolio.

Understood. So in the sense like if, let's say, once you completely merge with -- you have merged with TBANK, it will also take some time for your mutual fund fee to pick up from here, partly because you are still also building like your digital selling platform. Is that a fair comment?

Yes, it is, it is. Transformation takes time. We learned through good and bad experience, right. And we do not want to repay the same mistake, and we do not do just like other banks that always cheer customer up to jump into high-risk investment when the stock go up, when the market go up. And then customer get burned and feel bad about that advice, right. And the bank get good money through churning and cheering people to do things that they should not do. I think we have -- if we want to be a sustainable bank and do the things that are right to the customer, we have to bite bullet on this one that we build a product that would last and recommend the right thing to the customer. Yes, we would suffer a bit in the short run, but I think that will help create a more sustainable fee income.

Okay. Understood. And then my second question is on OpEx. So I think the expectation was for OpEx to pick up in this quarter, but as you mentioned, it appears that things were better than expected. So in a sense, like let's also assume that first quarter would be the peak for OpEx, or do you expect a bit more coming through in the coming quarters?

I believe so. In fact, the third quarter if we do not get this lockdown situation, the third and fourth quarter, the OpEx might go beyond Q1, but it would be a good OpEx, meaning that we will start to push for new product, push the product to the customer, meaning that our expense would go up because of the marketing expense, because of the incentive that we pay to our employee, our sales staff. But it seems that it will not happen that way because government just order bank to close the branches in the shopping complex to help curb down the COVID situation. So the cost would be peak in Q1. So it's good news and bad news.

So theoretically, by like second quarter, you wanted to do a bit more like marketing on the new brand, but because of, like, the restriction that happened, that caused kind of like pull back at least like a lower number for OpEx?

Correct. Correct. But there would be a bit continue on the integration expense, as mentioned -- as shown on this page -- on the page before. We have to move legally the asset to the merged bank, and there would be costs associated to that. System-wise, we already moved. But legal-wise, we have to continue to do during the third and fourth quarter even with the waiver we're talking about [indiscernible] of asset transfer. So there would be some fees, costs associated to that. But it will be onetime similar to early retirement package that we have in the first quarter, right. So all in all, next year, the core expense would come down a lot because we will not have repeating integration costs and this onetime cost next year.

Okay. Okay. And then my last question, I think it's just like on the accounting treatment because you mentioned earlier, like you have the accrued interest, but then you also provide some buffer. So does that mean like you -- on the accrued interest is a net amount or the provisions or the buffer is on the provision line. How is the accounting treatment there?

Because accountant forced you to overstate your income, yes, accountant forced you to overstate your income. In the past, remember the day that special mention loan mean they stop paying for a while. So you have to stop accrue because customers may not pay. So what you accrue is all right. But once customer turn to NPL, you have to reverse the accrue. So your balance sheet would be very clean. And if you can go back and collect your accrue, it become windfall. But under IFRS 9, you have to continue to accrue under EIR, effective interest rate. You have to imagine that what would be the probability that you would get accrual interest on your NPL, what would be the defaultability that you would get or you do not get on stage 2. So you invent a dream stream of revenue under hypothesis and assumptions. And I hate that. So in order for me to be able to play conservative, I imitate the concept under the old world meaning that, yes, accountant forced me to put accrue interest under stage 3. But I put in the model that defaultability is 100%. So you put THB 1 in and you take THB 1 out, right. That's why it occurred as a net accrual after provision.

All right. I have a lot of questions from investors. The next question is from Goldman Sachs about the new or third phase of the relief measures. On the new debt relief measures for the Phase 3, do you have a sense how many of your customers or percentage of loan will likely enter into this program? Will you then be happy to skip payment in this program? And you have a more stringent way of loan classifications. Would this mean that you will be classified by this loan into stage?

The good news about our portfolio is we have a very small exposure in hotel, restaurant and small SME. So the impact from this lockdown would be much less for us. The impact would be on the consumer portfolio. And again, a majority of our consumer portfolio -- or customer, the white collar, not the small business owner. So there could be some impact, but it should not be that much because I keep tracking unemployment rate. What we should worry is when the white collar losing their job or blue collar losing their job because the plant got shut down permanently, right. Today in Thailand, the good news is unemployment rate is still very low, meaning that there's still demand for workforces. So the problem that they do not have money to pay a loan would be interim. Because when the government order to shut down, this daily paid workers would not have money or even monthly paid worker, their OT would be gone. Their employers would negotiate with them to pay less during difficult time. But once things come back, this should be less of a concern because the damage would not be permanent, right. But the one that would be a bit more permanent is on tourism and service industry that heavily rely on international tourists. It will take a long, long time for Thailand to get to a risk back to the level that we used to enjoy.

Thank you, Khun Piti. I think the next question is attached to the third phase relief measure as well. So it is from [indiscernible]. Is there any risk to the loan yield from the recent new flow of government talking about cutting loan rate?

Talking is one thing, but the order would be another thing. From what I sense is, yes, the public pressure on high rate that financial institution charge to consumer. If you look into the details, the group that overcharge is not bank, is nonbank and cooperative, that they charge a high-teen interest rate, and they have very fatty margin. So those group are the one that might be subject to further scrutinize. But for banks, we charge much less, and Central Bank knows that if Central Bank puts to deploy that commercial bank fear that risk-return no longer justify, it would create the -- it would result in the unintended consequence, meaning that loan shark would prosper because there is no market from bank. So I do not worry much about banking sector when it come to high yield because high yield in banking is much lower comparing to nonbank. That is the first thing. Second thing is, in fact, bank has capability to do the debt consolidation, and debt consolidation would involve secure loans, top-up loan from the customers have. So bank can push that product and take away the market share from nonbank. But it would be applicable to certain group of customer. So it is more like a restructuring at the household level. That would be the way to fix at the root cause. Putting down the rate would not help much. You have to put systematic -- systemic restructuring at the household level in order to help the tide.

Thank you, Khun Piti, for the answers. Next question from Goldman Sachs. You mentioned that you have been very cautious on underwritings with a conservative loan growth. Can you share if you change the credit policy, for example, like the LTV policy stricter on the debt to service ratio?

Yes. Today -- put this way. 10 years back, TMB was very aggressive on the program called [ 3x ]. We lend -- if you have a car loan of THB 100, you can get THB 300 loan with the help from government guarantee scheme. Today, maximum loan-to-value would be THB 100. And with that very tough lending policy, our new credit limit set up or granted to customer come down to like 1/5 of what it used to be. So that's the level of care that we are taking, meaning that we cut the business down to 1/5 of what we used to generate in the past by making it more -- much more tighter when it come to loan to value, right. But what we got to do what we got to do. And that's why our SME part keeps shrinking, and that's the direction that we want to continue, at least for the next year or 2.

[Foreign Language], Khun Piti. Next question is actually [ Eugene ] and [indiscernible] asked the same questions on the asset warehousing. What is the pipeline for loan under asset warehousing? What could be the maximum size for your asset warehousing?

It should not be more than THB 5 billion, very small comparing to the total size of balance sheet. As I mentioned, the asset warehousing would fit more to only certain type of business, mainly hotel, shopping complex, community mall that suffer from cash flow and not on the permanent basis. And those must be the asset that have low LTV, meaning that not high gearing. So banks willing to take that asset. Quite certain that borrower will come and take it back because scaling is [ raw ], meaning that the customer already have huge equity at stake, right. And banks willing to lend them the money to buy back at the end of the COVID situation. So it's not the solution that would fit to all type of customer. For those with high gearing and have very little chance that they can come back, receive same level cash flow, then would not be willing to do the asset warehousing because bank also do not want to risk holding that asset and cannot push it back to the borrowers.

[Foreign Language] for answering. Next question is coming from China Capital, again, from [ Sheryl ]. For those that are under loan -- for those that under loan -- under relief, when is the expiry date for their relief? What are the proportions for the relief that under BOT soft loan program and those under TTB-specific program, 7 schemes? How much of them are with the interest deferred versus the principal deferred?

85% of our customer that seek for help for debt relief fall under scheme 1 to 3, meaning they at least are able to pay interest, right. That is the key. That is for the existing money. The question is mixed between the relief package that provide by TTB and government support. We have to separate between the 2, the old money support that is not the money and support that is the money, right. Let's deal with the old money and support. This page show how we handle the old money. They cannot pay us the money that they already take from the bank. So this is a program. And the support from Central Bank is forbearance in term of policy that do -- you do not need to downgrade them even you give them skip payment for a year. No interest payment, no principal payment. This is a support. And we do not utilize this kind of support because we downgrade this group of customer as per the reality that we should do. Another type of support is money, right. 0% interest soft loan give to the bank, so that the bank can lend to the customer. That money will stay for 5 years. So it's not short-term money. Meaning that the bank would pick the customer that should be able to survive and give them long-term working capital money that they don't have to pay back quickly. For TTB, we will only give money to those who we believe that they're still up and run and have a high chance of survival. And under the normal situation, regulatory support is -- regulator would not allow them to lend money to the customer that seems to be under trouble, right. But this one since most SME under trouble, so the definition is if this SME are not NPL before the COVID, they become -- they're getting into difficulty after COVID. Bank can still lend the new money, right. That is the regulatory forbearance support that Central Bank give. Again, for us, we do not only look at when they turn into difficulty, we also look at the feasibility. Again, no matter before or after COVID, if we look at today's situation, looking at the outlook, and we don't think that they would survive. We will not push them to borrow so that they would have liquidity to pay us back the interest so that we can keep the zombie alive. We will bite the bullet. We will bite the bullet and say that, sorry, this is not the way you should do to borrow money so that you would have liquidity to pay us the interest. We should restructure the loan, look into liquidating noncore asset, NPS that and we also put provision, right. And at the end, it could be game over for this kind of customer.

Thank you. Last question is from [indiscernible]. On the macro standpoint, when you talk to your customers, how are the businesses coping? For those who not able to pay on time, are they actively seeking alternative business or still applying for soft loan waiting for help? And for those business who are able to pay, is it because their sector were not as impacted as they managed to buy new business, employee deployment during the pandemic? I'm asking this as I wanted to understand more on the business dynamic and how they are coping with switching during the ever-lasting lockdown. And regionally, are you going to expand more businesses in the area where it's not impacted as badly -- for example, outside Bangkok area?

I think Thailand is quite badly impacted, right, because we are the country that rely quite heavily on tourism. Let's put the Thai economy into several pieces. Export is doing fine up until now. Now export also at risk not because we cannot sell but because of COVID. That factory might be forced to lock down, infection in the workplace that would impact the -- not only Thailand, but global supply chain, just like what happened in Vietnam that impacted the auto industry, right. So this is happening right now. But if we can manage to do like [ bubble and seal ] in the industrial estate, that would help because baht -- dollar-baht, baht is weakening, so that helped export. So export, not talking about short term, a month or 2, long-term wise, I think it's all right because the whole world is getting themselves out of the COVID trouble. So export should come back. Government infrastructure, that should be all right. So that sector with the government stimulus with the infrastructure development in Thailand. That sector should be all right. Retail is kind of gray. For the big guys, modern trade, it should be all right because the gearing is not high. They are much more efficient. Now go to the sector that will be in much trouble is, again, the sector that led to tourism and small retailers, that even before COVID, they have to fight with the big modern trade with e-commerce. So mainly those groups are the SME that does not involve in the global supply chain or local supply chain. They fight alone. Their business model is not competitive. Those are the group that will become problem or any banks that have exposure on that SME segment that is not part of the supply chain -- local supply chain or global supply chain and do things similar to many other 1,000 SME. So it -- I cannot answer as a generic to bank industry. So each bank have to look into their portfolio and macro-wise, those are the sector that are the most risky and very difficult to come back, at least in the short term.

Thank you for the answers, Khun Piti. I think this is going to be the last question for this session. The last question asking from [indiscernible]. Can you quantify a number of revenue synergies? When do you expect to realize those revenue synergies?

Yes. As appear on this page, the cost synergy will be the biggest contribution. Good news is we seem to be able to benefit more than we originally expect on the cost synergy. Back then, we think that 10% to 12% is a good number that we should be able to achieve. Today, we expect that it can be up to 50%. That is a good news. The bad news is instead of this number going to the bottom line, it goes to risk cost, it goes to strengthening our balance sheet. So THB 3 billion to THB 5 billion would be the revenue synergy, of which I think we can do more. We can do more, but it would take more time. And the COVID impact this one quite badly because situation would prevent us from actively going out and offer to the customer our flagship products. And the balance sheet synergy, it will not be much anymore because we cannot continue to cut our interest rate deposit. It would come from our higher yield product like cash your car, cash your home that would help enhance or move portfolio mix a bit. Again, I think, all in all, we still believe that we can deliver this number as the track record show, but the timing might shift a bit because of the COVID situation.

[Foreign Language] Seems like our management already answered all the questions we have. So I think let's call it a day. Anything Khun Piti would like to add to investors and analysts here, before we leave the session?

Okay. Again, thank you for your time. And as I always say, please stay safe, particular those who live in Thailand. As you know, the situation is getting worse. So the only way to protect yourself is to stay very alert and be very cautious about the situation. So see you again next quarter and hope that by that time we start to see the light at the end of the tunnel.

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