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Edited Transcript of BMRI.JK earnings conference call or presentation 24-Jan-20 2:00am GMT

Full Year 2019 Bank Mandiri (Persero) Tbk PT Earnings Call

Jakarta Jan 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Bank Mandiri (Persero) Tbk PT earnings conference call or presentation Friday, January 24, 2020 at 2:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ahmad Siddik Badruddin

PT Bank Mandiri (Persero) Tbk - Director of Risk Management & Director

* Darmawan Junaidi

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

* Rico Usthavia Frans

PT Bank Mandiri (Persero) Tbk - Information Technology Director & Director

* Royke Tumilaar

PT Bank Mandiri (Persero) Tbk - President Director

* Silvano Winston Rumantir

PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director

* Yohan Y. Setio

PT Bank Mandiri (Persero) Tbk - Group Head of IR

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Conference Call Participants

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* Gaurav Jangale;Fidelity International Ltd.

* Jayden Vantarakis

Macquarie Research - Head of Research

* Kevin Kwek

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Laurensius Teiseran

CIMB Research - Analyst

* Stephan Hasjim

PT Indo Premier Securities, Research Division - Head of Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to PT Bank Mandiri (Persero) Tbk 2019 Fourth Quarter Results Conference Call. My name is Albert, and I will be your operator for today.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your first speaker today, Yohan Setio. Thank you. Please go ahead.

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

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Thank you all for joining us. We would like to begin the meeting now.

I would like to mention a few points before we start. First, for those of you joining us on either the webcast or the conference call, I would strongly encourage you to download a copy of our presentation materials currently available either from the Investor Relations home page or from within the webcast itself. Second, in the interest of those analysts and investors joining our conference call or webcast, I'd like to ask all of you in the room to please speak clearly into a microphone when asking or answering questions.

I would now like to introduce Pak Royke, our CEO, to open the earnings call. Please, Pak Royke.

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Royke Tumilaar, PT Bank Mandiri (Persero) Tbk - President Director [3]

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Thank you, Yohan. Good afternoon, ladies and gentlemen -- sorry. Good morning, ladies and gentlemen. Thank you for attending the full year 2019 earning calls today.

Before we get into the greater detail on the achievement for Bank Mandiri 2019, I would like to share a few thoughts to give you an update on our new management team. As you know -- might already now, I have taken the reigns in the last December to replace former CEO, Pak Tiko, who has joined the new cabinet of Jokowi-Ma'ruf as a Vice Minister of State-Owned Enterprise.

We also have a new Board member, Silvano Rumantir, as a Chief Financial Officer of the bank. Together with the other members of the Board, we will continue on to focus on the sustainable growth to create long-term value for the -- for our shareholders. Our primary focus is capitalizing on our core strength as the biggest wholesale bank to boost retail segment.

I would like to spend opening session of this morning call -- this earning calls by elaborating our 3 key messages before giving more details on the financial performance. First, despite various concern on macroeconomic situation and external noises, Bank Mandiri continue to deliver positive and credible 2019 result. Second, our asset quality continued to show meaningful improvement. Credit cost and NPL are better than our guidance. Third, we want to focus the strengthening wholesale and retail integration by improving product cross-sell to institutional clients and leveraging on their value chain to grow our retail portfolio.

Bank Mandiri achieved record earning 2019 with strong growth in core PPOP of 6.5% year-on-year and set record-high net profit of IDR 27.5 trillion. Despite the ongoing volatility in the macroeconomic environment, we still managed to grow our loan book by 10.7% year-on-year while driving ongoing improvement in asset quality. Loan growth was mostly driven by corporate and salary-based micro loan.

As the liquidity remains competitive and tight, banks are facing a threat of between loan growth and NIM. For us, we are prioritizing NIM resilience. And hence, we managed to achieve 5.6% NIM, in line with our guidance. We believe our NIM [present] of 10 basis points was among the smallest in the industry.

OpEx rose by single-digits, 6.7%, even including 1 tax reserve to anticipate for potential tax penalties. Excluding the tax reserve, our OpEx growth was well under control, up only 5% year-on-year, thanks to our investment in IT and process automation in the past 3 years.

In the past 12 months, we have received feedback from the investor and analysts about 3 core issues, namely concern on pricey acquisition and expansion, NIM pressure and asset quality. I would like to share a few thoughts to give you a sense of confidence we have in our strategy.

Firstly, inorganic growth has been in Bank Mandiri DNA. Since the merger of 4 banks in 1998, we have been growing inorganically by creating GPN and acquiring other entities so that now we have 12 subsidiaries. These subsidiaries are now becoming our growth engine and most of them are ROE-accretive to the parent bank such as AXA Mandiri, Bank Mantap, BSM and MTF. From time to time, we assess various opportunity in the market for sake of finding new growth engine that will ultimately create value for the shareholder. And doing this, we always use disciplined approach to take in account feedback from the investment community before making decision. We will not do an M&A unless it is written effective.

Secondly, NIM has been present due to limited third-party funding in the system. Lower benchmark rate environment. However, our full year '19 NIM was in line with guidance in -- and the contraction were better than our peers as our portfolio mix is shifting favorable to higher-yielding products such as micro [SML] loan, which grew faster than the rest of the segment. In addition, we are also working hard to grow CASA. In a sustainable way, we are going to launch setting online onboarding soon to support retail setting growth and penetrating into the government institution to capture their floats.

Lastly, there were continuous jittering on asset quality after that happened with Krakatau Steel and the Duniatex. In fact, our NPL and credit cost has continued to improve by 42 basis point and 43 basis point year-on-year, exceeding our guidance, thanks to an effective early warning system so that any problem loan was already anticipated well in advance.

Two months in the role, one of top priorities is show to -- is how to optimize our profitability in a sustainable way. In wholesale, we are already the biggest player, so the focus is not the size anymore. We identify there are a lot of opportunities to capture a lot share of wallet in existing corporate clients' fee-based product. On the -- one of the key indicators we monitor is the cross-selling ratio. We are also going to capture opportunities to unlocking our wholesale value chain to the retail segment. This is where our growth story should come from. For example, being the biggest corporate lender in the country, we could leverage on our existing relationship with the both government institution and profit companies in order to win their employee payroll accounts.

In SME, we want to focus supply chain financing. We believe our key initiative of reengineering internal process and digitizing customer journey will show a more significant impact. Let's take a sample of the recent pilot project to process reengineer our SME business. We managed to have a faster loan approval from average 30 days to 11 days. As the result, SME loan growth rebounded from negative 7.8% in 2018 to positive 3.4% in 2019.

Bank Mandiri has been consistently improving asset quality with meaningful decline in NPL and cost of credit. When growing our wholesale business, we want to focus on customer whom we know very well. We develop customer targeting pipeline and review it regularly through collaboration between business unit and risk-taking unit. Before we offer financing solution for the names in the pipeline, we make sure we understand clients' need and their transaction flow. In retail segment, the [growth are really] focus on the corporate vertical, primarily employee and business partner of the big operation, which believe are low-risk in nature.

Despite concern from the market related to financial health some wholesale borrowers, we keep delivering in favor of guidance on asset quality, thanks to disciplined early warning system that enable us to identify problem ahead of time and to take prevention action. This included watch-list process, sensitivity analysis and booking mix monitoring to name a few. As a result of this initiative, our [in-depth] analysis showed that loan booking in the past 3 years have meaningfully better asset quality.

On IFRS 9 implementation, we have been doing parallel run since July 2019. Based on the parallel run, we estimate the book of -- a one-off adjustment of 21 -- around IDR 21 trillion to IDR 25 trillion directly against equity. The final number is subject to further dialogue with the regulator and our auditor. The one-off adjustment will reduce our capital adequacy ratio by around 2,020 or 2,050 basis points and increasing NPL loan at-risk coverage to 250%, 275% and 63%, 67%, respectively. As you might recall, our ROE has been under pressure due to fixed asset revaluation on 2016 and 2019 that resulted in significantly higher equity base. The one-off IFRS 9 adjustment will net off some of this revaluation impact and bring our ROE to normalized level.

Given the country's GDP growth forecast being the same with last year, we are aiming loan growth a similar level like in 2019 at the highest -- high single-digit, with potential upside coming from the CapEx cycle if the government manage to issue policies and could boost investment appetite in the profit sector.

NIM and asset quality remain our top priorities. We expect a slight NIM contraction, up to 10 basis points year-on-year, due to lower benchmark rate. Asset quality should improve as a result of consistent implementation of better risk management practices since 2016. As the result, our cost operated guidance is lower, around 1.2%, 1.4% in 2020, and NPL around 2.1% to 2.3%. We are confident that Bank Mandiri is on track to deliver 16% to 18% ROE target in 2 years, driven by strong PPOP growth and a lower credit cost.

As one of the biggest bank in the country, with diversified shareholder base, Bank Mandiri consider ESG as a growing importance in our day-to-day operation. We are fully agree that being better in asset ESG aspect will bring us to long-term business sustainability. From time to time, we continue to learn best ESG practices among prominent companies worldwide and incorporate this into the policies.

In term of lending, we are gradually implementing sustainability banking practices in 4 priority sectors such as palm oil, energy, infrastructure and FMCG. For example, we encourage our palm oil borrowers to have ISPO certification. And for those who do not have it yet, we are helping them to work on it.

As an agent of development in the country, we are quite engaged with various CSR initiative such as helping communities living underdeveloped region to unlock their potential through education and practical entrepreneurship training. This also includes our initiative in financial inclusion for SME and micro businesses.

Human capital is the most valuable asset in the financial sector. We empower our human capital by creating working environment that promotes equal employment opportunity as well as continuous education and training.

Lastly, as a part of digital transformation, Bank Mandiri is taking proactive strategy on customer data integrating and data protection, which will be crucial for the customer trust on us.

I would like now to turn the presentation over to Pak Silvano of Director, Finance and Strategy.

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Silvano Winston Rumantir, PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director [4]

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Thank you, Pak Royke. Good morning, everyone.

In full year '19, our loans grew by 10.7%, as Pak Royke mentioned, year-on-year to IDR 908 trillion, supported by corporate loan and salary-based loan in micro banking. So those 2 are the main drivers. We want to highlight that our asset quality continued to improve since 2016 with NPL currently sitting at around 2.3% from 2.8% a year ago. Our end period CASA ratio increased to 65.3%, with CASA growing by 13.1% year-on-year.

Despite headwinds from lower rate environment and deposit competition, we still deliver 5.6% NIM, which is in line with our guidance. The 10 basis points NIM contraction was relatively better than our peers as our portfolio mix was shifting to higher-yielding products and we did not jump into deposit pricing competition.

Our cost-to-income ratio stood at 45.7%. If we were to exclude the one-off tax reserves mentioned earlier, our efficiency ratio would have been at 45% flat. We expect gradual improvements over the next 2 to 3 years as we are committed to improving our internal efficiency by doing a number of process automation and optimizing productivity of our employees and branches.

Our core PPOP grew solid by 6.4%. The difference between reported and core PPOP was due to one-off other nonrecurring income last year related to tax settlement and divestment gain of 2 subsidiaries.

And therefore, we are pleased to deliver a record earnings after tax of IDR 27.5 trillion in full year '19. This robust performance during the year was underpinned by solid core PPOP growth and asset -- continued asset quality improvement.

I'll turn now to Pak Darmawan, our Treasury Director, International Banking and Special Asset Management, for an update on our liquidity position.

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Darmawan Junaidi, PT Bank Mandiri (Persero) Tbk - Treasury, International Banking & Special Asset Management Director and Director [5]

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Thank you, Pak Silvano.

We manage our asset and liabilities management by referring to macro prudential intermediation ratio instead of only loan to funding ratio as it gives a more complete picture of how we are funding our entire earning assets using all available funding options, not only deposits but also wholesale funding. Our loan to funding ratio and macro prudential intermediation ratio increased to 94% due to strong growth in our loan book in fourth quarter. As wholesale banking is a big contributor to our loan book, it is normal to see quarterly cyclicality to -- due to chunky disbursement and repayment. Despite general perception of tight liquidity in the system, Bank Mandiri's liquidity position was very good with net stable funding ratio and liquidity coverage ratio at higher level. We maintain NSFR and -- at 117% and LCR at 178%, higher than regulator's requirement at 100%.

The bank's consolidated loan grew by 10.7% year-on-year, faster than bank-only loan growth at 10.2% year-on-year. We saw strongest growth coming from micro, 20% year-on-year. The micro loan growth was primarily driven by salary-based multipurpose loan, a low-risk product that represents 62% of micro portfolio. Meanwhile, SME and Consumer segment continued to show positive growth at 3.4% year-on-year and 7.9% year-on-year, respectively.

I'd like now to turn back the presentation to Pak Silvano.

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Silvano Winston Rumantir, PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director [6]

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Thank you, Pak Darmawan. I'll spend the next few minutes talking a little bit more about our cost control, capital structure, NIM, loan growth, asset quality and cost of credit. And later on, Pak Rico will talk a little bit about our e-channel update.

So on the cost side, as mentioned, we are reporting a net profit after tax of IDR 27.5 trillion for FY '19, which is around 10% growth year-on-year. So this is thanks to the continuous effort to shift our portfolio to segments with better risk-adjusted returns. And we managed to deliver NII growth of 8.8% year-on-year while at the same time lowering loan loss provision expense by 15% year-on-year.

In FY '19, we grew core noninterest income by 5%, with main contributors coming from subsidiaries, retail transaction through mobile banking and foreign exchange business.

Other noninterest income declined year-on-year due to nonrecurring income last year related to tax settlement and divestment gains of subsidiaries totaling to IDR 2.4 trillion, as mentioned before. With discipline in cost control, OpEx growth was quite manageable at 6.7% year-on-year.

A little bit about our CAR. We maintain -- we continue to maintain strong capital ratio at 21.4% as of December '19. Pak Royke earlier already mentioned the impact of IFRS 9 or PSAK 71. Our CAR is well above BI's minimum for our risk profile at 9% to 10%, as you know, plus the additional Basel III requirements. Our CET1 on a bank-only basis stood at 20.3% as of the end of last year. Year-on-year, our ROE has been flattish despite strong profit growth. This is due to the sizable fixed asset revaluation in Q3 '19 of IDR 4 trillion that will recur every 3 years.

A little bit about our NIM. As we anticipated, our Q4 bank-only NIM declined by 8 basis points quarter-on-quarter as we adjust both deposit and lending rate after Central Bank cut benchmark rate. Our cost of funds decreased marginally by 4 basis points quarter-on-quarter, and this is due to lower time deposit rate. On the asset side, blended asset yield decreased by 10 basis points quarter-on-quarter as we passed on lower cost of funds to our wholesale borrowers.

Now in terms of some of the drivers for our loan growth. Our micro banking grew by 20.1% last year, represented 16% of total bank-only loan. We actively pursue growth in salary-based loan growing 17.5% year-on-year, and this represents 62% of total micro loan. We believe through better collaboration with wholesale banking and government and institution group, we could grow the salary-based loan to 70% of total micro loan by the end of this year.

We also helped the government to channel subsidized micro loans, that grew by 45.5% year-on-year, and this is a profitable product from a risk-return perspective. The magnitude of contraction in productive micro loan is getting smaller. As you can see in the chart, so the bottom blocks, now at minus 5.1% year-on-year. The good thing on this product is that the NPL continues to improve from 2.8% in 2018, down to 2.3% last year.

Our consumer loans grew by almost 8% year-on-year, 7.9%. Mortgages increased by 2.8% with payroll customer and first homebuyers as our primary target market. Slow growth was affected by weak real estate industry sales last year primarily.

In credit cards, we have seen growth momentum continue to improve as we realign our strategy and implemented business process reengineering. So this is both for approval of new accounts as well as well as better risk management. So that's part of the business process engineering. And therefore, our credit card rose by 20.1% year-on-year with NPL at only 1.7%, well below industry average.

Auto loans booked through Bank Mandiri grew 9.6%. If we include auto financing in Bank Syariah Mandiri, our Syariah banking subsidiary, it grew even higher at 13%. Compared to September last year, auto loan growth was accelerating in Q4 as regulators lowered the down payment requirement to 10%. We, however, continue to manage asset quality as our main target market is fixed income earners.

I'd like now to turn to Pak Rico, our Director of Information Technology.

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

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Thank you, Pak Silvano.

Our e-channel transactions continue to show strong growth annually. This is reflecting the customer preference to use our banks for their transactional business.

On the retail side, our flagship channel, which is Mandiri Online, that has been launched since 2017, has been showing very -- is a -- showing very good improvement in terms of the adoption from our customers. The active user has been growing at 72% in transaction value as well as the transactions amount has been growing more than double. By 2020, we expect that the numbers of the transaction value of the mobile banking should more or less the same or even exit the ATM.

We keep improving our features and reliability of Mandiri Online. Now the -- in -- on top of the traditional inquiry, financial transaction, fund transfer, paying bills, we're also adding biometrics log in, for example, and we're also adding a top-up capability for our E-Money in iPhone. Hopefully, in the next 2 or 3 weeks, you'll see the new version of the iPhone that can -- you can use for top-up E-Money.

On talking about E-Money, we have 70% market share on the E-Money itself. This has been quite strong since we have been early players on this space.

I will now turn the presentation back to Pak Siddik, Director, Office Management, for the explanation.

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk - Director of Risk Management & Director [8]

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Thank you, Pak Rico.

Overall, our asset quality continued to improve as we guided at the beginning of this year. Our consolidated gross NPL ratio has decreased to around 2.3% compared to 2.8% as of December last year. SML or special mention loan has also improved, currently at about 4.6% of our total loans, primarily driven by our retail portfolio where our special mention ratio has decreased significantly from 4.2% to 3.7%.

Please note that the special mention loan increase in wholesale segment mostly came from one name, which is Krakatau Steel, as we did restructuring in third and fourth quarter, as we've guided before. Excluding Krakatau Steel, the wholesale special mention ratio should have declined from 5% to about 3.8%.

Our consolidated cost of credit show consistent improvement over time, over the years, across all segments from 1.8% in 2018 to 1.4% in 2019. We also saw notable improvement coming from commercial and SME segments, though some of the homework still needs to be done within commercial banking segment. Overall, we've been directing our loan mix into lower-risk segments or products where, since the 2016, the corporate, micro and consumer banking have been growing faster than the rest of the portfolio. We are consistently implementing our strategy to achieve our target cost of credit by design rather than by accident, what happened in the prior years. Within micro, for example, we're growing a lot more from the lower-risk salary-based loans with the credit cost of below 1%.

I'd like now to turn over the presentation back to Yohan for Q&A.

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

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Thank you, Pak Siddik and BoD members of Bank Mandiri. Now we are going to do Q&A session. As usual, we are going to take question from the room and then from the dial-in.

Operator, could you please queue question from the dial-in first?

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Questions and Answers

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Operator [1]

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Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions)

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

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Now we are going to take a question from the meeting room, please, anybody? Kevin and then Laurence and Stephan.

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Kevin Kwek, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [3]

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Congratulations. That was a decent set of results as you take over, Pak Royke. I have a number of questions. I'm going to have to detail them. The first one is on credit quality. I noticed the restructured loan is finally declining on an absolute number. Is that trend going to continue?

Second one on still credit quality will be target coverage. It declined slightly. I think in the new environment of IFRS, that's going to be okay, but I would like to know, if possible, what types of thinking and whether the target number is something that you are able to share and what would drive that?

Turning to growth. Loan growth was okay, I guess, under the circumstances, but I'd like to know from the management team, what does it take for loan growth to come back to 13% to 15% type levels, which are not anywhere close to the past growth before, especially given your -- our long history in commercial? Specifically in those segments that the bank has seen slowing growth, what are you looking for before it comes back? Is it a question of demand because other banks don't seem to be seeing that? There was an aim to be coming back to 0 growth, but it hasn't happened yet. Are there things that you're trying to put in place to see what comes back? I think that will be helpful and obviously a big contributor to recovery.

The third is on the fee side. I noticed that in most of the areas, the growth year-on-year were pretty small. Can you give us some views on why that is?

Then just to make sure everyone has its fair share to the new CFO, OpEx control, obviously very good. One thing we noticed, obviously, was the branches have slowed over the years. OpEx control is helping now. Should loan growth retain -- remain at low teens? What expense growth can we expect? Is there some degree of operating leverage here? And the degree by which you have been able to maintain that cost growth, what is helping that? And if there was any pressure, what are the top areas you think will be manageable in the environment? I think that pretty much gives everyone something to say.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [4]

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Okay. Our next question from Laurence, please? Microphone, please?

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Laurensius Teiseran, CIMB Research - Analyst [5]

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Thank you very much. Well, congrats for the decent results. This is Lau from CIMB, and I have 3 questions. First question is about your SME commercial book, which obviously has been strong. Since 2015, it was 40%. Now 20%, 25%. My question is that whether you will start to see some growth in both of these segments this year? And whether you -- and what would it take for you to be more aggressive on this particular segment?

The second question is on your strategy and actually increasing your micro mix from -- to 17% for 2020 from 15%, and you said that it will be mainly driven by the salary-based loans from 60% to 70%. Now one is that's good for your credit cost because that's a safe sort of segment. The second one is basically then why your NIM guidance seems to be somewhat quite conservative? Is it because you are seeing pressure coming from other segments such as corporate, for instance? And if so, then what would be the degree of the pressure?

My last question on the fee income, 2 points here. First one is on your subsidiaries' noninterest income. There seem to be quite a big jump there in the fourth quarter, doubled Q-on-Q and year-on-year. Can you explain about that? And the second one is on your general e-banking transaction-related fees, which I would translate to retail transaction, all that. It seems to be growing at mid to high single digits in the past couple of years, and whether we can in see some improvement coming from this side.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [6]

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And a question from Stephan.

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Stephan Hasjim, PT Indo Premier Securities, Research Division - Head of Research [7]

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Stephan from Indo Premier. A couple of questions. My first question is on the other expense in the fourth quarter, you include IDR 600-something billion for tax reserve. The question is, last year, you actually did some reversal on the tax, but this year, you make another reserve for the tax.

On the loan at risk, I see that the loan at risk is now 9.6% as of fourth quarter. Third quarter, I think it was around 11%. Post-IFRS 9, what's sort of like loan at risk level that we should expect?

And last one is on the loan growth. Why -- the loan growth actually picked up by 8% quarter-on-quarter basis. I see that your overall deposit, actually mostly driven by CASA. Time deposit actually was flat on a quarter-on-quarter basis, but the loan growth actually picked up quite significantly. Could you give us some color on the loan growth?

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Darmawan Junaidi, PT Bank Mandiri (Persero) Tbk - Treasury, International Banking & Special Asset Management Director and Director [8]

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Okay. Pak Rico. If I may, probably, I'll try to answer the risk-related questions. So I think, first, a question from Kevin on the restructuring volume trend. I think as of end of the year, we have portfolio is around IDR 58 trillion of restructured book. But actually, since quarter 3, if we were to exclude Krakatau Steel restructuring, which amounted to around IDR 8-point-something trillion. Actually, our restructured book would have been decreased by -- to a volume of around IDR 50 trillion. So we have consistently decreased the new restructuring volume in the last 3 quarters. But the only thing that we have to include now is the Krakatau Steel.

In first quarter, we actually have a pipeline of restructuring only around IDR 2 trillion, so -- and we have actually come our commercial and corporate book, again, in terms of the watch listing, classifying accounts into green, yellow and red all over again every quarter and exactly included in the pipelines for the next 4 to 5 quarters. Barring any force majeure, we should be able to maintain the trend of restructuring volume of lower going forward. So hopefully, the economy will continue to be -- to hold up. So yes, I think we are quite optimistic that we'll continue to maintain the trend going forward.

In terms of the target coverage. We still continue to analyze both -- post-IFRS 9, what would be the right amount of coverage, considering that in January, within this month, we will decide, subject to approval of our auditor and regulators, on the one-off adjustment because that will determine how much would be the final projection for cost of credit for the rest of the year and onwards post-IFRS 9, considering also the many significant improvement in credit underwriting strategy and processes that we've actually built up in the last 3 years. But at least at the minimum, we would like to maintain a coverage of the same or even higher post-IFRS 9, which is above -- north of 200% onwards.

But we've actually made changes to our business strategy, credit monitoring strategy to be implemented or have been implementing in the last 2 quarters in view of IFRS 9 because going forward, any downgrade of big corporate or commercial account or any restructuring will entail a much higher provision cost versus before. So as Pak Rico mentioned, we're probably looking at between IDR 21 trillion to IDR 25 trillion kind of ad hoc adjustment. And that number actually has been going down since July. I think previously in July or August, we've actually conveyed to you that we'd probably be around closer to 280 or 300 basis points. But now in the last 6 months, we have continued to fine tune or refine our various models that we use to generate the IFRS 9 calculation.

We've actually increased the amount of data that we use in developing the model to make sure that at least this is the right amount of provision, both for individual and collective approach for various segments of the book. So -- and that number, the onetime ad hoc adjustment, has been going down every month, and it's been presented to the management, reviewed by the auditors, reviewed by the regulator. So hopefully, it will be probably on the lower end of the 200-kind-of-the-10 or 15 basis points, but we want to make sure that at least this is the amount that is appropriate that going forward, it will be just a new addition to the downgrade or restructuring, if any, that we have to add.

I think the other one on the SME and Commercial segment, yes, we do plan to grow our SME-Commercial book this year. Commercial book actually has been having negative growth in the past 3 years. That was also by design, by decision because we needed time to actually consolidate, change our structure, change our folks to make sure that we have the right people at the right sector at the right provinces. And we've also significantly upgraded our end-to-end credit underwriting processes. So we're now quite confident that we now have a much more robust process.

I think the most important change which we did is the pipelining process. So every quarter, the business and the risk folks would sit down and go through the pipelines, the names, who they are, the business model and then whether this fits our appetite, et cetera. So once we have got approval from [business] and risk, then we can start approaching or acquiring these customers so we will know what are coming our way in terms of the new books and versus what we did in the past, which actually the RMs are free to get new accounts. And we are also fixing a number of accounts where in the past, we probably did a lot of over-finance. We actually are fixing one by one in last year to make sure that now we have the right match between business or sales versus the loan repayment. And those accounts that we have unsustained kind of portions have continued to go down.

So the same thing with SME. SME focus of growth will come from basically leveraging the value chains coming from corporate accounts and commercial accounts. We're working with excellent folks to actually installing a new credit engine model to be able to capture better or more effective the value chain coming from corporate and commercial client, but we will not go outside looking for new to bank from segment or target market whom we have no idea of who they are.

In terms of the strategy for our micro banking, yes, we are going to continue to penetrate our existing payroll accounts for personal loans. In fact, the penetration of the personal loans into our existing payroll of government segment is still quite low at around 15%, 16%. So we're hoping in the next few years, we'll continue to mine those existing payroll accounts and increase the penetration of personal loan to around 20%, 30%. So we would not go outside the box until we've actually exhausted the existing KSM. In the meantime, the remaining resources will be geared towards us supporting our KUR business, which has also been performing quite well with low cost of credit and low NPL. So all in all, that's how we plan to grow our micro business going forward.

Okay. Let's see what else. I think that's it from my side. Pak Silvano, maybe you want to cover some of the financials.

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

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Yes, I think Pak Royke want to share some thoughts on loan growth?

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Royke Tumilaar, PT Bank Mandiri (Persero) Tbk - President Director [10]

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To answer that question from Kevin that yes, in the past few years, we are fairly aggressive in lending, especially because during the commodity price is very high. And then what happened is the commercial lending is -- we have suffered from the commercial lending when the NPL is very high. So we learn from this point. Still, we are focused in growth in the corporate because corporate, especially in the -- corporate is very -- now they have a very strong risk management now. They're very good risk management. So we are still focused in growth in the corporate, and then we try to get the value chain of that client. So I don't think we're back to the -- we can get loan growth from 15% to 16%, it's like in the past few years. We are focused in asset quality compared the asset growth. Not the -- we are now is -- we are prioritize asset quality compared to the loan growth.

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Darmawan Junaidi, PT Bank Mandiri (Persero) Tbk - Treasury, International Banking & Special Asset Management Director and Director [11]

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I'd like to address the question related to the NIM. Actually, what the result on 2019. Of course, we've been impacted by the trend of declining benchmark rate, but we manage our liability side with some products of the third-party funding more aggressively declining instead of we join in the competition of other bank's strategy, but we keep maintain our wholesale banking clients who probably before not really focused. But now you can see from the CASA growth, especially on the current account, that's from our corporate banking and commercial banking. Also, the government institution clients, we have a very important growth on that. And also, impact of the lower benchmark rate. We're also lowering the yield of loan.

But if you see the pressure on NIM, the trend of declining of the yield of loan is higher than the deposit rate. That's why if you see from the growth of the third-party funding impact to the not really bigger turning down of the NIM because we manage the cost of fund also very good. And as targeted, probably we continue very aggressive on the cost of fund management by the -- some product offer. And also, we are not really aggressive on the yield of loan. So that's why it looks like the guidance of NIM 2020 probably still give some declining around 10 basis points.

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

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Thank you, Pak Darmawan. I'll try to address the remaining questions before we go into some questions from the phone. I think Kevin was asking about costs -- I'll wait for him to come back. Okay, he's back. So Kevin, I'm going to try to answer your question about cost. So it's 1.5 months into the job for me. And what is striking for me is our IT cost. Our IT cost at the moment stands at around 10% of bottom line, of profit, so at around IDR 2.5 trillion to IDR 2.7 trillion, and that has increased over the years. Now I don't think we are against spending, and I'm talking off-script here, I'm talking in terms of my personal observation. I don't think we are against spending.

But I think what we need to be more disciplined about is what is the impact and benefit from each of our -- each dollar that we spend. So there's 3 things that I'm going to focus on along with the other members of the Board. One is prioritization of our projects, particularly in IT. So I think we're going to focus on activities that actually contribute most for the bank. And it doesn't have to be cost savings. It can be more volume in transactions. It can be if we spend money and the benefit to the UX and UI for our customers is good, then that will translate into increase in business volume as well, right? So we're not against spending, but we want to prioritize what activities that we spend money on will contribute the most for the bank in a sustainable way.

Second, we're going to rationalize. So projects that are just a waste of our money, we're going to cancel them. So I've been very involved in our IT committees along with Pak Rico and other Board members, I think we want to be more disciplined in being a little bit more honest with ourselves and make sure that, first of all, is our IT architecture a good match to our business strategy. IT architecture should follow the business strategy, right? And I think at the moment, we are still refining that. And we have a lot of good projects that are ongoing, but we have some projects that we think we can live without as well. So I think being a bit more honest about rationalizing some of the projects.

Lastly, I think optimizing. So I think Pak Rico has been very tough with our vendors, looking at our licensing agreements, our vendor agreements. In IT, we have 3 types of projects, projects that are multi-years, projects that are new or projects that are delayed, right? All those impacts our spending, right? So I think if we focus on those 3 things, we hope that next time we meet, we can give you a bit more quantification as to how much cost savings or how much more business impact this refocus will bring.

Moving on to some of the other points, I think just about tax -- and fee-based income. You want to talk about fee-based income? Okay, please.

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Rico Usthavia Frans, PT Bank Mandiri (Persero) Tbk - Information Technology Director & Director [13]

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Just want to explain on this retail fee-based income a bit. On this is, if you look at the charts that I showed you earlier that Mandiri Online has been growing very fast. Last year, our ATM -- fee-based income from ATM has been dropped by 20% roughly because we implement ATM link, whereby we waive all the fund -- cash withdrawal from banks, Himbara banks. So e-banks, we didn't charge anything for cash withdrawal. Also for the fund transfer, usually, we charge for IDR 6,500, we charge only IDR 4,000. So that's impact the fee-based income on the ATM side, which dropped by 20%.

However, on the EDC side, we have been growing around 8% to 9% and prepaid e-money growing on 22%. And important -- more importantly, on the Internet banking and Mandiri Online, we have been growing fee-based income on 27%. So as the ATM fee-based incomes are dropping and stabilizing, we should see a more increase in terms of the growth, in terms of the retail fee-based income because the transactions now, fee-based income coming from the Mandiri Online Internet banking has been slightly above the ATM, so it's going to be -- the trends, I believe, will continue.

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Darmawan Junaidi, PT Bank Mandiri (Persero) Tbk - Treasury, International Banking & Special Asset Management Director and Director [14]

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Continue the fee-based income, especially on the subsidiaries. We can share that the improvement of performance from our BSM, Bank Mantap and also Mandiri Tunas Finance has a very, very good result. You can see the improvement on the asset quality and the growth of asset of Bank Syariah Mandiri also are very good. And you can see also from AXA Mandiri that contribute quite a significant amount of the fee base since now we have succeeded to [sifting] the business model from previously like more on the investment products instead of the insurance. Now we are bring AXA Mandiri to more over the insurance product instead of investment product. And also from the Mandiri Tunas Finance, we keep the good performance from MTF and also Bank Mantap. That's why if you see from the details of the subsidiaries' contribution, like a very significant contribution.

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Silvano Winston Rumantir, PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director [15]

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Okay. I think regarding tax, was it Stephan who was asking about tax. So as you can see from our numbers last year, we also did a tax provision. So I think it's a recurring activity where we are always audited, and there is a lag of 3 to 4 years from the tax office when they audit us, right? I think this is not unique to Bank Mandiri. If you talk to our main competitors, they also, as a recurring practice. The amount may differ, depending on their confidence of winning the appeal with tax office.

Just making sure we answer everything. I think coverage, I think, Kevin, you also asked about coverage. So just to reiterate and add to what Pak Royke mentioned at the beginning. So we will have and allow me, Pak Siddik, to mention a little bit about coverage. So IFRS 9, as you know, will allow us to make a one-off impact. And this will reflect in January 2020 numbers, monthly financial statement. So we expect that we will book an additional of 21 -- a range of IDR 21 trillion to IDR 25 trillion of additional provisioning against equity in our balance sheet. Now the impact to our CAR is a range of 220 to 250 basis points. So that will bring us down to a healthy or healthier level or still healthy level of just below 20%. So still very healthy.

Now there will be no impact to loan collectability, but it will increase our LAR provision to anywhere between 63% to 67%, and the NPL coverage will be around 2.5x. So 250%, if not more. So we -- as Pak Siddik alluded to earlier, I think there shouldn't be any material impact to the ongoing cost of credit. And anyway, credit cost is theoretically more procyclical, but the long-term average, we still aim at 1.2% over the cycles.

Yohan, have we answered everything?

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [16]

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I think, yes. Now let's take a question from the dial-in. We have 2 persons. Operator, please?

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Operator [17]

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Our first question comes from the line of Jayden Vantarakis from Macquarie.

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Jayden Vantarakis, Macquarie Research - Head of Research [18]

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Okay. Thank you very much for the presentation and detailed explanation so far, guys. I have a couple of questions. The first is just a follow-up up on the tax side. So I think last year, the government tax realization was quite low. So I can understand why they want to go through and audit corporates. But can you give some guidance as to what you think the probability of winning if there's any dispute about the tax claim? I know usually the processes you pay first and then you go and discuss with them later.

The second question is just on fee income. I think the focus to try to turn around particularly the wholesale fees is really good. I just want to understand when we should start to see that coming through the numbers. Obviously, the bank has got a good franchise. And when should we start to see some of the things like syndications and other corporate fees really starting to turn around?

And my third and final question is a bit more on the tech side. You talked a lot about reviewing projects. I heard a lot about external providers and procurement and vendors, et cetera. Can you give us some guidance as to how much of your technology comes from internal and how much of it is externally procured? And the reason why I ask is I note that some of the really successful banks with technology and generating a lot of retail fees, they have really strong internal teams. Maybe you could give us some guidance about what your capacity is to do stuff internally as well.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [19]

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And the second question, please. Operator, is there any second question? Okay. Let's select the time for our BoD to -- yes, please.

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Operator [20]

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The next question comes from the line of Gaurav Jangale of Fidelity.

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Gaurav Jangale;Fidelity International Ltd., [21]

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Two quick questions. One is, can you elaborate on the fee strategy going forward for the next 2 to 3 years?

And second is your view on NPL formation this year if the current weak macro trend persists.

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Silvano Winston Rumantir, PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director [22]

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I think NPL loan formation, if Pak Siddik can comment in a minute. And then Pak Rico, if you can comment on the mix of our internal and external IT. Let me address some of the other questions.

I think, Jayden, the first question about tax, I think we are reasonably confident, so pretty confident, not guaranteeing, but pretty confident. If you look at the precedent case in the past that we will win our tax appeal. And this practice is not, again, not unique to Mandiri. But just to be conservative, that's why typically we provision about 50%.

I think I can comment a bit more about fee-based income. As I previously shared with some of you, I think fee-based income should be one of the low-hanging fruits for Bank Mandiri going forward. I'll give you some statistics. If you look at our corporate loan book alone, that's around 40% of our bank-wide loan book. Our -- if you take the total fee-based income in corporate bank, it indicates that we are charging on average 75 basis points to our corporate clients. So that's 40% of the loan book, 75 basis points. That's everything, not just indication, it's up-front arranger fees, it's agency fees, administration fees, what have you. So that's 75 basis points.

We are the main lender to most of the top 25 corporate groups, the blue chip ones in Indonesia. Just to give you more statistics, out of our corp loan portfolio, only 20% have their employee payroll accounts with us, only 20%. Only 25% use us as their trade finance bank. And only about 40%, this is last year, only about 40% of our corporate client groups use us as their treasury bank. So that's FX, hedging, et cetera. So -- and we're not even talking about the other 60% of the loan book. So we feel that the 5% core noninterest income growth last year is a bit on the low side.

And I think one of the things that we are already trying to implement is incentivizing our wholesale bankers, so corporate, commercial and government institution bankers, to look at their clients as not just as a loan client, but as a bank client. I think it's time for us to turn the fact that we have the most complete products and services under one roof as a strength. I think for so long, it's been seen as a weakness that we are complete, and it's seen as a weakness. I think it needs to be understood that unlike some of our peer competitors, they do not have as complete suite of products and services as us.

Now it's easier said than done but I think just emphasizing what Pak Siddik and Pak Royke has mentioned earlier, I think the strategy for fee-based income will and should focus -- should and will focus within the wholesale client segment, so that corporate commercial and government institutions. And I think we are putting in place a simple tweak in our KPI mechanism to incentivize the wholesale bankers so that the weighting of their appraisals is not too skewed towards loan growth but more balanced between the fee-based income and the loan growth. So we just need to be more ruthless in asking for the cross-sell. I think Pak Siddik, if you want mention about NPL formation?

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk - Director of Risk Management & Director [23]

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Yes. Okay. I think before going to the numbers on the NPL formation, let me just probably give you a bit of our latest projections on some of the credit numbers for 2020 based on what we have actual December and what we plan to do for the rest of the year in 2020. I think on the NPL side, as per Pak Royke's guidance, we will probably be at around 2.1% to 2.3% by end of the year. And that improvement basically primarily will come from our retail segment today, at the end of December, the NPL retail segment, which from micro consumer banking all the way to SME, we actually achieved 1.45% as of December 2019, and we'll probably be around below 1.3%, 1.2% at the end of this year. So as Pak Silvano mentioned earlier, all the booking quality vintages across retail segment, including SME, has improved gradually in the last 3 years.

So we're quite confident we're going to deliver better quality of retail book in 2020. That said, because the retail book has been growing faster than the wholesale book. So in last year, the retail book grew 11.9%, and this year, the retail book will probably be growing closer to 13%, the downgrade to NPL will be slightly higher to around IDR 10 trillion, but that's not because of the quality of the book, but more of the size of the portfolio.

On the wholesale side, the formation of the new NPL or the downgrades last year, 2019, in total, is around IDR 6.5 trillion and primarily all of them or most of them come from commercial banking. This year, we'll be around IDR 8 trillion-something for wholesale, again, primarily from commercial banking. And all of this has been under the same projection as in the last few quarters. But if we continue to grow the commercial book at the quality that we've been actually generating in the last 3 years, the NPL will be below 9.4%, 9.3% at the end of the year. So the quality of the new books we are bringing in, in commercial banking has improved significantly, but we have to deal with the existing back book that actually we have to work through and we did a few years before our NPL continued to decrease to below 5% or 4%.

So -- but we are quite confident that with the improvement of the credit quality book in vintages across the book, from micro all the way to commercial and corporate, over the years, we'll continue to improve the credit quality into more a predictable, gradual improvement over the years with no surprises. So our -- the biggest job for us today is to make sure the big chunk that we have in our restructured book, the likes of Krakatau Steel, [PTP] and et cetera, we have to be able to find good solutions without creating too much, I guess, issues downwards. So I think on the big accounts, even Pak Royke himself and Bu Xandra are actually on top of it to make sure that we work with all the stakeholders or creditors to find the best possible solution so that at least this -- a few big accounts we'll have a soft lending in the next couple of months.

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Rico Usthavia Frans, PT Bank Mandiri (Persero) Tbk - Information Technology Director & Director [24]

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Thank you for the questions on the technology. So basically, historically, Bank Mandiri has been using vendor and has been relying on the vendors and our IT has been nicknamed as not IT manager but IT Vendor Manager. But now we take over -- in the past 3 years, we have been trying to take over the IT. If you look at 3 years ago, we only have less than 5% to 10% of developers. Right now, our developers has been around 37% to 40% of our 800 FTE. Another 35% to 37% are engineers. So they are not developers, but they're engineers, network engineers; they are hardware engineers. So we have -- and including the SOC, security operations center, as well.

So out of the 800, roughly 75% engineers and developers. If you look at our IT architecture, the back-end we use our core banking from (inaudible) so we don't have access to their source code, so we have been using their services for our core banking. However on the middle ware like the -- we use web method, we have growing our own in-house capabilities. Now we have around 40 to 50 engineers that has been working on our API portal, we are developing services. We're using RESTful method [and refitting]. So I don't want to talk about technically but basically, we are ready for open banking because we have been developing in-house API capabilities.

We also developed several COE, center of excellence. We have Pega COE, around 80 people that has been trained and has been developing our BPR for Pak Siddik, for example, for loan origination system. We use Pega workflow. We have -- we're working also with experience on programming the decision engine. So we also use our system as part of our tools local programming to develop our end-user computing. On the front end side, our [elastic] -- the Mandiri Online, in 2017, we 100% rely on our vendors to develop the Mandiri Online. This year, we are working on the native versions of Mandiri Online, and this is a joint development. Also parallelly, this year, we have been working with Accenture. And we are developing the next [questions], and we have been recruiting around 200 people. Some of the majority is still offsite, but we have sitting our people around 50 of our people there. By the end of the program, we should have 80% of those people will be acquired as our in-house developer.

So -- and we have been putting this in-house capability in practice as well. Last year, we have been experimenting on the gov tech. Our GTI government institutions has been complaining to IT because we have been very late in terms of responding to their needs and solutions. So what we have been doing is we're deploying around 15 people, developers, sit next to the government team. And whenever they come to the customers, they bring our team as well. So they understand what needs to be done. And in the next 1 month or so, they have been coming up with prototype and also the solution. So those kind of things has been happening in the past 3 years, and we are quite confident that we are building our enhanced capability, not on the back end, but more on the middle end -- middleware as well as the front end.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [25]

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Thank you, ladies and gentlemen, for asking a very constructive question. I understand that you might have a lot of questions, but we will try to address that in a private session as our BoD needs to proceed to the next event, which is public expos. This is the end of the session. Thank you, our Board of Directors, and thank you, everyone.

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Operator [26]

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Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.