U.S. Markets closed

Edited Transcript of BDMN.JK earnings conference call or presentation 24-Jul-19 10:00am GMT

Half Year 2019 Bank Danamon Indonesia Tbk PT Earnings Call

Jakarta Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank Danamon Indonesia Tbk PT earnings conference call or presentation Wednesday, July 24, 2019 at 10:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Dadi Budiana

PT Bank Danamon Indonesia Tbk - Chief Credit Officer & Director

* Reza Iskandar

PT Bank Danamon Indonesia Tbk - Head of IR & Corporate Planning

* Satinder Pal Singh Ahluwalia

PT Bank Danamon Indonesia Tbk - Director

* Seow Wah Sng

PT Bank Danamon Indonesia Tbk - President Director

================================================================================

Conference Call Participants

================================================================================

* Henry Tedja

PT Mandiri Sekuritas, Research Division - Research Assistant

* Willy Suwanto

BCA Sekuritas - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Reza Iskandar, PT Bank Danamon Indonesia Tbk - Head of IR & Corporate Planning [1]

--------------------------------------------------------------------------------

Thank you, and welcome to our first half 2019 analyst briefing. Before we start, I want to introduce one new member of Board of Management, [Pak] Muljono Tjandra, our CFO, which will be replacing Pal Satinder Ahluwalia at the beginning of this month.

So without further ado, I invite Pal Ahlu to walk us through the first half results.

--------------------------------------------------------------------------------

Satinder Pal Singh Ahluwalia, PT Bank Danamon Indonesia Tbk - Director [2]

--------------------------------------------------------------------------------

Thanks, Reza, good evening, everyone. The most important event in the last quarter for us was the acquisition of Danamon by MUFG was completed, whereby MUFG now own 94.1% in Bank Danamon. As we've mentioned in the earlier quarters leading up to this acquisition, the biggest impact for us is, we will now be able to freely collaborate with MUFG across all segments, whether it's a business, whether it's support areas, whether it's digital banking, et cetera.

And to some extent, we've already started seeing those positive fruits of that relationship, and we are hopeful of seeing even better and better results going forward. That was our truly biggest event in the last quarter.

Okay. Now going on to the next one, regarding our loan growth. Over last 2 to 3 years, we used to keep saying that we had good loan growth, but Micro is coming down, we are still looking flat. I'm happy that even in this quarter, which has been the story over the last 2, 3 quarters, notwithstanding Micro, et cetera, we continue to see very strong robust growth across all our focus segments in Bank Danamon.

Overall growth was about 14%. Yes, this does include our inorganic acquisition of Bank BNP, which is now part of Bank Danamon, we call it business banking. So if you include that, we are almost 14% ahead year-on-year. So our strategy in acquiring this company was right on.

The mortgages and automotive portfolios, which are largely our organic portfolios, they have shown growth of 28% and 12%, and I will show you later slides, how it's extremely creditable for automotive to have done that.

The Enterprise Banking segment and the SME, which are our core business functions, especially the Enterprise Banking, which has received a lot of (inaudible) after MUFG coming in, has shown increase of almost 15% year-on-year.

The Bank Nusantara, of course, BNP contributed IDR 6 trillion.

Most important for us in terms of liquidity has been our focus on CASA and TD. That's been our story for the last 4 years. So this year also, while year-on-year, our CASA growth is almost 8%. Time deposits, as most of you know, liquidity was tight last year, and we've been chasing time deposits. And there's another story which I'll (technical difficulty) going forward. TDs grew almost 16%.

We, in anticipation of compliance with NSFR, LCR regulations, we have planned a IDR 5 trillion share program, of which we issued IDR 2 trillion of bonds early this year in May, of which were mostly 1 year and 3 years. And if need be, we'll issue probably another IDR 3 trillion in the second half of this year.

Moving on to the balance sheet side. You can see our loans, overall growth, it's 11%, and if you take away Micro Banking because that's where our true segment is, it's almost 14% year-on-year and 8% quarter-on-quarter. Funding too has matched it. This is very important for us that we need to keep our funding in check. So funding has been almost 14% year-on-year, whereas, quarter-on-quarter also is 7%.

Of course, BNP has been contributing substantially to this, and we expect a lot from that franchise which we acquired recently.

In terms of income, of course, given the increase in interest rates last year and the consequent chase to liquidity, right? We're very happy in the sense our net interest income, in particular, Micro, has still remained positive at 2% this year and quarter-on-quarter 1%, it's still positive because we've seen many of our competitors go negative in this area.

Noninterest income, which is our bread-and-butter, that's how we actually make our money, is up 4% year-on-year and 9% quarter-on-quarter.

Operating expenses have been our best story for the last 4 years, and it continues to be so. Our OpEx grew only by about 3%. Of course, quarter-on-quarter, there are movements in the second quarter, but we still feel it's under control, and you will see in the next slide how -- for cost and commission was still under control. So OpEx, we're very pleased we'd been able to maintain at this level.

Cost of credit. We are seeing some early signs of incremental delinquency, but we feel this is in line with the industry, and we are pretty hopeful in 1 or 2 quarters coming down will be again back to where we were 2 quarters ago, and I'll share some details on that later.

Because of the pressure on cost of funds and the competition, we prefer not to increase our yields on any of our loans because we want to maintain our loan growth momentum. So consequent to that, we saw a decrease in our net profits, that's the main reason. Because as you see, OpEx, well controlled; cost of credit, pretty well controlled, notwithstanding that the cycle has turned, I would say, slightly adverse. So we feel this number can be recouped back in 1 or 2 quarters, especially the cost of funds now starting to go down, so we'll start to see a reverse cycle, we will start to draw back some of these funds.

Key ratios. As I mentioned, the NIM suffered likely because we -- our first focus has always been to maintain liquidity. To maintain liquidity, we had to compete for deposits at market rates. So we paid the price, cost of deposits was almost 100, 120 basis points.

On the other hand, we preferred not to burden our customers with yield, also there were adequate market competitive pressures. And consequent to that, our NIM has suffered. But again, as I said, with the interest rates now going down, we expect to see this cycle reverse over next 1 or 2 quarters. It'll take a while, but definitely start to reverse positively for us.

Cost of credit. So far so good, as I said, it fluctuates every quarter, sometimes is up 20 basis points, sometimes is down 20 basis points. We feel whatever has to peak will peak in Q3; Q4, we should be back to normal. That's our expectation on cost of credit.

Now, cost-to-income ratio has got impacted largely -- purely because our incoming numbers didn't grew as much as what we thought because we maintained our interest rates. So if we look at the scenario going forward, the cost of functions start to come down and the yields remain -- we expect it to remain stable. So we would expect to see improvement in cost-to-income ratio also. And I have another good story on cost to income, which I'll cover in another slide later.

CASA ratio. Since we preferred to chase time deposits to maintain adequate liquidity, CASA ratios suffered a little bit. But overall, I will show you another slide, CASA has also grown year-on-year. So that's a good story.

In terms of NPL, still there. As I said, it keeps moving up and down 20 basis points every quarter. We feel Q3 will be a time we see the peak in NPLs. After that, we expect Q4 onwards to go back to what we saw last year.

Now if I move on loan loss coverage. What happens -- June is a month where -- [we were] short but collection [weren't]. So consequently, a lot of things land up in special mention and they start to go back in the month of July, August. So consequently, loan loss coverage appear little lower but again, we expect to recoup it back over 2 quarters.

ROA, ROE, obviously were impacted purely because our net profits are down, but we yet remained a very healthy 2%, roughly -- or 1.9% in this quarter.

Our CAR remains as strong as anyone if not better than most people in the industry.

The next slide will show you what I just alluded to about cost/income ratio. If we take away Micro Banking, and Micro Banking we've been rationalizing over last few years, we feel the majority of the rationalization in Micro Banking will finish by this year-end, although, there'll be some remnants going into next year.

So if you see the cost to income ratio, if you take away SEMM, we are 47.9%. And clearly, that's probably one of the best gains in the industry in Indonesia as we speak today, with very few large-sized banks with such a good quality in cost-to-income ratio. So that's the good story that will come out next year, once the same portfolio has run off.

Moving on to funding. As I alluded to you earlier, whilst the CASA ratio has seemed higher, there we see that our CASA has grown 8% year-on-year, but our term deposits grew 16%. Our focus, we are always conservative, we will always keep adequate, if not strong liquidity, so our TDs grew faster than CASA. Consequently, CASA ratio looked a little higher -- sorry, little lower.

Having said that, over the last few weeks, we have adequate liquidity, but we issued bonds in May. We've now started to let go of expensive term deposits and now with the interest rates coming down, we expect to see now CASA ratio come back to what we've been seeing over the last 2 to 3 years. So that's the good story out here.

In terms of LDR, we are very healthy as compared to the industry. Industry is roughly about 95% to 100%. We are at 95%. We're clearly at the lower end of that. 95% was last year, so we have 95% this year. So we are much better than the industry.

In terms of LFR, RIM, we are well within all parameters, including our own internal risk appetite. So liquidity wise, we will always remain strong.

Moving on to our capital structure and the consolidated ratio of almost 21.7%. This is post-dividend payouts. I think we have one of the strongest CARS in the industry and that's where we will remain. So it's a good story.

Loan growth. Over the last 2 to 3 years, we've been investing, spending money, growing our bread-and-butter businesses, which within the bank are consumer, SME, commercial and corporate, which we call enterprise, and of course, our subsidiary Adira Finance. If you look at some of these numbers, each and every one of those segments has continued to grow strongly.

Over the last few years, we would always be lagging behind industry, and we would be explaining for the Micro. Now we don't ever need to say that, if you see these numbers, they speak for themselves. If we look at Enterprise Banking, even Q-on-Q and FI, there's an almost 12% growth. If you look at SME, which includes our business banking, the ex-BNP is almost 12%, and if you take our consumer mortgages it's 22%.

Now even Enterprise Banking and consumer, if you exclude the business banking portfolio, even on stand-alone Danamon basis, year-on-year 11% better, consumer mortgages and all everything else 17% better. So total loan growth was 14% better, and even if we exclude business banking, which is now very much our own, it's still 9%. It's very healthy, almost in line with all the top banks in Indonesia.

Now moving on to the next page we see our performance for Adira. And as I said, this is a very credible story, of course, we preferred to be more conservative in the industry as far as two-wheelers are concerned. So consequently, whilst the industry has gone down, we've also reduced our share in that, but our new unit finance is still very positive. That's quite helpful. In four-wheelers, although the industry declined by almost 14%, Adira decline was only 0.1%. Consequently, overall, Adira contribution to the company has been very strong. So Adira had a very good story.

In terms of new financing amount, as I said, we will focus always more on four-wheelers, but the fact that we can still grow despite industry falling 14%, it's a very -- it's a large credit to the company as such. So on a year-on-year basis, Adira, two-wheeler loans are up 13%, four-wheelers are up 13%. Quarter-on-quarter, two-wheelers 4%, four-wheelers 2%. That's a very credible story in this challenging market.

NIMs. As I said, we got impacted by NIMs, but as we have always been saying for the last 3 to 4 years, we have deemphasized Micro within the bank. We let Adira continue to play a good role in the two-wheeler segments, which is a Micro equivalent index. But our non-higher-yield segment is now almost 80%, 81%, and that will be the trend going forward too. So because of that, of course, we expected our revenues to go down, but it provides stability to the revenues. So we hope to see better performance in the next 2 quarters.

As I mentioned, the NIM has got impacted. That's purely because we raised the cost of funds, that was the right thing to do over last 2 quarters to preserve our liquidity with the interest rate cycle now turning in our favor over next 1 or 2 quarters. Of course, it takes time to reprice the deposits which we have on our book, but we expect to start seeing cost of funds go down and NIMs move up in the next 1 or 2 quarters. That's clearly happening.

NPL. NPL, again, this is a June end, which is called the holy month. Unfortunately, a lot of people go away, and this we saw last year, too. So there's always an increase in special mention that month, which kind of comes back in July and August.

Having said that, if you compare last year's second quarter and this year's second quarter, they're 50 basis points better. So overall, whether it's a Adira, whether it's the bank, overall we've been focusing on credit quality, and we've been able to keep this much better.

In terms of NPL, we've had 1 or 2 legacy accounts, [large tickets] come down, but we are assured by credit colleagues there's hope to regularize that, if not this quarter, by the second quarter. So we should end the year back to where we started off with a good rate.

In terms of NPL, again, our SME, especially some of the portfolio which we inherited from business banking, we have a different risk profile, so it has slightly higher NPL, but the earnings are much higher. Our own SME too, we saw in certain regions, not across all in certain regions, NPLs were rising.

So I think those reasons we slowed down and we've kind of fixed it, and we are hoping quarter 3, quarter 4, all these things will start to compound. In NPLs. But normally, when NPLs rise, it takes a quarter or 2 to go down. So we expect all these NPLs to peak out by Q3. By Q4, we should be heading towards good numbers. So we are well set for next year in this one.

In asset quality, of course, key sector, as I mentioned. We had 1 account for mining, which is from very old days, of course, kind of running off, but certainly, they couldn't manage again. So that's the one which you see in mining which has spiked up compared to everyone else. Yes. So it's all in. Yes.

Seow, do you want to add on that -- something on that?

--------------------------------------------------------------------------------

Seow Wah Sng, PT Bank Danamon Indonesia Tbk - President Director [3]

--------------------------------------------------------------------------------

Just to add, it's an oil and gas account. But under the OJK regulation, it's classified under mining, but it's actually related to oil and gas.

--------------------------------------------------------------------------------

Satinder Pal Singh Ahluwalia, PT Bank Danamon Indonesia Tbk - Director [4]

--------------------------------------------------------------------------------

Yes. Okay. In terms of CoC, percentage-wise, we are very much there. As I said, we've seen an uptick in NPL. Normally CoC lags 1 or 2 quarters, but we feel it'd probably play out if not third quarter, by fourth quarter. So we should be back to normal starting next year.

In terms of restructured loans we are always asked these questions, very stable. In fact, we would have gone down, but for the restructured loan portfolio, which we inherited from business banking, but we've reviewed that portfolio as business as usual, and it'll start to run down. So we don't expect any significant increases in restructuring going forward.

My last slide, which is a very important slide. This is where we earn our bread-and-butter, is the fee income slide. In the credit slide, we did see an impact in fees, right? There's a lot of competition in the market, we preferred not to increase our yields. But consequently, we couldn't charge that much fee as we wanted to, whether it's in our Adira segment or Enterprise Banking or SME segment. So consequent to that, we've lost some ground on credit fee income. However, the noncredit fee income has shown a very good trend.

Treasury, they had a gala time in the first half. There's been lots of volatility in the market, and that's where treasury thrived. So treasury has done a great job, and we're well ahead in terms of our performance.

Adira Finance, as I said, have been doing a great job compared to the industry and consequent to that, Adira Insurance also benefits. So the insurance amount is also fairly up this year. So that's a positive story.

Bancassurance, notwithstanding so many retail bonds issued and people wanting to subsite to those. Bancassurance has still held ground till now, and we are hopeful, Q3, Q4 should start to see improvement. But suffice to say, even if we are flat, we're very happy with that part, considering the industry has been fairly -- going through some tough time in the last few months out here.

Cash management, we've invested a lot. I have a new colleague on board on our Board of Management, who specializes in cash management. And you see our fees and income is very good right now, but we will continue focusing on this, and especially with MUFG collaboration, our hopes are extremely large for cash management. So our plan is and vision is over next 2 to 3 years, we should be doubling kind of these numbers. So that's our expectation in terms of this year.

So that's roughly it from Bank Danamon side. we're now open to questions to everyone, including our colleagues on Webex too.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Willy Suwanto, BCA Sekuritas - Analyst [1]

--------------------------------------------------------------------------------

My name is Willy from BCA Sekuritas. I wanted to know about the exposure that BDMN has to [Duniatex] loan. And if -- and how many percent have you provisioned?

And secondly, about the BI secondary reverse repo rate cut. What's the impact to the loan yield and funding yield?

--------------------------------------------------------------------------------

Satinder Pal Singh Ahluwalia, PT Bank Danamon Indonesia Tbk - Director [2]

--------------------------------------------------------------------------------

Second question first. So, of course, the reverse repo rates cuts and all that stuff. Most importantly, the big thing was a couple of months ago, 1.5 months ago, they reduced the reserve ratios. That's had a huge positive impact for us, almost IDR 30 billion to IDR 40 billion a year.

Now, of course, with the BI rates going down, we expect to review those rates. We have an ALCO coming up next week, but we've been having some discussions. We feel interest rates will probably start to drop interest rates, but slowly, just to test the market, maybe 25 basis points. But the expectation again is that a Central Bank may have at least 1, if not 2 more cuts through the year. So the expectation is we should start seeing cost of funds go down by 25 to 50 basis points.

Suffice to say, it can't be repriced overnight. If we reprice them as a loan term, deposits roll off, but the trend looks very positive in terms of cost of funds for us.

Pak Dadi, will you address this?

--------------------------------------------------------------------------------

Dadi Budiana, PT Bank Danamon Indonesia Tbk - Chief Credit Officer & Director [3]

--------------------------------------------------------------------------------

On Duniatex. Yes, we do have an exposure to Duniatex. They are basically a long time borrower of Danamon. But the -- in terms of exposure, we probably cannot mention the total amount itself. However, I can say that we are definitely not among the top 10 largest lenders of Duniatex. So if you look at the top 10 largest lenders, you're going to see how big the exposures are. And I can talk -- I can even say that we are not even among the top 50 in largest vendors of Duniatex. So I do not think we are in a position to actually say how big our total exposure is.

In terms of provisionings, obviously because this is relatively revealed only recently, right? I believe, only last week or last 2 weeks, I would say, last week, yes. So at the moment, we are planning to obviously start building up provision on the -- on this exposure.

--------------------------------------------------------------------------------

Willy Suwanto, BCA Sekuritas - Analyst [4]

--------------------------------------------------------------------------------

And I guess you're already discussing with the clients on (inaudible).

--------------------------------------------------------------------------------

Dadi Budiana, PT Bank Danamon Indonesia Tbk - Chief Credit Officer & Director [5]

--------------------------------------------------------------------------------

That's true, that's true.

--------------------------------------------------------------------------------

Seow Wah Sng, PT Bank Danamon Indonesia Tbk - President Director [6]

--------------------------------------------------------------------------------

Like just to add, we had some exposure on the ex-BNP portfolio and a few, I think, about a month or so ago, we asked them to pay that one-off, and they already paid that one-off.

--------------------------------------------------------------------------------

Unidentified Analyst [7]

--------------------------------------------------------------------------------

I'm Arisa from (inaudible). Just double checking on Page 4, there is the cost of credit on quarterly basis. So is it actually increasing or decreasing?

--------------------------------------------------------------------------------

Satinder Pal Singh Ahluwalia, PT Bank Danamon Indonesia Tbk - Director [8]

--------------------------------------------------------------------------------

Okay. So if you say cost of credit, well, this is a minus 12%, it's higher Q-on-Q, right?

--------------------------------------------------------------------------------

Unidentified Analyst [9]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Satinder Pal Singh Ahluwalia, PT Bank Danamon Indonesia Tbk - Director [10]

--------------------------------------------------------------------------------

Yes. So if you look at -- okay, what my mention was, year-on-year wise, we look at year-on-year because some quarters they are big chunky ones which go in, sometimes they go out. But as far as we are concerned, Q3, Q4, I don't think those chunky ones may happen. But overall, we expect CoC to peak probably third quarter; fourth quarter, we expect it to go back to normal. That is expected.

--------------------------------------------------------------------------------

Unidentified Analyst [11]

--------------------------------------------------------------------------------

So now they are increasing?

--------------------------------------------------------------------------------

Satinder Pal Singh Ahluwalia, PT Bank Danamon Indonesia Tbk - Director [12]

--------------------------------------------------------------------------------

This increase in second quarter, so I'm saying maximum third quarter will be there all in peak, but then after fourth quarter should expect to go down. Dadi?

--------------------------------------------------------------------------------

Unidentified Analyst [13]

--------------------------------------------------------------------------------

So it should be increasing 12% (inaudible) instead of minus?

--------------------------------------------------------------------------------

Seow Wah Sng, PT Bank Danamon Indonesia Tbk - President Director [14]

--------------------------------------------------------------------------------

Yes. Minus means that it's worse.

--------------------------------------------------------------------------------

Satinder Pal Singh Ahluwalia, PT Bank Danamon Indonesia Tbk - Director [15]

--------------------------------------------------------------------------------

Worse.

--------------------------------------------------------------------------------

Seow Wah Sng, PT Bank Danamon Indonesia Tbk - President Director [16]

--------------------------------------------------------------------------------

Minus means it's worsened.

--------------------------------------------------------------------------------

Unidentified Analyst [17]

--------------------------------------------------------------------------------

I see, I see. Okay.

--------------------------------------------------------------------------------

Seow Wah Sng, PT Bank Danamon Indonesia Tbk - President Director [18]

--------------------------------------------------------------------------------

The minus sign is deterioration.

--------------------------------------------------------------------------------

Unidentified Analyst [19]

--------------------------------------------------------------------------------

All right, all right. Now I got it.

--------------------------------------------------------------------------------

Seow Wah Sng, PT Bank Danamon Indonesia Tbk - President Director [20]

--------------------------------------------------------------------------------

Doesn't mean it's gone down.

--------------------------------------------------------------------------------

Unidentified Analyst [21]

--------------------------------------------------------------------------------

Okay. But the peak -- so will be on the third?

--------------------------------------------------------------------------------

Unidentified Company Representative [22]

--------------------------------------------------------------------------------

Starting with fourth quarter.

--------------------------------------------------------------------------------

Unidentified Analyst [23]

--------------------------------------------------------------------------------

So maybe around another 12% and then...

--------------------------------------------------------------------------------

Seow Wah Sng, PT Bank Danamon Indonesia Tbk - President Director [24]

--------------------------------------------------------------------------------

If you look at our trend last few years, Q4 is always our best quarter.

--------------------------------------------------------------------------------

Unidentified Analyst [25]

--------------------------------------------------------------------------------

Which quarter?

--------------------------------------------------------------------------------

Seow Wah Sng, PT Bank Danamon Indonesia Tbk - President Director [26]

--------------------------------------------------------------------------------

Q4 is always our best quarter. So the reason being that in Q2, we have Lebaran also. We have Ramadan, Lebaran coming Q2 last year and this year also. So currently, it's a bit elevated. So again, like trend last year, we are hoping that by December it will -- the ratio will come down.

--------------------------------------------------------------------------------

Henry Tedja, PT Mandiri Sekuritas, Research Division - Research Assistant [27]

--------------------------------------------------------------------------------

Henry from Mandiri Sekuritas. My first question is about the direction from the shareholder to MUFG. If you -- if we -- Seow has said, the Security Bank in the Philippines when the MUFG came and then suddenly, the loans pick up is primarily in the consumer banking. And what is the direction from the shareholder for Bank Danamon going forward? Is it -- I don't know, is it more Enterprise, consumer? What's the -- shareholder wants to grow later on?

And the second thing, it's maybe about your asset and liabilities. If we look at the time deposits, actually it's plus 16%, while in the same time, if we look at other -- firstly, in other banks that already giving the analyst presentation is still more like good, the time deposit because maybe they know that the interest rate is going down, right? But in your case, actually, you increase the time deposit a lot. I mean, I just want to know like what is the reason behind this from the management point of view?

--------------------------------------------------------------------------------

Satinder Pal Singh Ahluwalia, PT Bank Danamon Indonesia Tbk - Director [28]

--------------------------------------------------------------------------------

I'll take the second one and maybe -- loan deposits. Okay. So the second one, I'll go first. Okay. So let's clarify that -- the second one, what term deposits. We have traditionally been extremely conservative as far as liquidity is concerned. I guess that arises from our experiences doing the prices, et cetera. But we've always been extremely conservative. Just one thing we will not take a chance with that. So we had opportunities to take on time deposits, we've been taking on term deposits.

However, in terms of May, when we already heard that this was happening, we had already planned our bond issuance. So we went through with the bond issuance of IDR 2 trillion. And earlier in the quarter, we had done our MTM -- small MTM, relatively of IDR 500 billion. But we wanted to issue them to test the market so that we can come back to the market. The bond issuance was not so much from liquidity as it more for NCR and SFR purposes, just so that we maintain a healthy buffer on those ratios.

So after that, we've started to let go of our term deposits. So what you will start seeing in this quarter, Q3 onwards, we will start to let go off some expensive time deposits, and you will start to see our CASA ratio come back up. And we don't have -- right now, we are thinking, since we have a shelf limit of IDR 5 trillion of bonds, if we plan to issue that in the third or fourth -- probably fourth quarter, we might let go of lots more term deposits. And these are the expensive term deposits.

Now having said that, term deposits, the expensive ones are more to fill in the buffer gap for us so that we remain adequately liquid. But the underlying great story that has been happening underneath this, which is not visible from here is our granular deposits constitute almost 60% to 70%, whether it's CASA, whether it's term deposits. So that number has been increasing especially in the last one quarter, and those are much lower cost deposits than compared to the normal expensive time deposits.

So I think that has been a very good story over last 3 to 6 months. And we are hoping from third quarter onwards, one, interest rates will come down; two, the expensive term deposits will run off. So we expect to see positive impact from that. That's what I would say on term deposits.

--------------------------------------------------------------------------------

Dadi Budiana, PT Bank Danamon Indonesia Tbk - Chief Credit Officer & Director [29]

--------------------------------------------------------------------------------

Okay. Let me take the first question. You question us about the strategic direction under MUFG in terms of business growth over Danamon, right?

--------------------------------------------------------------------------------

Henry Tedja, PT Mandiri Sekuritas, Research Division - Research Assistant [30]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Dadi Budiana, PT Bank Danamon Indonesia Tbk - Chief Credit Officer & Director [31]

--------------------------------------------------------------------------------

Let me start with a very simple example, real example. Last week, we announced a new mandate, a new engagement. It's one of Honda's primary dealer for our distributor financing program. It's not disclosed yet, but we also got exclusive mandate from German car manufacturer in a similar dealer finance -- distributor finance program.

Likewise, since MUFG got maturity or even before maturity, Danamon team and the MUFG team collaborated to pitch to all M&C customers to capture the supply chain finance. And these efforts are being paid off. So likewise, collaborating with MUFG, Danamon will get new type of financing.

It's across the sector. It's not just corporate but SME and even consumer. Because once we get access to large anchors or their distributors, Danamon can provide other type of products, like payroll, mortgage or our old loans. So every business collaboration or strategy comes from leveraging MUFG's close customer relationship for those MSE customers.

--------------------------------------------------------------------------------

Unidentified Company Representative [32]

--------------------------------------------------------------------------------

I think to add to Dadi's point, from a customer segment point of view, we have -- before MUFG came in been deemphasizing microfinancing to a point that today, it's a very, very marginal business within Danamon. They've been investing in consumer and the small SME segment, and the other segment was really the co-Enterprise Banking, but largely it's Commercial Banking. And MUFG came in because their forte has been the connections and relationships with a global multinationals, and that's not confined to just a big Japanese houses. They've also introduced and opened the doors to us to some of the global non-Japanese multinationals and enable us to do business with these multinationals through the financial supply chain approach that Dadi just explained to you.

The beauty of this business is that it's not that we lend to these multinationals. It may be that our pricing is quite low. But what's good is, it opens up a whole new ball game for us. It enables us to heavy trade these multinational suppliers and more often the distributors. And this is the target segment that Danamon is good at is Commercial Banking and SME. When we go into these customers, we get to do loans. We get to do the treasury business and we have cash [mentioned]. Because it's a financial supply chain arrangement, the payments come through us to the multinational company. We call them the anchor. So we will trade for certain amount of CASA with us, but more importantly, the transactions come through us.

In addition, we get to access the multinationals and this customer's employees, which means, therefore, it's another way of ship acquisition for new customers for our consumer and small SME business. And you know in our business of banking today, the most expensive and the most -- very significant part of our business expense goes into acquiring new customers. This enables us to acquire new customers in a much more productive way, and we don't have to worry about so much due diligence as we did before because coming through a multinational, we can work with these customers for a long time.

Obviously, they are not fraudulent customers. They are genuine businessmen who we like to do business with. So the approach to banking for Danamon now will, therefore, not just be confined to Adira Finance, Consumer Banking, small SMEs, Commercial Banking. We have now ventured into the larger players in that sense that opens a door for us that spend down the line. I hope that's clear enough.

--------------------------------------------------------------------------------

Reza Iskandar, PT Bank Danamon Indonesia Tbk - Head of IR & Corporate Planning [33]

--------------------------------------------------------------------------------

Do we have any more questions?

--------------------------------------------------------------------------------

Unidentified Analyst [34]

--------------------------------------------------------------------------------

(inaudible). I have a question, and can you give us a color on the divestment of the Adira Insurance? And where demand deposit cost has been increasing quite high for like 60 to 70 (inaudible) 2018 and first quarter '19. Can you give a background on why this is the case? Like what are client types of the demand deposits? Also, how did the (inaudible) outlook do you think it will go down in the future?

--------------------------------------------------------------------------------

Satinder Pal Singh Ahluwalia, PT Bank Danamon Indonesia Tbk - Director [35]

--------------------------------------------------------------------------------

Adira Insurance, we've signed the documents with Zurich, and we are currently in discussion with the regulators as to how the things should progress. And we feel we now have a solution in place. And we expect the transaction to be concluded. Of course, there's a whole process to be undertaken, but we expect the transaction to be concluded sometime in the fourth quarter of the current year. We're very confident of that being achieved. That's for Adira Insurance.

Term deposits, again, as I mentioned earlier, our term deposits in Indonesia are likely, most of them are 1 month, sometimes we have some 3 months, et cetera. So in that sense, we prefer to take lots more term deposits. And if you take the expensive ones, which are the ones which you can only get if you need to buffer short-term liquidity. So we call them expensive term deposits or premium term deposits. So I'd say, what the question was earlier, we rather -- we prefer to keep some expensive term deposits through the second quarter just to get over through the Lebaran period to ensure we have good liquidity.

But having said that, in May, June, July, we figured out we had enough. So we started to let go of our term deposits because we also got lots of term deposits from our business banking, which is the erstwhile BNP. So going forward, our loan growth is still very good, and we still expect to keep the same trend. But temporarily, we feel now we have enough liquidity. So we probably don't need some of those expensive term deposits. So we'll continue to run them off with the extent we are comfortable with. We always keep buffer with us. We don't want to have a sleepless night on account of liquidity.

So having said that, on the cost of funds too, we just about kind of discussed internally and next week we have an ALCO, and will probably start to reduce our time deposit cost also. But again, we don't want to rock the boat, we'll probably start very conservatively at 25 basis points. But again, the portfolio will take time to reprice, et cetera. So I think that would still take another quarter or 2 quarters before you start to see a substantial impact on cost of funds.

So I think all this will be in play for Q3 and Q4. But this sets up well for next year because that's the momentum of downwards cost of funds. 2020 is well set then.

--------------------------------------------------------------------------------

Unidentified Analyst [36]

--------------------------------------------------------------------------------

I think cost demand deposits?

--------------------------------------------------------------------------------

Satinder Pal Singh Ahluwalia, PT Bank Danamon Indonesia Tbk - Director [37]

--------------------------------------------------------------------------------

Demand deposits in CASA or?

--------------------------------------------------------------------------------

Unidentified Analyst [38]

--------------------------------------------------------------------------------

In CASA. Yes.

--------------------------------------------------------------------------------

Satinder Pal Singh Ahluwalia, PT Bank Danamon Indonesia Tbk - Director [39]

--------------------------------------------------------------------------------

Oh, CASA. CASA, again, as I mentioned earlier, CASA is an extremely good story. One, we've inherited a lot of CASA from business banking too, plus internally, last year, when we looked at it, we went more for our time deposits, right? What we call TDs in that sense. The demand ones overnight is called CASA, the current account, savings account. So our focus is more on term deposits.

Having said that, this year first quarter, second quarter, we started to focus on CASA and that not just through our consumer, but also through our cash management, wholesale banking unit too, and we've now started to see momentum happening in CASA.

If you see my earlier slides, I've shown, CASA has gone up from IDR 51 trillion to IDR 55 trillion. It's on Page #7, right? So that's been a good story also. And the more important underlying factor, which I mentioned, 60% to 70% of this is what we call granular CASA, which is priced exceedingly low. So that's how we will make our money, and that's what we're going to focus on.

So going forward, overall CASA, second, third quarter, fourth quarter, clearly will increase. Term deposits, we'll let go expensive term deposits. Net-net, Q3, Q4 we'll start to see an improvement in our CASA ratio. So we should start seeing improvement in cost of funds consequently.

--------------------------------------------------------------------------------

Reza Iskandar, PT Bank Danamon Indonesia Tbk - Head of IR & Corporate Planning [40]

--------------------------------------------------------------------------------

And if any more questions?

--------------------------------------------------------------------------------

Unidentified Analyst [41]

--------------------------------------------------------------------------------

Sorry. Maybe one more question for Adira. Can you, let's say -- can you explain about maybe -- the Adira has been growing; for the last 2 quarters, it's above the market. Is there any target for disbursement for -- towards the end of the year?

And then also, like how is the trend -- our trend NIMs in Adira for the first quarter and second quarter? I mean, we know that for the last 2 quarters, actually, the bigger multi-finance, actually, are performing thus for one because of the -- maybe the S&P case last year. So would be more liquidity to you guys than the small one in your (inaudible).

--------------------------------------------------------------------------------

Unidentified Company Representative [42]

--------------------------------------------------------------------------------

So first, what the growth of our portfolio. Practically, we grow 4% versus year-on-year even though the market is minus for four-wheelers and flat for two-wheelers, mainly because we also have other portfolio like used car and used motorcycle. For example, our new car is dropping about -- our new car dropped about 8% last year -- year-on-year, but our -- the used car grew by about 15%. So this way, it makes our portfolio grow nicely versus the market.

In terms of NIM, with the increase of rate. Yes, we have a little bit of a margin squeeze, yes? Not much because we are able also to increase our lending rate to the customer.

In terms of what is our target for the years. We're aiming for to grow about -- between 5% to 10% of the amount financed for the year.

--------------------------------------------------------------------------------

Reza Iskandar, PT Bank Danamon Indonesia Tbk - Head of IR & Corporate Planning [43]

--------------------------------------------------------------------------------

Thank you. Do we have any more questions from the floor? If not, then we will end the event. Thank you for attending.