28/09/2020

UDS-Biz

Growing Your Income

Edited Transcript of BMRI.JK earnings conference call or presentation 8-Jun-20 9:30am GMT

Jakarta Jul 21, 2020 (Thomson StreetEvents) — Edited Transcript of Bank Mandiri (Persero) Tbk PT...

Jakarta Jul 21, 2020 (Thomson StreetEvents) — Edited Transcript of Bank Mandiri (Persero) Tbk PT earnings conference call or presentation Monday, June 8, 2020 at 9:30:00am GMT

PT Bank Mandiri (Persero) Tbk – Treasury, International Banking & Special Asset Management Director and Director

* Yohan Y. Setio

Ladies and gentlemen, thank you for standing by, and welcome to PT Bank Mandiri (Persero) Tbk 2020 First Quarter Results. (Operator Instructions) I must advise you that this conference is being recorded.

I would now like to hand the conference over to your speaker today, Mr. Yohan Setio. Thank you. Please go ahead.

Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk – Group Head of IR [2]

Thank you all for joining us. I will encourage you to download a copy of our presentation materials, currently available in our website or within the webcast itself. The management team will run through the presentation for 30 minutes, followed by the Q&A for another 30 minutes.

And now our CEO, Pak Royke, will open the meeting. Please, Pak Royke?

Thank you, Yohan. Good morning, ladies and gentlemen. I would like to spend the opening section of today’s earnings call on how we are navigating through the COVID-19 pandemic and walk you through the update on our restructuring pipeline in relation to the pandemic.

During this unprecedented situation, we need to make a lot of difficult decision from time to time. In doing so, I want to reiterate our continuous commitment towards GCG principles in every aspects. We align with minority and majority shareholders interests by proactively being a strategic partner to policymakers in order to achieve the best outcome for all stakeholders. It’s important for us to quickly rebound post this pandemic. Therefore, we adopt conservative accounting policy on interest income accrual to minimize this on interest income reversal when the economic recovery takes longer than expected. We also assign high-end loan loss reserve to restructure loan to reflect high degree of economic uncertainties when loan moratorium period ends on March 2021.

The health and safety for our employees, communities and customers are our highest priority and we have shown our commitment in keeping our services up and running. We have started accepting the new normal and gradually bring our employees back to office, but we have ensured the same distancing requirements are put in place.

Nobody knows when the pandemic ends but we continue to strengthen our endurance in terms of liquidity and capital management. For example, we doubled our internal safety level for U.S. dollars, followed by a successful $500 million global bond issuance last month. Our team has worked very hard in reaching out to our borrowers in order to identify and complete restructuring pipeline as soon as possible. As of June 2020, loan restructuring pipeline from COVID-19 has reached IDR 123 million. Total approved restructuring is IDR 99 trillion or equivalent 12.5% of total consolidated loans. Most of restructuring comes from the Corporate segment, comprising almost 60% of total restructuring pipeline. When we look into the list of borrowers’ name within Corporate segment restructure book, we believe a majority of the — majority of them should probably recover after the pandemic.

Within private-sector corporation, we see strong support from the group’s owner. For state-owned enterprise, the government, through the Ministry of Finance, then Ministry of SOE have been playing crucial roles in propping up several SOE through a combination of shareholder loan, capital injection and accelerating subsidy payment. When this pandemic ends, we want to be able to recover as quickly as possible. We recently just announced our 5-year new corporate plan, which I will be presenting briefly on the next slide.

Since the pandemic, there has been a boost digital banking adoption which could be a permanent shift in customer behavior. We will ensure continuous improvement in customer interaction, customer experience, internal processing and infrastructure through investment in technology and our digital initiatives. We believe that we are going to win an even bigger slice of business. Being in stronger position in the market, our funding business will continue to grow, given more customers are getting used to our platform, our smooth operation and several digital initiative launch.

And for lending, we have been continuously striving to give our best support to our customers, such as extending working capital loan and restructuring support. We will also continue to invest technology and digital initiatives as well as data analytics capabilities in order to improve customer experience and business efficiency.

Next, we move on to our new corporate plan 2020-2024. We will implement 3 major strategic initiatives.

In Wholesale, we want to be a better corporate bank beyond lending, tapping a more fee income potential and low-cost funding. While we have been maintaining leadership position in terms of outstanding loans in Corporate segment, we noticed that the cross-selling for cash management, credit finance and treasury products are still far from being optimal. When we increase customer product holding ratio, the customer will be more sticky to us, which mean room to improve on low-cost bundling potential.

In Retail, we want to be Indonesia’s #1 modern digital retail bank, leading in the employees’ ecosystem and mainly targeting urban and suburban households.

Lastly, we are going to grow our SME segment in sustainable way, mainly tapping those within the wholesale client business ecosystem. To achieve this, we will strengthen collaboration with subsidiaries to better serve our customers with more comprehensive product and service offerings. We will also accelerate the business process by engineering initiative to simplify and digitize process to ensure superior user interface and user experience to our customers across different segments.

As a result of new 5-year corporate plan, we are targeting to deliver a sustainable return on equity between 16% to 18% with progressive dividend policy .and in terms of geographic area, we will continue to focus our business in Indonesia. So what our numbers will look like if we effectively run our new corporate plan? By 2024, we want to be able to grow sustainable whereby loan CAGR is targeted to be around 10%, supported by 12% CAGR in third-party fund. As a result, CASA ratio should increase around 70% level. Via lending, we expect faster growth in noninterest income of around 12%.

In terms of cost management, we expect the change in how we run our business would be — result in lower cost-to-income ratio by 100 to 200 basis points. While growing in our business, asset quality is highly a factor. We are targeting long-term cost of credit to be below 1.2%. And lastly, return on average equity at 16% to 18%. We hope this pandemic will end sooner rather than later so that disruption to our 5-year target being minimized.

Next, I will let my fellow Board members to continue with financial and operational updates, starting with Pak Darmawan, Director of Treasury, International Banking and Special Asset Management.

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Darmawan Junaidi, PT Bank Mandiri (Persero) Tbk – Treasury, International Banking & Special Asset Management Director and Director [4]

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Thank you, Pak Royke. We continue to maintain a strong balance sheet that provides room for growth. Our loans grew by 14.2% year-on-year, in line with the growth of our deposits at 13.7%. On the funding side, our low-cost fund has actually been growing quite good. First quarter’s deposit growth was usually rather weak. However, this year, we are seeing stronger pattern than usual, especially in demand deposits from institutional clients. We believe this is as a result of our effort in the past 2 years to let go cyclical funding and focus more on sustainable funding.

Another possible reason, even though that not that significant, could be deposit flight to quality from customers anticipating for challenging economic outlook. Our equity stands at IDR 174 trillion, down by 8.7% year-on-year due to IFRS 9 implementation during the quarter and our deliberate decision to increase dividend payout. However, our CET1 ratio is still at a healthy level, 16.5% as of March 2020. We are prudently managing our capital to weather the current global challenges and to prepare ourselves should we see tailwind in economic recovery going forward.

Since 2018, we have been implementing a strategy to optimize our asset and liability management by maintaining an elevated level of loan-to-deposit ratio. Compared to December 2019 position, our LDR slightly decreased due to strong low-cost funding growth while appetite to grow loan was rather muted. The bank’s diversified funding base give us a strong liquidity and stable funding position, as evidenced by our liquidity coverage ratio of 169% and net stable funding ratio of 116% (sic) [113%] as of March 2020. We continuously monitor our monthly liquidity forecast for the next 12 months. And so far, we are confident with our liquidity position.

I would now like to turn the presentation to Pak Silvano, our CFO, to run through our first quarter results. Pak Silvano, please?

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Silvano Winston Rumantir, PT Bank Mandiri (Persero) Tbk – Finance & Strategy Director and Director [5]

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Thank you, Pak Darmawan. Bank Mandiri reported first Q 2020 total operating income of IDR 23.9 trillion, 13.5% up year-over-year, supported by NII and non-NII, which grew by 8% and 24% year-on-year, respectively. Noninterest income growth was contributed mostly by syndication fees, mobile banking fees, FX and fixed income. We will discuss this in more detail in the next few slides.

Our OpEx increased by 13.3% year-on-year. This was due to an increase in personnel expenses of 17.3% year-on-year driven by variable-pay component to employees due to the good performance achieved last year. As we are currently trying to navigate through this pandemic, we are fully committed to deliver significant cost savings, aiming at low single-digit growth.

In line with revenue and OpEx growth, PPOP during the first quarter was reported to be IDR 13.9 trillion, growing by 13.6% year-on-year. Starting in March, our provision expenses started to increase as we were already approximately half a month into the pandemic back in March. The increase in provision expense was to reflect asset quality downgrades in retail segment, mainly from auto and micro productive loans. As a result, we booked net income after tax of IDR 7.9 trillion or up 9.4% year-on-year.

Page 22. Our NIM declined to 5.4% in Q1 on the back of lower benchmark rates since July last year and 2 were the rate cuts year-to-date 25 bps in February and another 25 bps in March, bringing current benchmark rates to 4.5% level. You saw BI decided to maintain the rate at the last meeting.

Our cost-to-income ratio was at 43.4%. If we were to exclude tax reserves of approximately IDR 164 billion, our cost-to-income ratio would have been 42.7%. I can discuss this further later on in terms of efficiency. Adjusted return on average equity increased from 14.3% in 2019 to 17.7% in Q1. This is mainly contributed by the IFRS 9 implementation that is adjusted directly from our equity as well as a higher dividend payout ratio at 60%.

We have an ample NPL and LAR coverage post-IFRS 9. NPL coverage increased to 257%, while LAR coverage increased to almost 60% — or 57% on a consolidated basis. CoC remains manageable at 1.3% as of Q1. However, we are expecting a higher cost of credit in subsequent quarters as we deliberately choose to build loan loss reserves for restructured loans, as most of you would know from our recent discussions. And finally, NPL in Q1 increased marginally from 2.33% in December to 2.36% in March.

Moving on to the next page. As you might already be aware, in the past several quarters, we’ve been showing loan and deposit growth using daily average balance instead of ending balance. This is to reflect changes in the KPI of our business. And this is a strategic move made by us, management, in order to have better asset/liability management. As you can see on the left-hand side chart, daily average loan grew healthily by 10.7% year-on-year with 2 biggest contributors coming from Corporate, 9.9% growth; and Micro, 19.1% growth.

The Micro side is predominantly coming from salary-based loan and subsidized KUR or KUR loan. Our subsidiaries continue to be our growth driver with 15.6% year-over-year loan growth. Our pension-lending subsidiary bank, Bank Mantap, grew by 30% year-on-year. As a result of recovery in Commercial banking segment asset quality over the years, we started to see growth in the segment. However, we might move to temporarily curb the growth again due to this pandemic. The growth in lending is self-funded by our third-party funds growth at similar level as we grew current accounts strongly by 23% year-on-year. We reduced our reliance on time deposit in Q1 2020, which only grew by 6.8% year-on-year during the year.

Page 25 on the asset side, our blended loan yield decreased by 36 basis points Q-on-Q due to transmission mechanism of lower benchmark rates. While on the funding side, cost of funds decreased marginally by 5 basis points Q-on-Q due to lower time deposit rates. We are being less reliant on time deposits in Q1 of this year. As anticipated, our Q1 NIM declined by 17 basis points quarter-on-quarter.

We prefer to increase the diversification of our funding customers like tapping more into transaction-based and regular depositors. This will be a new baseline for us to grow our market share in CASA going forward. In addition, COVID-19 leaves customers with not many other options but online banking. Our operations has been smooth during this pandemic and more customers are getting used to our digital platform. This could be a permanent shift, as our CEO mentioned at the beginning, in customer behavior and should lead to a more efficient business process on our side.

Page 26 shows you our fee income. So our core noninterest income grew by 45% — 45.4% year-on-year, mainly contributed by 3 things: one, e-channel fee income, which was driven by massive growth in the number of mobile banking active users; number two, fee income from fixed income, FX and derivatives due to the high market volatility and loan-related fee driven by syndication and loan admin fee.

And finally, for this section of my slide, Page 27, as Royke mentioned earlier, our OpEx grew by 13.3% year-on-year in Q1 due to the variable pay to employees for 2019 results. Our cost-to-income ratio in Q1 was 43.4% and if we exclude the tax reserves, it would have been 42.7%. Now considering the significant slowdown in business this year, management have already identified significant cost-saving items, and we aim to arrive at a low single-digit OpEx growth for the full year. Originally, we were budgeting for approximately 7% before COVID OpEx growth. Now we have capped that significantly. We have identified about IDR 2 trillion for now for cost-cutting from our initial guidance of 7%. Cost-cutting mostly will be on G&A, general and administrative expenses, such as traveling, sponsorships, events and the old normal-related expenses mostly.

Now I’d like to turn the presentation to Pak Siddik, our Director of Risk Management, to discuss our asset quality.

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk – Director of Risk Management & Director [6]

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Thank you, Pak Silvano. In this slide, we show that our consolidated cost of credit slightly increased from 1.2% in the first quarter 2019 to about 1.3% in the first quarter of 2020.

Within retail banking, that increase in cost of credit most notably come from consumer financing, which we source through our 2 subsidiary, Mandiri Utama Finance and Mandiri Tunas Finance as well as from the micro productive loans where we started seeing a higher increase of late payments at the end of March, when actually the impact of the COVID-19 crisis started to kick in. In wholesale or Corporate, we built up loan loss reserves for several main and commodity sectors. But the impact of COVID-19 crisis, we started seeing much earlier in the retail banking portfolio versus the wholesale.

Until March, we have not booked any specific loan loss provision related to COVID restructuring. Earlier in the year, we expected cost of credit to improve the full year as our asset quality has been continuing to improve. However, with the COVID-19 crisis, we have actually done a number of studies and modeling, and we are in the process of finalizing that model to actually make estimation out of all the accounts that we restructured due to COVID, which one of those will actually become good credit 12 months from now, which one of those will probably stay in special mention or needs another round of restructuring, and which one of those accounts will probably go to downgrade NPL post-COVID. And we are actually doing these studies and analysis for each of the customer business segment.

This is the first time ever that we have written this kind of analysis. There’s a lot of, I guess, assumption and fine-tuning that we need to do. And we’ll continue to actually upgrade and modify the modeling analysis as we get more information in the next coming weeks and months. But the intention is — remains the same. We want to actually start gradually building up some of the potentially higher revision between now and March 2021 when the relaxation of POJK No. 11 will probably expire so that any increase in provision that we might expect next year will have probably already built up gradually for the next 12 months. So — and then Pak Silvano will probably cover some of the guidance on cost of credit at the end of the presentations.

In the next slide, we actually cover that as of March 2020, our NPL and loan at risk coverage were at 257% and 50%, respectively, significantly higher compared to its average level basically due to its IFRS 9 adjustment. While the consolidated NPL was stable at 2.4%, the loan at risk ratio was slightly higher due to increasing trend of late payment in retail banking segment when the economy started to get impacted by pandemic in late March, especially the impact of the PSBB or lockdown has a significant impact to our retail portfolio. If you refer to the table at the bottom left, we are conservative in setting aside reserve for potential loan loss reserves — loan losses, whereby in average, the LLR-to-total-loan ratio for stage 2 and stage 3 is already high at 35% and 80% level.

In the next slide, we just wanted to update you on some of the capital ratios. Even after the dividend payment and IFRS 9 one-off adjustment in the first quarter, our total CAR and CET1 ratio are still at a healthy level at 17.6% and 16.5%, respectively. Amid this concern on a higher RWA weighting due to the pandemic, our simulation shows that the impact of — to our total CAR is around only 33 basis points or 1 full notch downgrade in our wholesale debtor rating. Hence, we believe the high and resilient capital ratio, we do not need to raise capital in any plan soon. We also continue to run our business prudently with only 11.7% leverage ratio.

I’d like now to turn the presentation over to Pak Rico Frans, our IT Director, to present about our digital banking strategy and initiatives. Pak Rico, please?

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Rico Usthavia Frans, PT Bank Mandiri (Persero) Tbk – Information Technology Director & Director [7]

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Thank you, Pak Siddik. As laid out in the beginning of the presentation regarding our new 5-year corporate plan, we are aiming to be the best modern digital retail bank in Indonesia by 2024. To achieve that, our core initiatives will be done by building our human capital capability and focusing on our capability to shift our paradigm to digital mindsets and nurturing our talents accordingly. This will be supported by a 3-pronged strategy, whereby, we will be focusing on digitalizing our internal platforms, modernizing our digital channels and leveraging digital ecosystems. This, of course, we will do it in the context and the framework of IT security as well as a good risk management.

Next. As the foundations to be the best in digital banking, we have also prepared ourself by upgrading our core banking capacity to anticipate huge digital transaction traffic. After the upgrade, which was done late last year, now we have 2.7x more capacity in terms of the maximum number of transactions per second. We cut our processing time by half, and we lowered our maintenance costs by 20%.

With more capacity available, now we are primarily focusing on continuing business process reengineering in retail segment that we have started last year in credit card. This credit card business process reengineering has been very successful. It is proven by the fact that 80% of our incoming application has been decided by decision engines. So 80% automatic decision of credit card applications have been done. And we also double our level of productivity.

We are now progressing into another areas like SME, salary-based loan and consumer loan segments. As we are automating our processes, we are also building our capability in data analytics in order to be able to identify client needs, servicing them better and even launching product event in more efficient and targeted manners. Right now, we are also modernizing our enterprise data management with AI and machine learning.

Next. We are continuously modernizing our mobile bank platform, our Mandiri Online. The latest development includes addition of biometric log-in and more billers into the platform. As you can see, the annual growth of our Mandiri Online has been quite satisfactory, around 60% to 70% in terms of Mandiri active users, transaction frequency as well as transaction amounts. Right now, we are in the process of redesigning and re-platforming our Mandiri Online to enhance customer experience with services from our subsidiaries as well as external digital ecosystem. We believe integrating our services in one single platform will bring tremendous convenience to our customers as we are most diversified banks with leading market share in every product category.

Next. To accelerate our customer adoptions for our products, we are opening ourselves to digital ecosystem by building APIs and we’re also embracing open banking. We want customers to be able to access our products and services through various platforms they are using in daily lives such as e-commerce or other third-party applications.

For example, our customers is now able to top up e-money card from e-commerce website and e-commerce apps when they are doing shopping. Another example is our merchants in e-commerce has been able to apply loans through our e-commerce — through their e-commerce platform without hassle as compared to if they come to our branch to open our app separately. We are also working on direct debit, and we’ll be launching the services with several partners by end of this month.

Our e-channel transactions continue to show growth year-on-year, reflecting customer preference to use our banks for their transactional business. Since it’s launching, Mandiri Online has been very well accepted by our customers as shown by the numbers of monthly active user that continue to grow. Right now, as of March, the monthly active users is 3.6 million. We still see ample room for growth in terms of number of active users as we are close to — we have close to 25 million deposit customers in total.

The transaction value conducted via our mobile banking platform also shows strong growth at 60% to 70% year-on-year, which also translate to fee income generated. However, during the COVID pandemic, despite our stronger adoption rate of our mobile banking, the total transaction value has started to show flat or declining trend, a bit declining, as overall regular transactions in the economy slow down significantly. We believe this trend will be reversed once the COVID pandemic has passed.

I would now like to turn the presentation back to Pak Silvano.

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Silvano Winston Rumantir, PT Bank Mandiri (Persero) Tbk – Finance & Strategy Director and Director [8]

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Thank you, Pak Rico. So now we turn to the guidance for 2020, revised guidance. Because of the unprecedented pandemic situation, needless to say, we need and have revisited our target for this year. So for loan growth, it might be slightly experiencing a correction or contraction as we focus more on quality and the overall loan demand is weaker than normal.

Our net interest margin could decline by as much as 100 to 120 basis points year-on-year, mostly due to our conservative accounting policy. We use cash basis for COVID restructured loan with grace period relaxation. And in addition, the lower benchmark rate environment also partially contributes to this lower margin outlook. Cost of credit, we expect a very sizable change, so between 2.5% to 3%, as we decide to build up loan loss reserves for COVID restructured loans, as Pak Siddik outlined earlier.

So I’ll stop here, and we’ll turn it back to Yohan to moderate the Q&A. Thank you.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk – Group Head of IR [9]

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Thank you, Pak Silvano. So now, we are entering Q&A session for the next 25 minutes. (Operator Instructions). Operator, could you please queue questions from the participants, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of [Robin] from JPMorgan.

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Harsh Wardhan Modi, JPMorgan Chase & Co, Research Division – Co-Head, Asia Financials [2]

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This is Harsh from JPMorgan. Two questions. One is the NIM compression of about 100-odd bps. Can you explain the drivers of the NIM compression? How much of it is just the lower interest on restructured loan? And how much is from the subsidy, which you have or may not have approved? That’s one.

And second, the provisions of 250 to 300 basis points, this is this year’s. Do you think we go back to normal next year? Or do you expect some degree of elevated provisions next year as well? Because we’re talking about March ’21 here.

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Silvano Winston Rumantir, PT Bank Mandiri (Persero) Tbk – Finance & Strategy Director and Director [3]

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All right. Thank you, Harsh. This is Silvano. Thanks for the question. I’ll answer the first question about NIM in terms of the breakdown. So guidance of 4.4% to 4.6% versus 5.6% last year. So breakdown is as follows: approximately or the majority, 50 to 70 basis points, we expect is going to come from our conservative interest accrual policy, which is the cash accrual policy from the COVID-19 restructured loans. The remaining, approximately 30 to 40 basis points, will likely come from the transmission mechanism from the lower benchmark rate environment. And then the balance of about 10 basis points impact is from the lowering of the LDR to strengthen our liquidity management.

In terms of pattern, just to share with you, we expect that the lowest dip of NIM could be in Q3 or Q4 as most loans should already be restructured, most eligible loan that needs to be restructured should already be restructured for the most part by Q3. There will be some exception. And there is a possibility of further benchmark rate cut according to our internal view.

Second half of next year, we expect that NIM should start to improve as restructuring grace period will end. By regulation, it will end in March next year, and then we will start to see gradual incoming of the deferred interest to be paid. So expect second half next year, we will be collecting deferred interest again.

In terms of cost of credit, I will refer to Pak Siddik to provide some color.

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk – Director of Risk Management & Director [4]

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Okay. Harsh, basically, earlier this year, our projection for this year’s cost of credit without COVID crisis would be around 1.3% to 1.4%. And then when COVID started to happen, even the original projection of provision, we would need to increase because some of the accounts that even were problematic before COVID actually get accelerated during the crisis. So we will probably come to a higher cost of credit towards the end of the year because of 2 impacts.

First, I think from our BAU projection, there will be a group of accounts that were weak before COVID anyway, then we’ll have to increase provision because of COVID but they cannot be qualified under POJK 11.

And then there’s another group of accounts who were healthy before COVID, and we have to do a onetime restructuring because their business model was disrupted because of the lockdown. So these are the additional provision that Pak Silvano mentioned earlier that we may want to have to come up with between now, end of the year.

But the difference is that this account that we structured big time starting end of March were actually good accounts before COVID. Their business model works. It’s just that because people are not traveling, people are not going to the malls, they don’t have cash flow. But once some of these lockdown is being relaxed by the government, people started to shop or go to the restaurants, some of these businesses will go back up again. So we estimated that maybe some portion of the account that we restructured today will probably go into downgrade next year because they may not be able to adapt to the new normal post-COVID.

A big portion of them will be able to adjust and survive because the underlying business model was sound before COVID anyway. So I think the guidance for this year, taking into account the additional loan loss reserve where we’re going to do that is optional, will be around 2.5% to 3%. And then that elevated level of cost of credit will stay until probably March to April next year, depending on the severity of the crisis between now and end of the year. If the relaxation of the PSBB or lockdown is considered to be successful being that the economic activities are being done without impacting the number of new positive cases of COVID, then I think we can actually scale back on some of the additional provisions. But if, for example, the relaxation causes a higher number of COVID new cases, then we may have to increase a bit.

So between now and end of the year, we’ll have to play by ear as we get more information on how much actually provision we’re going to build. But I think the guidance that Pak Silvano mentioned, around 2.5% to 3%, is probably what we would see by end of the year. It should stay at that level, probably until March or April next year and start to taper off as some of these accounts start to survive and do their business activities again.

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Operator [5]

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And your next question comes from the line of Jayden Vantarakis from Macquarie.

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Jayden Vantarakis, Macquarie Research – Head of Research [6]

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I have 2 questions. The first is just a follow-up on the restructured loans. So is there any update on the pipeline of the restructured loans? I see in the slide, there’s a number of about IDR 123 trillion. But do you think that we’re sort of getting close to the peak? Or is there much more that we should expect to come?

And following on from that, is there any initial view on what proportion would be seen as riskier and may need to potentially be downgraded eventually and be subject to the provisions you were outlining just now?

My second question is just on capital and dividends. During the presentation, I think Pak Royke mentioned that there’s a progressive dividend policy. So there’s obviously a very nice dividend coming through after last year. What sort of dividend should we expect in terms of the stitch?

And is there any sort of constraints in terms of what capital ratio we should be looking at as a floor? Those are the 2 questions.

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk – Director of Risk Management & Director [7]

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So let me take up the question on restructuring, Jayden. This is Siddik. I think we’ve done basically a few rounds of review of our existing portfolio to identify what is the potential universe that we should consider for restructuring, meaning that these are the accounts that are in the impacted sectors such as transportation, hotels, tourism or account in the industry sector that are directly impacted by lockdown. So — and we’ve done it from Micro all the way to Corporate Banking.

As of today, the total potential universe is about IDR 238 trillion of portfolio, out of the total probably around IDR 800 trillion. So these are potential universe, even the worst case, only IDR 238 trillion. But we know not all of them will be restructured due to COVID because not all of them will be impacted by COVID. And some of them may not qualify for the documentation requirement for restructuring.

So let’s say assume IDR 238 trillion is the right number of the potential universe, as of June 1, we’ve actually restructured — approved for restructure about IDR 99 trillion. So that IDR 99 trillion may be around 30%, 40% of the total universe. So I think — and how much do we think we’re going to do restructuring a lot more in the next few months? That depends on how successful the government implements the ease of relaxation of the PSBB or lockdown.

So we’re going to have to watch it in the next 2 to 3 weeks. If the moves are deemed to be successful, we may not see probably close to 60% or 70% of the universe being restructured. We’ll probably stop at the lower level. And we’ll probably see a more — a quicker recovery of even the restructured accounts.

In terms of segments, we actually see a higher number of accounts in SME and micro productive loans being, I guess, impacted fastest versus a commercial or corporate account. I think one of the main reason is because for the SME and micro productive accounts, they don’t really have much of cash reserve or savings. So if they don’t actually sell anything in their shops for 1 week, they don’t get a lot of money directly versus a corporate account or a commercial account, who can actually not selling anything and being able to pay the salary for the next 3 months because they have cash reserves.

So some of these things are — that’s why we need to actually do restructuring very quickly. We converted a number of folks in our regional team to support the implementation of the restructuring program because of the market size of it.

So Jayden, I think the question is we’ve done for 30%. We’re going to play by ear as we know more information in the next coming months. Hopefully, probably 60% of the IDR 238 trillion would probably be restructured.

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Silvano Winston Rumantir, PT Bank Mandiri (Persero) Tbk – Finance & Strategy Director and Director [8]

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Right. Thank you, Pak Siddik. And just to add, IDR 230 trillion, as Pak Siddik mentioned, is the worst that we think at this point is eligible. And that represents approximately 28.75% of our — I mean if you assume flat loan growth, that’s — eligible is about 28%. But as you heard, we don’t expect that entire 100% of the IDR 230 trillion at this stage will need to be restructured.

Regarding your second question, Jayden, about capital and dividend payout policy. So we expect that we would like to maintain our total CAR at around 17% minimum, of which CET1 ratio of around 16% in the long term, and that includes this year and long term. And we do not think that total CAR will go down below 17% during pandemic based on our current visibility.

As regards dividend policy, in the long term, we want to continue with our progressive dividend policy. As you all saw, we increased significantly from the last 3 quarters of 45% to 60%, our very last one, 60%. And we committed to deliver an optimal ROE level in the long term with obviously sufficient level of capital adequacy ratio.

Now during the current pandemic period, we need to see further development as we believe strengthening the bank’s endurance in terms of capital and liquidity is the right thing to do. While we also want to maintain the view that if condition is not worsening, then we will decide what dividend payout ratio to deliver. At this point in time, we don’t have a real visibility, I don’t think anybody does, as to what December will look like other than our best estimate based on the methodology that we have. But rest assured, in the medium term and long term, we want to continue to commit to a progressive dividend policy.

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Operator [9]

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And your next question comes from the line of Andri Ngaserin from Credit Suisse.

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Andri Ngaserin, Crédit Suisse AG, Research Division – Research Analyst [10]

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Congratulations for the good first quarter ’20, Mandiri directors. This is Andri from Credit Suisse. Just 2 questions on my end.

Number one is it to say — you mentioned cost/income ratio to go down 100 to 200 bps a year target. Obviously, just wondering, is this cumulative or a year basis? Because obviously, your cost/income ratio now is above industry standards. And just now, Pak Silvano was mentioning about old and new normal. So just wondering in terms of this, is this something that certain costs, line costs will be sustainably going down in the future? So that’s my overall first question on details on cost/income ratio.

Second is perhaps just to ask your sense within this government credit guarantee program, how does this — has this — it may be early, but how does this affect your potential risk-weighted assets and your general overall sense of being more aggressive on loan going forward? [I know it may be] too early, but I’m just asking that.

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk – Director of Risk Management & Director [11]

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Okay. I can try to answer the second one first. I think, well — on the government guarantee program. So basically, the government has just — has not yet issued the detailed requirement or processes on giving more credit — new credit given to micro borrowers — to client borrowers and then where the credit risk is actually covered by Askrindo or Jamkrindo. This is an 80-20 rules. 80% credit risk covered by Jamkrindo, 20% is by the bank. And account has to meet certain eligibility criteria to be considered for fresh money. And these are accounts that are impacted by COVID.

And the thing is that we really have to be able to estimate quite well how much working capital loan that is needed by this SME or micro borrowers. And since this are meant to be for payment of salaries of staff and then payment of utilities, bills, payment of premises.

So we’ve done our calculation. But again, I think this is probably too early to tell for the government guarantee program and there’s another program that will be also rolled out shortly, which is the interest subsidy, where 6% of the KUR interest rate for the next 3 months will be paid up by the government, whilst 3% will be paid out by the government for the next 3 months.

This one, the interest subsidy program, is easier to actually measure because it’s very much based on mathematical formula. And we probably will get around IDR 1.3 trillion potential interest subsidy from the government based on our existing accounts that were restructured due to COVID that may be eligible under this program. So this is going to be — have a positive benefit for our customers because this will reduce the burden of them when they come off the restructuring program mid next year.

So the second program that are probably difficult to estimate today is the need for fresh money for the same micro SME borrowers and where the credit is actually given or covered by insurance. Why is it difficult? Because traditionally, we do not give fresh money to a restructured account during a crisis so that — because of the perceived risk is very high.

But again, these are restructured accounts during COVID, where the business was actually good, and the account is actually current before COVID. And they need basically some money to continue to be able to pay the salary and not doing any lay off to their employees and pay their bills. So we are still in the process of understanding the detail and how much of our portfolio can be put forward eligible for this program. We’ll probably get back to you in the next 1 or 2 months on this second program.

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Silvano Winston Rumantir, PT Bank Mandiri (Persero) Tbk – Finance & Strategy Director and Director [12]

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Okay. Regarding costs, just to clarify, the 100 to 200 basis points lower cost-to-income ratio is cumulative long-term, by 2024, as part of our new corporate plan target.

Secondly, yes, you are right. I think we — if you look at our cost-to-income ratio, in Q1, it was 43.4%. And that’s an increase from year-on-year, 42.3%. However, it was a decrease from 45.7% in December.

Now our cost was also increased in Q1 driven by the variable-pay component that we mentioned. And lastly, about costs, for this year, because of the pandemic, we have started to identify key items within our OpEx side of the business. And we’ve identified so far IDR 2 trillion. And if we are able to deliver that, that will take us down to a very low single-digit cost growth for this year, which we believe is the right thing to do in times of crisis.

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Operator [13]

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And our last question comes from the line of Jovent Muliadi from Indo Premier.

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Jovent Muliadi, PT Indo Premier Securities, Research Division – Research Analyst [14]

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Have few questions with regards to your guidance. My first question will be on the NIM. The guidance, the NIM will be dropped by 100 to 120 basis points. But mostly, it came from the accrual side and the lower BI rate. If we assume that the restructured loan will get worse, so do you think there will be some further downside to NIM? Because you didn’t mention that you’re already taking into account the worsening asset quality on the restructure side.

My second question, on the way you accrue your interest, you mentioned that the NIM recognition will be on cash basis. But what happen if you defer that interest? If you defer the interest, will you recognize entirely by cash or — on a cash basis? Or you still accrue it this year? If you defer, not cutting the interest.

My third question, with regards on the total restructure on — because of the COVID, which is around IDR 150 trillion to IDR 230 trillion under the risk scenario, how much you expect that it may default? And when I look at your presentation, on the stage 2, your average provision, the loan loss coverage is around 35% for stage 2 when the OJK actually take out the relaxation next year. Also, so do you think that you expect that you will need to set aside 35% for the entirety of the restructured portfolio?

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk – Group Head of IR [15]

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Okay. Jovent, this is Yohan. So for your first question on the NIM guidance that declined by 100 to 120 basis points, the basic assumption here is that we are going to restructure up to the amount that Pak Siddik mentioned, which about IDR 200 trillion, the worst-case scenario. So if situation gets better than expected, so hopefully, the NIM compression could be smaller than that.

And then on the restructure — on the accrual policy, as long as there is grace period, it means that we do not accrue the interest. We only accrue interest if the clients are still paying for us.

And for the last question, we expect the majority of the restructured loan will remain in stage 1 after the restructuring, which is March 2021. And only small portion could be — maybe like 10% or below, might go into stage 3 NPL. And for the loan loss reserve, we are going to assess one by one for the wholesale clients. We are using individual analysis. For the retail segment, we are going to use our typical provisioning, which typically for the stage 2 loans, for the retail segment, we expect around 15% loan loss reserves. And for stage 3, around 60%. That’s for the retail. For the wholesale clients, we are doing individual analysis.

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Operator [16]

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Thank you so much. There are no further questions at this time. You may continue, speakers.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk – Group Head of IR [17]

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Yes. So thank you for joining us through the call. Thank you for the management team of Bank Mandiri. If you still have further questions, kindly send e-mail to InvestorRelations@bankmandiri.co.id (sic) [ir@bankmandiri.co.id], and thank you again for joining the call.

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Royke Tumilaar, PT Bank Mandiri (Persero) Tbk – President Director [18]

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Thank you.

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Silvano Winston Rumantir, PT Bank Mandiri (Persero) Tbk – Finance & Strategy Director and Director [19]

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Thank you.

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk – Director of Risk Management & Director [20]

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Thank you.

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Darmawan Junaidi, PT Bank Mandiri (Persero) Tbk – Treasury, International Banking & Special Asset Management Director and Director [21]

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Thank you.

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Operator [22]

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And that does conclude your conference for today. Thank you for participating. You may all now disconnect.