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Edited Transcript of BMRI.JK earnings conference call or presentation 28-Oct-19 9:00am GMT

Q3 2019 Bank Mandiri (Persero) Tbk PT Earnings Call

Jakarta Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank Mandiri (Persero) Tbk PT earnings conference call or presentation Monday, October 28, 2019 at 9:00:00am 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 - Director of Treasury & International Banking and Director

* Panji Irawan

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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* Jayden Vantarakis

Macquarie Research - Head of Research

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Presentation

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Editor [1]

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This transcript is incomplete due to a portion of the audio being unavailable. The following summary is not a verbatim representation of this missing audio portion and has been provided by the Company.

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Unidentified Company Representative [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 get started:

1. 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 homepage of Bank Mandiri, at https://www.bankmandiri.co.id/web/ir or from within the webcast itself.

2. Second, in the interests 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.

Good afternoon ladies and gentleman, thank you for attending our Third Quarter 2019 earnings call today. As you might already know, Pak Tiko has received an opportunity to join new cabinet of Jokowi-Ma'aruf 2019-2024 as a Vice Minister of State Owned Enterprise. We are thrilled for him to take on this bigger role to transform SOEs into leaders in its respective fields and to better align various stakeholder interests.

During his leadership in the past 3.5 years, Bank Mandiri has been strengthening our fundamentals in various aspects, such as Risk Management, Information Technology, Human Capital, and Culture transformation. We are shifting our strategy by focusing on sustainable growth to create long term value for our shareholders. Our Return on Equity has been in upward trajectory supported by moderate loan growth and better asset quality.

As for Bank Mandiri, the CEO responsibility would automatically be handed over to Vice CEO as an acting CEO until the next Extraordinary General Shareholder Meeting or maximum 90 days. I would like to turn the presentation over to Pak Siddik to discuss latest development of the bank.

Bank Mandiri delivers record 9 months earning in 2019 with all time high PPOP and Net Profit. We selectively grow loan portfolio by 7.8% YoY mostly driven by salary based micro loan and subsidiaries such as Bank Syariah Mandiri. As the LDR in the banking system stays at an elevated level, banks are facing tradeoff between loan growth and Net Interest Margin. We are right now prioritizing NIM resiliency with 5.6% NIM. The small 8bps contraction in NIM is relatively better as compared to the industry. In the past three years we have been investing on IT and process automation. This starts to show positive results with operating expense growth well under controlled at only 5%, resulting in Cost-to-Income ratio improvement now at 43.8%.

We continue to see positive outlook for our business. However, facing a very dynamic environment globally and domestically, we need to be agile by fine-tuning some of current year target to reflect recent development in the operating environment. We revise ending balance loan growth by 2 ppt from 10-12% to 8-10% for 2019 as part of our strategy to continue focusing on sustainable bottom line growth.

At the same time, we also lower our Credit Cost guidance by 10bps to 1.5 to 1.7% as we have been seeing good progress in asset quality as a result of consistent implementation of better risk management practices since 2016. In the midterm, we expect high single digit loan growth, with potential upside coming from successful Government infrastructure development and capex cycle resuming.

Net Interest Margin and asset quality continue to be our priorities when facing trade off with loan growth. Bank Mandiri is on track to deliver 16-18% ROE target by 2021, driven by lower credit cost, and strong PPOP growth of around 10%.

In this opportunity, I would like to share some of our recent development in our business. We leverage on technology to boost our retail banking as well as low cost funding.

Beyond the conventional bank, we are also seeing a very good business momentum in our sharia subsidiary. Sharia is a growing trend in Indonesia, including among millennial generation and well educated people. Bank Syariah Mandiri's loan and CASA are growing much faster than in conventional banking industry. Aligned with Bank Mandiri strategy to focus on sustainable growth, Bank Syariah Mandiri growth also comes from their core competence in consumer and Hajj financing. We have seen strong inflow of retail deposit into sharia bank, so that our sharia bank has Cost of Fund of only 3.5%, which is among the lowest in the banking industry. Our sharia bank commands around 30% market share and delivers an attractive ROE of 16% supported by 22% Pre Provision Operating Profit growth and sharp improvement in asset quality. Now, Non Performing Financing ratio stands at 2.7%, 90 bps improvement YoY, and cost of credit is below 1%. We believe our subsidiaries, especially Bank Syariah Mandiri, will become our new growth engines.

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Editor [3]

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End company-provided text.

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

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capital in January 2020 of around 300 basis point, mostly from accounting technicalities, which is the very different methodology between PSAK 55 and IFRS 9 and basically accounting for stage 2 and stage 3, where in stage 3, we actually have close to 100% of probability of default. And then we actually incorporate the macroeconomic scenario assumptions in the individual calculation of the provisions. And there's also additional provision that we actually have to incur due to unused committed lines. So that will happen in January 2020. But with our capital adequacy ratio of around 22.5%, the 300 basis point is actually quite reasonable number for us to actually absorb.

Next page, please. So these are basically to summarize what we plan to do for each of the business segment for the rest of the year and even in the coming year in 2020. Corporate, we have 3 major industry sector we will continue to focus: infrastructure, FMCG and health care. And then we'll continue to also push for our noninterest income revenue segments and then working with the Commercial SME and Consumer to capture the remaining business potential along its steady chain. Micro salary-based loan, we want to continue to grow around 20% per year and maintain a low of cost of credit and NPL. Subsidiaries, I think we mentioned earlier about contribution increase from Bank Syariah Mandiri as well as from Bank Mantap. SME, focusing on value chain and transaction-based customer with the new credit engine, which we are piloting very soon. Growth will be around single-digit, high single-digit, 8% to 9%, probably on steady-state, and asset quality will continue to improve. Commercial will continue to only grow in good-quality segments, good-quality industries in various regions. We'll only grow maybe low single-digit in the next year, 4% to 5% max.

Consumer banking, we continue to increase our market share. We're now #2. We'll probably be closer to #1 following the BCA and be able to be a good challenger to BCA in the next few years. And we want to continue to focus on the lower-risk segment, which is the fixed income earners, focusing on our existing payroll customers, giving automotive loans to MTF and MUF on new passenger cars. And on mortgages, we will focus on first-time homebuyer and really end user who will actually occupy the house rather than speculate through investors.

Next page, please. We've also been getting questions or concerns from the markets on our inorganic growth activities as well as some concern on national services. I think what you've seen earlier part this year when we actually handled the due diligence on one of the midsized bank that every opportunity that comes along to us, we will actually look at it in a very disciplined way. And you are aware that Bank Mandiri, since inception in 1988, we've been doing a lot of joint venture and M&A activities resulting into our subsidiaries that today contribute significantly to our bottom line, and namely these are AXA Mandiri, Bank Mantap with Bank -- with Taspen, Bank Syariah Mandiri as well as Mandiri Tunas Finance and Mandiri Utama Finance with joint ventures. So any significant M&A activities that we want to do or may want to do in the future, we will be very transparent. We'll continue to communicate with you, the investors community, and we basically will take it seriously all feedback and input that we will get from you. And definitely, we have plenty of capital. We will evaluate any potential opportunities, but we will be very -- using disciplined approach in terms of reevaluating any potential opportunities.

Next slide, please. One of the, I guess, more exciting aspect that we have incorporated in our business is actually embedding the ESG aspect in what we do every day. That has -- we've actually been getting a rating of BBB from MSCI ESG rating. There are a number of activities that we've actually been doing in terms of lending activities. We focus on 4 industry sectors, which is CPO plantation, energy, infrastructure and FMCG. We have been putting together a very detailed action plan, which we have submitted to OJK. And one way for us is to make sure that we continue to help our borrower to obtain ISPO certification, and we've been making very good progress in the last 1 year. And then we also continue to be engaged in many community development activities where we do business, especially to include the initiative in financial inclusion for SME and micro businesses. In human capital, which is our most valuable asset in the financial sector, we continue to actually upgrade and create a working environment that promotes equal employment opportunity as well as continue to upgrade, educate and train our staff.

Lastly, on our digital transformation, we continue to take focused strategy on maintaining customer data integrity and data protection, and we will do it very diligently because we want to earn the customer trust.

Now I'd like to turn over the presentation to Pak Panji to discuss our financial performance in more details. Pak Panji, please.

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director [5]

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Thank you, Pak Siddik. I would like now to -- would like to show and echoing some more key consolidated financial highlights, which is on the slide, that Bank Mandiri's September 2019 performance continues to improve.

In September 2019, loans -- our loans grew by 7.8% year-on-year to IDR 842 trillion supported by salary-based loan in Micro Banking as well as our subsidiaries. Bank Mantap, which is growing -- which has grown by 33.6% year-on-year; Mandiri Tunas Finance, which has grew by 21.4% year-on-year; and Bank Syariah Mandiri grew by 13.16% year-on-year.

We want to highlight that our asset quality continued to improve since 2016, with NPL currently at 2.5% from 3% a year ago. Our end-of-period CASA ratio was stable at 63.7%, with 5.9% CASA growth and more aggressive growth in time deposits, which is 9.7% year-on-year growth. Net interest margin remains stable at -- in the previous quarter at 5.6%, in line with our guidance of 5.6% to 5.8%. Note that the lowest point for our net interest margin was on April. And since then, the net interest margin has been gradually recovering, along with continued loan repricing until mid of this year. Our cost-to-income ratio at 43.8% was well within our guidance of below 45%.

Operating expense growth was well controlled at only 5% year-on-year. We are committed to improving internal efficiency by doing a lot of process automation and effective management of human capital and network infrastructure. Core PPOP grew solid by 8.7%. We are pleased to deliver a record earning after tax, or EAT, of IDR 20.3 trillion in September 2019 despite challenging economic condition. The good September 2019 performance was underpinned by solid PPOP growth and asset quality improvement.

We manage our asset and liability management by looking from macro prudential intermediation ratio instead of only loan-to-funding ratio as it keeps a more complete picture of how we are funding our entire earning asset using all available funding options, not only deposit but also wholesale funding. Our loan-to-funding ratio and micro prudential intermediation ratio gradually eased to 90% and 92%, respectively, due to strong growth in demand deposit and conservative loan growth strategy.

Despite of general perception of tight liquidity in the system, Bank Mandiri's liquidity position was still good with net stable funding ratio and liquidity coverage ratio at a high level. We maintained net stable funding ratio at 121% and liquidity coverage ratio at 173%, higher than regulator's requirement at 100%.

The bank's consolidated loan grew by 7.8% year-on-year, faster than bank-only loan growth at 6.3% year-on-year. We saw strongest growth came from Micro and subsidiaries. The Micro loan growth was mostly coming from salary-based, multi-purpose loan, a low-risk product that contributed to 60% of Micro portfolio. Meanwhile, SME and Consumer segment continues to show positive growth at 4.6% year-on-year and 4.1% year-on-year, respectively.

Year-on-year Commercial segment was still contracting by 3% as part of our bank-wide strategy to improve risk management standards. However, on quarterly basis, the segment started to grow again by 4%.

Despite of transition to lower-risk portfolio, we managed to deliver net interest income growth at 8.9% year-on-year. We -- net premium income from insurance subsidiaries was because of increase in claims reserve on first quarter 2019 due to lower bond yield. But position was fully hedged with unrealized gain in bond portfolio.

In second quarter 2019, the net premium income was already back to a more normalized level. We have the biggest noninterest income among Indonesia's bank, both in term of nominal amount and contribution to total income. At this level, growth is more challenging, especially from contents in our services such as admin fee. Therefore, we work hard to grow noninterest income from new channels such as mobile banking as well as from our costing as the wholesale bank grew more sophisticated treasury solution products. In September 2019, we grew core noninterest income by 5.7% year-on-year.

Noninterest income from bond trading in third quarter recovered significantly due to favorable market condition. We expect this situation will continue until year-end, with expectation of lower bond yield. Other noninterest income declined by 3% year-on-year due to a one-off income from tax case settlement last year amounting to IDR 0.7 trillion. Excluding these, our total noninterest income and core PPOP should have grown by 8.7% year-on-year.

With disciplined cost control, OpEx growth was quite manageable at 5% year-on-year. As we guided, provisioning expense continued to improve, decreasing by 6% year-on-year, translating to credit cost of 1.65% as compared to 1.94% a year ago. This happened despite more provision on certain accounts like Krakatau and Duniatex in third quarter 2019. Bottom line, our net profit after tax grew by 12% year-on-year.

Ladies and gentlemen, our quarterly bank-only net interest margin at 5.48% in third quarter 2019 was stable Q-on-Q.

Cost of fund marginally decreased in third quarter due to lower special rate term deposit following benchmark rate cut on asset side. Blended rupiah loan yields slightly increased by 20 basis point quarter-on-quarter to 10.3% due to strong growth in higher-yield segment such as Micro Banking. On monthly basis, the lowest NIM this year was on April. Since then, NIM has been gradually recovering.

Our Micro Banking grew by 19.4% year-on-year and represented 16% of total bank-only loan. We actively pursue growth in salary-based loan, growing by 19% year-on-year, representing 62.3% total Micro loan. We believe through better collaboration with wholesale banking and government and institutional group, we could grow the salary-based loan to 70% of total Micro loan by 2020. We also have the government to channel subsidized Micro loan that grew by 34.8% year-on-year. This is a profitable product from risk return perspective. The magnitude of contraction in productive Micro loan is getting smaller, now at minus 1.1% year-on-year as compared to 2.5% contraction in the previous quarter.

So ladies and gentlemen, overall, our asset quality continue to improve as we guided at the beginning of this year. Our consolidated gross NPL ratio improved to 2.5% from 3% year-on-year. Despite of lower credit costs, we continue to prudently build our NPL coverage to 152%. Special mention loan is currently at 4.7% of total loan, a slight increase quarter-on-quarter came from Duniatex Group, as we already expected. We want to highlight that special mention ratio in retail segment continued to improve, now at 4.2% as compared to 4.8% in previous quarter and previous year.

I would now like to turn the presentation back to Yohan to coordinate the question-and-answer session.

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

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Thank you, Pak Panji. So now we are going to go to the Q&A session. Let me explain again. So we have our 5 Board of Directors members here. We have Director of Risk Management, Director of Finance, Director of Retail Banking, Director of Treasury and Director of Distribution. So we are going to take a question from the room first, and then we take room -- questions from the dial-in.

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

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Questions and Answers

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Operator [1]

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(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 take 3 question from the room. Please, Jayden, [Joven] and Joshua.

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Jayden Vantarakis, Macquarie Research - Head of Research [3]

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A couple of questions from me. Firstly, the more of a strategic one with the Board change. How persistent is this strategy? Obviously, the bank's been executing on a strategy over the last 3 years. There hasn't been any Commercial loan growth. I think the market's like that. But someone in Indonesia has to lend to commercial debtors. How much movement can there be in the strategy? And how persistent is it in your view? Other banks that have had management changes have had very persistent strategies. So...

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Darmawan Junaidi, PT Bank Mandiri (Persero) Tbk - Director of Treasury & International Banking and Director [4]

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Okay. Back to Joshua question. Related to the rate cuts, the applied rate for decreasing on the time deposit -- I mean, not only time deposit but all the third-party funding, only decreasing by 12 basis points. So it's very hard to adjust the liability side because still asking for higher rates. But on the asset side, we are already adjusted because we more reference rate plus margin methods. So I think this is automatically reduced the loan yield.

And the other question related to DBS and Bank Syariah Mandiri Capital, I don't think we have targeted condition to have IPO. But we -- now more on the reins a good storyline for Bank Syariah Mandiri because so far, we have good track of the business progress. And I think once we decide that this is the time for BSM to IPO, I think it's not -- depends on how much the capital that we targeted for them. Yes.

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director [5]

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Okay. Thanks, Pak DJ. So now I'll cover the rest of the question. First on the business strategy question from Jayden. Now business strategy is not cast in stone. So we used to have a 5-year cycle of corporate plan, which we think now is probably 5 years too long because things are moving very fast. So we'll continue to actively review our corporate plan on an annual basis. Today, we are also in the process, as part of the planning for 2020, to also review the entire business strategy again for 2020 and onwards with the flexibility for us to make changes in the next 6 or 9 months. For example, maybe 6, 9 months ago, we were very optimistic to be able to grow in probably double-digit in mortgages and auto loans. But the reality is in the last 9 months, the actual sales of auto and real estate has actually gone down. So we have actually to shift to other sources or asset business segment to actually cover from the shortfall that actually, we cannot deliver on the mortgages or on auto loans because of the market environment because we're not willing to go down-market, for example. Hence, we accelerated the SME transformation to actually accelerate how fast can we actually deliver the new pilot schemes or the new credit engine to cover some of it. Same thing with commercial banking. Now we actually have put a lot of gas on the pedal because we've already made all the changes to be able to deliver close to 4% to 5% growth for next year.

Corporate Banking, last year, we actually grew faster than this year, and we want to continue to grow faster but only in selected segments. And we have actually reviewed our subsidiaries, and we said, "Okay. Bank Mantap, you've been able to deliver a very resilient asset quality and profitability. What can we do to actually grow more aggressively?" The same thing with Bank Syariah Mandiri. We actually are reviewing the business segments so that they focus more on the retail consumer side versus a corporate side to actually deliver double-digit growth for the next 12 months. So we do review the business strategy to make sure that we are, again, review -- growing in the right segment with the right balance between risk and return.

On the restructuring question from [Joven], yes, as of end of quarter, we now have IDR 60 trillion of restructured book versus around IDR 54 trillion in the last quarter. And the increases actually came from Krakatau Steel, IDR 6.6 trillion restructuring, which we did in August. Without Krakatau Steel, I think the new restructuring volume during the quarter is between IDR 250 billion to IDR 300 billion.

Questions on IFRS 9. Actually, the -- this year, we still follow the old accounting method. So until end of the year, as Pak Joshua mentioned earlier, why would we still guide to 1.5% to 1.7%? Because that's the accounting method that which we have to follow, and we're actually being audited by EY and OJK to make sure that we don't actually prepone the implementation of IFRS 9. And as an example, in IFRS 9, we actually have to implement a lifetime expected losses starting in stage 2. In stage 3, we have up to 100% probability of default already. And then we also have to incorporate the worst-case scenario under macroeconomic assumptions, which may vary from bank to bank. So I think, today, OJK still allow for each of the bank to come up with their own 3 scenarios of macro economic factors to be applied on the individual basis, mainly on wholesale. So some bank may elect to be a bit conservative. Some bank to be have more optimistic macroeconomic scenario, which will impact on how the IFRS 9 provision will come up in January 2020.

And also, the mix of the portfolio from one bank to another may vary. So to compare one bank of X 100 basis point to another bank of X 100 basis point, may require a deeper analysis because if my portfolio has a bigger mix of corporate and commercial versus another bank that has more retail book, the total impact of IFRS 9 may be different. But I think another angle, which we also have to take into account that a bigger portion of the portfolio may have a longer tenor or unused committed line, which we now have to provide under IFRS 9. Going forward, all this business strategy will gradually have to be changed to make sure that we optimize the provision strategy under IFRS 9.

The question on how much coverage on loan at risk post January 2020 from Joven . Today, we have around 50% provision coverage on loan at risk. So post January 2020, we will have around 90% coverage of loan at risk and provisioning. Yes. So I think that's probably about it for IFRS 9. Okay. Yohan?

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

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Next, we take a question from the dial-in. Please, operator.

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Operator [7]

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(Operator Instructions) We do not have any questions at the moment from the audio line. I would like to hand the call back to (inaudible).

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [8]

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Okay. Now we take question from the room again, if there are any more questions from the room. No? Quite clear. Okay. Okay, there are 2 question from the webcast.

Okay. A question from the webcast from Salman Ali. He asked about how much provision for Krakatau and Duniatex in quarter 3. And what is our load exposure to Krakatau and Duniatex as well as the coverage now?

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk - Director of Risk Management & Director [9]

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Okay. So on Krakatau Steal, so as of September, we provisioned around 26% of the total and outstanding, and then we will add 4 more percent. So by end of the year, we'll have around 30% of the total cash exposure covered.

And then to -- in IFRS 9, when we actually look at various scenarios, we probably plan to add additional 25%. So at the end, Krakatau Steel, once we implement IFRS 9, we'll have 55% coverage. And basically, this will be enough to cover the entire [trans-C] as we have actually to incorporate the worst-case scenario in provisioning under IFRS 9. So these are the trans-C where the outcome or the loan payoff will have to wait for the next 5 years when the corporate action involving Inalum and the majority shareholder will have to happen. So there are a lot of uncertainties in the resolution of trans-C . And as such, we will be adding under IFRS 9 to cover the majority of the amount in trans-C .

For the total exposure, Pak Panji just mentioned to me, including the noncash flow, it's around IDR 9.4 trillion, right, Pak Panji? Okay, thank you. So Duniatex, I think Duniatex today is still influx because of the (inaudible) proceeding that we are actually involved. So our legal team actually is making sure that our interests are actually put forward, and we will probably also be installing our representative in the -- under the proceeding as well.

So in terms of provisioning, as of September, we have put in 15% of the total exposure. We will add, between now and December, up to 25%, yes? And then we'll probably look at it closer to end of the year on the outcome of the (inaudible) before we finalize what we want to put in, in January 2020. So today, we have very short-term vision because it still depends on the outcome on the (inaudible) between now and December. Okay?

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [10]

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Thank you, Pak Siddik. Since there is no more question from the dial-in and from the room, so we conclude our presentation for Q3 and listen until here. Thank you, our Board of Directors; and thank you, ladies and gentlemen. If you have any further question, feel free to e-mail ir@bankmandiri.co.id.

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Operator [11]

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Thank you. This concludes the conference for today. Thank you for your participation. You may all disconnect your lines now. Thank you.