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Edited Transcript of BMRI.JK earnings conference call or presentation 28-Jan-19 10:00am GMT

Full Year 2018 Bank Mandiri (Persero) Tbk PT Earnings Call

Jakarta Feb 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank Mandiri (Persero) Tbk PT earnings conference call or presentation Monday, January 28, 2019 at 10:00:00am 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

* Donsuwan Simatupang

PT Bank Mandiri (Persero) Tbk - Director of Retail Banking & Director

* Hery Gunardi

PT Bank Mandiri (Persero) Tbk - Director of Small Business & Network and Director

* Kartika Wirjoatmodjo

PT Bank Mandiri (Persero) Tbk - President Director

* Panji Irawan

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

* Yohan Y. Setio

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

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Conference Call Participants

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* Joshua Tanja

UBS Investment Bank, Research Division - MD, Head of Indonesia Research, Head of Indonesia Equity and Bank Analyst

* Jovent Giovanny

CIMB Research - Analyst

* Kevin Kwek

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

* Raymond Kosasih

Deutsche Bank AG, Research Division - Research Analyst

* Salman Ali

Citigroup Inc, Research Division - Head of Research for Indonesia and Director

* Suria Dharma

PT Samuel Sekuritas Indonesia Tbk., Research Division - Head of Equity Research, Strategy, Banking and Consumer Staple

* Wei Yi Kuang

Goldman Sachs Group Inc., Research Division - Executive Director

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the PT Bank Mandiri (Persero) Tbk 2017 -- Fourth Quarter Results 2018. (Operator Instructions) I must advise, this conference is being recorded today, the 28th of January 2019.

I would now like to hand the conference over to your speaker for today, Mr. Yohan Setio. 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 get started.

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 or 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 Tiko, our President Director, to begin the meeting.

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Kartika Wirjoatmodjo, PT Bank Mandiri (Persero) Tbk - President Director [3]

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Thank you, Yohan. We appreciate you all for joining us today for a discussion of our full year 2018 financial results and the bank's recent operating performance.

I would like to spend the opening section of this earning call to discuss what we have done in the past 3 years since I was in charge of this bank before moving to our review on macroeconomy and the operating performance update.

From a financial perspective, we almost doubled our net profit, supported by 24% loan growth and 32% decline in loan loss provision over the past 3 years. Thanks to a successful risk management transformation, all of this have [developed] our ROE and ROA to 14.4% and 2.1%, respectively. As a result of risk management, which drive our loan composition to a much lower risk portfolio, our asset quality is becoming more resilient toward potential volatility from external factors.

Credit cash now is already below 2% and should be moving lower to our aspiration of around 1.2% to 1.5% within 2 years' time. At the same time, we keep being prudent by gradually building up our NPL coverage ratio currently to achieve 143%.

Putting asset quality back on track, Mandiri management team is now spending a lot of effort to shift our business from a more conventional model to a digital banking model. One of the most visible result is our Mandiri Online platform, which have currently 1.9 million active users within 2 years and still have a lot of room to further grow. However, our digitalization initiative is way more than what you currently could see.

In addition to IT capacity upgrade, we are strengthening our middleware by building AP architecture to enable us to capture tremendous growth in Indonesia e-commerce sectors. We will launch several major digitalization projects this year, which will keep us ahead of the competition, and we will try to attach our product to ecosystem that is already prevailing.

Definition of our company, last year, we also relaunched our new Mandiri culture, which we believe will bring our employees to be more collaborative and dynamic in order to deliver sustainable, healthy growth.

Let me update you a little bit now on the macro challenges in 2019. Global economic growth in 2019, estimated to decelerate, especially in large economies such as U.S. and China. This might delay or reduce the magnitude of rate hike in the U.S., which will bring positive impact to emerging markets, including Indonesia where we start to see more stable currency and stronger stock market performance year-to-date.

Lower oil price is another tailwind in Indonesia [current account] deficit, exchange rate and inflation. We estimate current account deficit to improve from 3.1% in 2018 to 2.8% this year, while inflation will remain under control below 4% in 2019.

Backed by expectation on benign inflation and stable currency, our economists believe that Indonesia will be less aggressive in increasing the stock rate of only one rate hike this year. All of these factors, combined with BI continued support, will result in less liquidity pressure this year compared to 2018.

On the other hand, we keep closely monitoring risk from coal and palm oil prices, which started to show recurring trends since Q4 last year. We believe that this time, we are relatively more resilient from the impact of commodity price as we have been strengthening our portfolio management since 2016.

To reiterate our corporate plan initiative, we want to be Indonesia's best [and ASEAN] prominent bank in 2020. In order to achieve this, we will certify our position as the #1 corporate bank in Indonesia. We keep leveraging our relationship with our corporate clients to capture business opportunity along their value chain. Supervise infrastructure, FMCG, health care, manning oil and gas are in our [priorities].

We identify that Consumer and Micro segments are our key growth drivers. We will employ bank and book products that leverage our strength in wholesale to expand our retail distribution on the payroll segments.

On the Consumer side, we will focus on mortgages and automotive. This year, we are going to penetrate into younger segment of mortgage by launching a product called Millennial Mortgage as well as into low-cost housing where we could tap both the buyer side through mortgage and contractor side through SME loan. We believe this initiative will result in higher mortgage growth in 2019 with slightly lower risk profile.

Our Micro loans will grow through a focus on low-risk, salary-based loan. This is a very profitable product, yet with high barrier to entry, as the key to win the segment is by having the biggest payroll account base. Now Mandiri is an SOE bank as well as the biggest also in Indonesia, so naturally, we have competitive advantage to win payroll account both from civil service front and private sector employee, including SOE corporations.

To achieve our 2020 target, the management has been focusing on strengthening the fundamental in the past 2 years, mainly on risk management and IT capabilities. We have several digital banking initiatives this year. One of the most important one is on payment where there will be a new product launching using dynamic [user] technology as well as cooperation with other SOEs.

To tap in the fast-growing e-commerce sector, we're exploring several collaborative, such as building API tool in our business both in funding and lending side to e-commerce players, providing financing to merchants as well as distributing our retail product to e-commerce platform.

If we implement the adjustment to our corporate plan, we expect some changes to the asset and liability mix. By 2020, we expect retail banking to contribute at least 27% of our portfolio. And we will focus mostly on the mass-affluent and fixed-income earners, utilizing the bank strategy and also penetrating the SME segment and also Micro segment on the production side in a much more controlled way.

As a result of strong retail growth of the segment consisting of Corporate and Commercial segment, we'll shrink from [66%] to around 63% of total portfolio. Within also the segment, as you have been noticing, our [recipe for that] is more toward corporate merger segment rather than towards commercial or middle corporate segments.

In 2018, we continue to deliver strong result. Asset quality continue to improve with NPL ratio down by 71 basis points year-on-year and 26 basis points quarter-on-quarter. This came as a result of consistent implementation of better risk management practices. Despite operational commodity price downturn, we are still optimistic that our asset quality will not be impacted as bad as we have on 2016, as we have been gradually reducing our exposure to high-risk commodity companies and also high-risk middle commercial or middle corporate segment.

As a result of our portfolio strategy, our ROE continue to improve by 1.5 percentage point to 14.4%, thanks to 11.5% PPOP growth and much lower credit cost. We expect this trend to continue in the next couple of years. Despite a big shift in our loan composition towards low-risk portfolio, which resulted in a much lower credit cost, we are able to maintain our net interest margin contraction limited to 9 basis points year-on-year. As compared to other major bank, our NIM compression was quite small last year. This was partly attributed to our strategy in asset liability management where we were less aggressive in time deposit and focusing more on sustainable CASA funding.

Last year, we implemented a new method in asset liability management where we focus on using daily average as a key performance metric instead of ending balance. We understand that this change in management focus will result in temporary weak year-on-year growth of third-party fund, particularly on CASA ending balance of 2018. However, we believe this will bring greater benefit for our subsequent performance as average balance is more relevant and accurate picture of our business performance and more efficient to be used to control our NIM projection.

As we mentioned previously, our third-party fund ending balance growth looked weak on year-on-year basis. However, if we do use daily average, the funding growth rate was still good at 7.2%, consisting of 10 -- to 10% CASA growth and 3% time deposit growth.

We changed the business unit focus to put more emphasis on average balances of remaining balance and focusing more on stable funding, such as from trading segment and from payroll segment. This will help us to focus our asset liability management process on winning a more sustained funding from time to time. As you can see on left-hand chart, the daily average loan balance also grew healthily by 11.3% year-on-year.

I would now like to turn the presentation over to Pak Panji, Director of Finance, to discuss our financials in greater detail. Pak Panji?

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance Director & Director [4]

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Thank you, Pak Tiko. Financially, our consolidated numbers continue to show improvements. Our loan growth in Q4 continued to be strong at 12.4% year-on-year, driven by Corporate and Micro segment.

We want to highlight that our asset quality continue to improve since 2016, with NPL currently at 2.75% from 3.5% a year ago. Our end-of-period CASA ratio declined by 2 percentage point as a temporary consequence of changes in our ALM strategy, as Pak Tiko explained before.

Despite our general perception on tight market liquidity, we managed to deliver 5.74% NIM, slightly higher than our guidance of 5.5% to 5.7%. Our NIM was only marginally lower by 9 basis point from 2017 level, mainly due to portfolio mix adjustment to lower risk segments. We managed to deliver better cost-to-income ratio at 44.4%, within our guidance of below 45%, and 1 percentage point lower than last year.

We are committed to improving internal efficiency by doing a lot of process automation and effective management of human capital. Finally, our earning after tax increased by 21% to IDR 25 trillion, primarily due to Mandiri PPOP growth and lower credit cost.

The bank's consolidated loan grew by 12.4% year-on-year, with the strongest growth came from Corporate, Micro and subsidiaries. The Micro loan growth was mostly coming from salary-based multipurpose loan, a low-risk product that contributed more than 60% of our Micro portfolio. On the other hand, as part of our bank-wide strategy, Commercial and SME segments were contracting year-on-year from a combination of tightened underwriting standard, improved target market selection and write-off of bad loan.

We continue to maintain a strong balance sheet that provides room for growth. Year-on-year, our loans grew by 12.4%, faster than the growth of our deposit at 3.1%. This translated to a higher LDR of 97.06% from 89.25% a year ago.

On non-loan-earning asset, we optimized our yield by shifting from lower-yielding intra-bank asset into marketable securities, bonds and loans. Our equity stands at IDR 185 trillion, and this remains the highest level of capital in Indonesia. We continue to prudently managing our capital by paying a special dividend while maintaining a strong capital adequacy ratio of 21%.

Our LDR increased to 97.1%, driven by foreign exchange LDR at 114%, while rupiah LDR was stable at only 92%. Internally, LDR is not our main liquidity parameter as there are other sources of funds which are not captured in the LDR calculation, such as securities issued and wholesale bilateral funding facility.

Despite of general perception of tight market liquidity in the system, Bank Mandiri's liquidity position was still good with excess liquidity of more than USD 2 billion, a number that has been stable for years.

Other important indicators in liquidity management include net stable funding ratio, or NSFR, and liquidity coverage ratio. We maintain NSFR at 117% and liquidity coverage ratio at 180%, higher than regulator's requirement at 100%.

We also want to highlight that we partially funded our loan growth in 2018 using other low-yielding asset such as placement at other banks. This strategy was another reason why we intentionally increased our LDR last year.

In fourth quarter 2018, we disbursed loan of IDR 174 trillion, bank-only. New loan disbursement were dominated by Corporate segment at IDR 122 trillion. The Consumer and Micro segment together disbursed IDR 22 trillion. The Commercial and SME segments together disbursed IDR 31 trillion, representing a decrease of 7% year-on-year. Note that the disbursement in Commercial and SME segments are closely being monitored and targeted to the value chain of our corporate clients, a target market that we perceive has lower-risk profile.

Despite of transition to lower-risk portfolio, we managed to deliver net interest income growth at 4.9% year-on-year. Our noninterest income increased by 21% year-on-year to IDR 28.4 trillion, mainly supported by these 3: foreign exchange business, subsidiaries and cash recovery. With disciplined cost control, OpEx growth was quite manageable at 7.6% year-on-year, resulting in a healthy 11.5% PPOP growth.

As we guided, provisioning expense continued to improve, decreasing by 11% year-on-year, translating to credit cost of 1.87% in full year 2018 as compared to 2.3% in 2017. Modest PPOP growth, combined with lower credit cost, pushed our net income to IDR 25 trillion, an increase of 21% year-on-year.

Our total noninterest income grew by 20.6% year-on-year to IDR 28.4 trillion, with core fee income growth at 11.6% year-on-year. Main contributors to core fee income growth came from cash recoveries that grew by 36% year-on-year and subsidiaries that grew by 16% year-on-year. Admin fees declined by 2.4% year-on-year due to lower loan admin fee as we are focusing on less number of borrowers in SME but with higher profitability.

Despite of ATM consolidation and MPG implementation on debit cards, our transfer and retail transaction fee managed to grow by 4% year-on-year due to strong growth in fee income from Mandiri Online, our digital banking platform. In total, our fee income represented 33.2% of our total operating income.

Our cost-to-income ratio in full year 2018 was 44.4% consolidated and 41.6%, bank-only; 119 basis point improvement year-on-year. We have been able to control G&A expense, such as occupancy-related expenses of our physical network, increased by only 2.4% year-on-year as our expense and strategy relies more on digital banking initiatives.

On personnel expense, we also maintained the number of employees so that personnel expense only increased by 10% year-on-year, roughly in line with minimum wage adjustments stipulated by the government. Overall total OpEx grew by 7.6% year-on-year.

We continue to maintain a strong capital ratio at 21% as of December 2018. Our CAR is well above Bank Indonesia minimum for our risk profile at 9% to 10% plus additional Basel III requirements. Our common equity Tier 1 and Tier 1 CAR on a bank-only basis stand at 19.8% at December 2018. The bank's consolidated ROE continue to rebound due to lower cost of credit as well as higher dividend payout.

I would now like to turn the presentation over to Pak Darmawan, Director of Treasury and International Banking.

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

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Thank you, Pak Panji. Our fourth quarter 2018 bank-only NIM was stable throughout the year at 5.5%, with a slight increase in cost of fund being mitigated by earning asset yield increase.

Our asset yield remain elevated in Q4, thanks to higher bond and loan yield as we gradually reprice our loan portfolio. Despite of the anticipated challenging market liquidity, we managed to maintain our cost of fund relatively under control with a marginal 10 basis points increase quarter-on-quarter.

Our corporate loan book continued to grow, supported by oil and gas, road and bridge construction, and retail trading. These 3 sectors together contributed 55% of corporate loan book expansion of IDR 64.5 trillion in the past 1 year. On the other hand, our commercial portfolio booked a net contraction of IDR 13.2 trillion year-on-year, with the biggest contraction coming from the trade distribution, raw material manufacturing and chemical manufacturing.

Next, I would like to update you on the progress of our wholesale transaction banking initiatives. This is 1 of the 3 main pillars of our strategy. The number of transactions through our cash management services continues to grow rapidly. We rolled out our cash management platform in 2010. And as of December 2018, we had more than 25,000 users, representing a 17% year-on-year increase.

The bank completed 183 million cash management transactions in 2018, an increase of 52% year-on-year. This is a good leading indicator that more customers are actively using our cash management to do their day-to-day transactions.

We continue to focus on deepening the relationship with our customers, enhancing the capabilities of our cash management infrastructures, both in terms of reliability of processing as well as customizing it to cater to focused sectors.

I would now like to turn the presentation over to Pak Hery, Director of Small Business and Network, to discuss our retail business and transactions in greater detail. Pak Hery, please?

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Hery Gunardi, PT Bank Mandiri (Persero) Tbk - Director of Small Business & Network and Director [6]

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Thank you, Pak Darmawan. First of all, you would like to see the chart on the back. Our deposit franchise are about to maintain a stable retail deposit base with little CASA ratio at 70.6% as compared with 70.2% last year.

On the right-hand graph, our rupiah saving deposit and rupiah demand deposit average yield is 1.1% and 2.1% across the total portfolio. [Reach] on our saving account remain relatively flat year-on-year.

As part of changes in asset liability management strategy for the bank, basically we're focusing more into daily average funding. We want to pursue more aggressively on less volatile funding. For savings account, we increased the depositors' diversification by shifting deposit compositions mixed into lower-tier deposits, which usually is less demanding in term of pricing as well as less volatile in term of fund flow the half year.

Rupiah time deposit rate at 5.7% in quarter 4 '18 increased by 20 basis point quarter-on-quarter, a level that is below the industry average for time deposit and less sensitive to changes in Central Bank benchmark grid.

We also increased rate on FX demand deposit and time deposit to match FX loan demand in quarter 4 2018. Overall, our third-party funding base is growing healthy. In addition to that, we also actively used the other sources of funding, including bond issuance and collateral loan from regional bank.

So ladies and gentlemen, I would like also to elaborate. So you see on the deposit sides, we see that our deposit growth is quite low last year, 3.1%, so even lower compared to the industry growth. So I would like to convey you, we realize that fight for funding is inevitable in a rising rate environment. Meanwhile, the bank need to maintain their growth performance.

This is where the risk of having unsustainable funding comes into play. We realize that significant persons or funding fall into the unsustainable category, in which the deposit would only stay for a very short period of time and at the end of the month. Therefore, starting last year, we decided to aim for healthy funding growth by not putting the ending balance as our primary metric anymore, but we put our concern more in the average balance for the KPI for our branches.

We are confident, by strengthen our transaction banking and providing a reliable and secure digital transaction platform, we would have more sustainable growth and more efficient in term of interest expense.

We also would like to assure you that at this low growth, we have prepared a number of wholesale funding alternatives, both for short-term and also long-term need. We actively used our government bond and repo transaction as well as collateral for long-term borrowing. Last year, we also issued senior bond of IDR 3 trillion to cover our funding need for the next 5 years. In addition to that, as part of our recovery plan, we also issued a subordinate MTN of IDR 500 billion to strengthen our capital base.

So now I would like to turn the presentation to Pak Donsuwan, Director of Retail, to continue to explain the Retail Business and also transaction in greater detail. Pak Don, please?

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Donsuwan Simatupang, PT Bank Mandiri (Persero) Tbk - Director of Retail Banking & Director [7]

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Thank you, Pak Hery. Consistent with our strategy to grow retail book faster, the total retail portfolio of SME, Micro and Consumer loans now accounts for about 34.3% of the bank's loan portfolio. The biggest driver for Retail Banking growth came from Micro loans, which increased by 23% year-on-year, mostly coming from our Micro loans fixed-income earners and attractive segment from a risk-return basis.

The second-highest growth in Retail Banking segment was consumer loans, growing by almost 11.6% year-on-year, driven by strong growth in auto loan. SME loans contracted by 7.7% year-on-year as we have been focusing on asset quality by being more selective in targeting customer segment by existing CASA customer and value chain of Corporate clients. If we use daily average balance, SME loans are stable at 0.1% year-on-year. Note that, however, we already have been -- seen the bottom of our SME loan in first quarter this year. And since then, the outstanding loan gradually recovered every quarter.

Our Micro Banking grew by 23% year-on-year and represented 14% of total loan. We actively pursued growth in salary-based loan, growing by 32% year-on-year, representing 60% of total Micro loan. We believe through better collaboration with wholesale banking and government and institution groups, we could grow the salary-based loan to 70% of total Micro loan by 2020. We also have the government to generally subsidize Micro loan that grew by 32% year-on-year. This is a profitable product from risk-return perspective.

As a result of our assessment of the risk-return characteristic of our products, the productive Micro loans was contracting by 10% year-on-year. We are still fine-tuning the best way to prudently grow this particular product.

Our Consumer loans grew by 11.6% year-on-year. Mortgage loan grew above the industry, increased by 10.4% year-on-year, with payroll customer and first homebuyer as our primary target market. This year, we will enter a new target market, which are millennial customer and low-cost subsidized housing.

In credit card, we have seen the growth starting to improve as we realign our strategy and implemented business process reengineering, rising by 11.9% year-on-year.

Through Mandiri Tunas Finance and Mandiri Utama Finance, we are able to grow our vehicle loans significantly, while maintaining asset quality. Total auto loan finance book in Mandiri is now IDR 31.6 trillion, growing by 18% year-on-year.

As part of our digital transformation, we focus on the reliability to drive operational efficiency in the long run. At the front end, we continuously enhanced Mandiri Online's stability, our platform for customer interface. Since its launching, Mandiri Online has been very well accepted by our depositor, as shown by the number of active user that grew exponentially, reaching 1.9 million active user, with average of IDR 31 trillion transaction value per month in 2018.

We still see ample room for growth in term of the number of active users as we have close to 24 million deposit customer in total. We keep improving features and reliability of Mandiri Online where the user could easily view their deposit on loan data, paying bills to more than 1,000 institution and even do top-up for E-Money, our flagship prepaid card.

Our prepaid card also saw significant progress with menus' case to pay for road and parking. Right now, there are 17 million cards outstanding with IDR 1.1 trillion transaction value per month in 2018, bringing us to control almost 80% market share in prepaid card segment in Indonesia. This is a good indicator that customer are actively using our prepaid cards to do their day-to-day transactions and activities.

We are committed to maintain our leadership in digital banking space in Indonesia to deliver the most value to our clients. Our e-channel transaction continue to grow strong growth annually, reflecting customers' preference to use our bank for their transactional business.

Last year, we strengthened our retail transaction banking capabilities by launching our new app called Mandiri Online, which is an improvement to our existing Mandiri mobile application. The users of our mobile and Internet banking continue to grow. As we can see on the right-hand graph, currently, we have over 8 million mobile banking subscribers and 2.4 million Internet banking users. The transaction value conducted here via our mobile banking platform also saw strong growth at 59% year-on-year, much higher than the growth in ATM transaction at 3% year-on-year.

So I would like to turn the presentation back to Pak Siddik.

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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 Donsuwan. We have been doing transformation of many parts of the fundamentals of the risk management processes, from front end to back end to enhancements in our credit policies, business processes, internal controls and tight supervisions. We'd like to highlight that the credit risk analytics has been playing a crucial role in our initiatives, mainly to the more effective portfolio management and disciplined monitoring.

Our wholesale portfolio guideline defines which industry sectors that we want to overweight or underweight in our portfolio across business segment and across regions. This guideline is regularly updated twice a year by incorporating various input from various experts, including our chief of economists, various analysts within the Mandiri Sekuritas as well as discussion with various subject matter expert from industry sector associations.

For retail segments, we leverage on our capability in advanced statistical analysis to dynamically adjust our risk acceptance criteria and processes across business segment, customer segments, products in order to produce better quality booking vintages moving forward.

Just as important as the underwriting itself, the disciplined monitoring is essential to achieve better asset quality on a sustainable basis. We have created an effective early warning system, especially for the wholesale business, and then we actually do very elaborate monthly portfolio monitoring processes as well as quarterly stress testing process to enable us to take corrective action on identified accounts that may be of higher risk or vulnerable in the near future.

From all the aforementioned processes improvement that we've made, we've delivered strategic improvement in 2018 where NPL and credit cost has declined gradually over time, and we've actually made significant progress in various aspects on our credit management process.

The mix or composition of lower-risk borrowers has significantly increased in various products. In mortgages, for example, the primary mortgages product, mix has risen from 38% to 55%; while in SME, about 91% of the new disbursement came from lower-risk customer segments. As we have already clearly defined a lower-risk target market, we're actually able to accelerate the underwriting processes by using auto approval workflow where we actually, in the last 2 years, made improvement in our retail end-to-end underwriting processes using more advanced technologies.

The overall asset quality continue to improve, we guided at the beginning of the year. Our consolidated gross NPL ratio improved -- or lowered to 2.8% from 3% in the prior quarter and from 3.5% in December 2017. Despite the lower credit costs, we continue to prudently build our provision, our NPL coverage to around 143%. Bank-only, our provision coverage remained high at 147%.

The special mention loan has also showed a marked improvement in the fourth quarter. SML ratio in December 2018 was 4.0% versus 4.5% in September 2018, with most of the segment contributed to the quarter-on-quarter improvements.

The bank-only NPL at the end of December 2018 stood at IDR 20 trillion, implying a bank-only NPL ratio of 2.8%. Upgrades to performing loans totaled IDR 630 billion, while write-offs accounted for IDR 2.3 trillion during the quarter. Downgrades to NPL were IDR 2.7 trillion, out of which 75% came from Commercial Banking and Micro Banking segments.

Almost all of the NPL formation in the wholesale segment were already expected or projected earlier, so there was no significant or surprise downgrades so far this year. The fourth quarter write-offs were primarily from the Commercial Banking and Micro Banking segment, which represented 70% of the total write-offs.

Our consolidated cost of credit show consistent improvement from 4.0% in 2016 to around 2.3% in 2017 and 1.9% in 2018. In 2018, the improvement in cost of credit mainly came from retail and the structured loan, which is managed by our special asset management team.

Cost of credit in Commercial Banking was slightly higher year-on-year as we increased NPL coverage for the segment. However, the NPL level and NPL formation in Commercial Banking segment continue to show decrease in quarter 4, 2018. At subsidiaries' level, our Syariah bank has been delivering lower cost of credit as well as, at the same time, increasing their NPL coverage from 70.3% in 2017 to 99.1% in 2018.

Overall, we've been directing our loan mix into lower-risk segments where from 2016, 2018, Corporate, Micro Banking and Consumer Banking asset products grew faster than the rest of the portfolio. We will be consistently implementing our strategy to achieve our target cost of credit gradually by design. Within Micro, for example, we're growing more from a lower-risk salary-based loan and KUR loan with cost of credit of less than 1.5%.

Our restructured loan book ratio has been stable quarter-on-quarter at 7.4% of the total loan. While the total loan, collectively, the profile has gradually shifted to better profiles. Even though more and more restructured loan has been performing, it will take some time for the total restructured loan balance to show a meaningful decline as the regulator has been conservative in requiring banks not to remove the restructuring flag until the loans are fully repaid.

On the right-hand side of the slide is the [recidivism] ratio. That is an indicator of our restructured book quality. We've been able to maintain this ratio at low level since last year consistently, which means that the restructuring program that we've done actually works to actually help resolve the temporary problem that our clients have.

Another indicator of improvement in risk management is reflected by improvement in recovery ratio. Year-on-year, that stood at 39% in 2018. We gradually shifted collateral requirement from inventory and working capital towards fixed asset as well as increasing the quality requirement of the respective fixed-asset collateral. And this shows also the good performance that the Special Asset Management team has been doing in the last few years in actually getting our money back from the bad credits.

Loan at risk decreased by 120 basis points from 10.9% in 2017 to 9.7% in 2018, contributed mostly from lower restructured loan and NPL ratio. We'd like to highlight that NPL formation improved in all segments in 2018, with total formation of 1.1% of loan as compared to 1.3% in 2017.

I would like now to turn over the presentation back to our CFO, Pak Panji, to discuss our subsidiaries as well as 2018 guidance. Pak Panji?

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance Director & Director [9]

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Thank you, Pak Siddik. Ladies and gentlemen, Bank Syariah Mandiri continues to be the dominant bank in the Syariah segment.

In the fourth quarter of 2018, total financing of Bank Syariah Mandiri increased to IDR 67.8 trillion or grew by 11.6% year-on-year. We are starting to see positive results from our transformation of Bank Syariah Mandiri with the nonperforming financing ratio declining to 3.3% from 4.5% a year ago.

In 2018, Bank Syariah Mandiri finally increased NPL coverage ratio from 70% to 100%, which is a level we deem sufficient for an asset-based lending bank like Bank Syariah Mandiri. Hence, trade cost in 2019 should be normalized by too much lower level compared to 2018.

Mandiri Sekuritas supports our corporate -- support our corporate clients with investment banking and capital market services. Mandiri Sekuritas underwriting volume triple year-on-year, while earning volume grew by 10.2% year-on-year. Mandiri Sekuritas is among the largest equity trading firm by volume in Indonesia, with a 5% market share.

AXA-Mandiri Financial Services has developed a wide range of bancassurance product to cross-sell across our customer segments. AXA-Mandiri has been the most ROE-accretive subsidiary with 47% ROE on 2018.

Bank Mantap, or Mandiri Taspen, is part of Bank Mandiri's plan to develop the pension lending segment. Bank Mantap has been growing its loan book by 48% year-on-year with 0.6% NPL, delivering net income growth of 109% year-on-year. Even though its relatively short history, Bank Mantap already show a 20.4% return on equity on 2018.

Mandiri Tunas Finance has emerged to be a significant player in auto financing, with total outstanding loans of IDR 43.5 trillion, growing by 18% year-on-year with 21% annualized ROE.

Overall, we deliver our 2018 guidance in term of loan growth and efficiency ratio. Positive surprise came from asset quality and NIM, where the ratio was slightly better than our guidance.

For 2019, we expect loan growth in the range of 10% to 12%, as GDP growth will be roughly similar with 2018 level. In terms of loan composition, we still expect retail to continue become key growth driver. Commercial and SME segment should rebound to positive territory around 5% level, while corporate growth should normalize to around 10% to 15%.

We are conservatively estimating net interest margin in the range of 5.6% to 5.8%. An increase in cost of fund is expected as overall system LDR is high. However, as major banks are not overly aggressive in growing their loan book, the pressure should be relatively manageable.

On lending side, we are optimizing our blended loan yield, as loan repricing is still ongoing and portfolio mix is shifting toward higher-yielding segment. In the short term, we are committed to maintain cost-to-income ratio below 45%. Our investment in IT should deliver positive growth in operating leverage in the next couple of years.

We continue to see our customer activities are shifting from branch and ATM to our mobile banking platform. Asset quality has been consistently improving, and we expect nonperforming loan ratio to go lower between 2.5% to 2.7%, with credit cost in the range of 1.6% to 1.8% not only from the parent company but also from our subsidiaries such as Syariah Bank.

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 [10]

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Thank you, Pak Panji. For the Q&A session, we will first take question from participant in this room, and then we're going to take question from the participant in the dial-in.

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

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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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Thank you. Any question from the room? Please, Salman, Jovent and the one at the corner, please?

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Salman Ali, Citigroup Inc, Research Division - Head of Research for Indonesia and Director [3]

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Salman from Citi. I have 4 questions. My first question was that you bring only net interest income growth is only 3.7%, which is probably the lowest among the big banks. So when we look at your guidance in 2019 in terms of loan growth and net interest margin, what sort of net interest income growth you are looking at? Because last year, your asset growth was only 6%. My second question is on the asset quality, that if I look at the downgrade in value terms have gone down from about IDR 15.5 trillion to IDR 14 trillion this year. So have we touched the bottom in terms of the downgrade in value terms? My third question is in your other income, this has been very volatile this year. I think you had a tax write-back in Q2 and then you decided to take some provision in Q3. So can you share some light on your other income? It was IDR 2.7 trillion in the fourth quarter. Does this have any element of tax? And my final question is the hard one, but I will rephrase it in another way. That for your 2019 budget, how much have you allocated in terms of capital injection in your subsidiaries? And how much have you allocated for potential acquisition?

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

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Next question from Jovent, please.

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Jovent Giovanny, CIMB Research - Analyst [5]

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Jovent from CIMB. I have 2 question. My first question is on the LDR. What will be the target LDR for 2019? If I see the FX LDR, it's pretty high. The current account FX actually dropped significantly. Well, I suppose it was due to three-part withdrawal at the end of December, but it was being offset by the FX time deposit. As a result, the FX time deposit rate went up from 0.5% to 1.8%. What will be the strategy on the FX side for the 2019? My second question is on the capital adequacy ratio. As we know that you continue to grow in corporate. And obviously, Corporate segment is, I think, is the capital addition but capital adequacy actually dropped from 21.6% to 21%. Can you give us some color on that?

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

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The last question from [Rafun].

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Suria Dharma, PT Samuel Sekuritas Indonesia Tbk., Research Division - Head of Equity Research, Strategy, Banking and Consumer Staple [7]

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Again, Suria from Samuel. I must say the number is a lot of improvement from Mandiri. However, I want to ask you about the commercial bank NPL. The number is fairly -- still fairly high at IDR 15 trillion. Can you share with us about the -- your strategy about the -- this NPL? And what is your projection of -- in 2019 for the commercial bank -- commercial loan?

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Kartika Wirjoatmodjo, PT Bank Mandiri (Persero) Tbk - President Director [8]

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Okay. Let me give a more broader comment, and then I will ask each of the respective board to respond for a bit detail. First, on the -- sorry, on the first question from Salman is...

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Unidentified Company Representative, [9]

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NII. Growth (inaudible)

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Kartika Wirjoatmodjo, PT Bank Mandiri (Persero) Tbk - President Director [10]

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For NII. NII, okay. So basically, if we look into 2018, it was a tough year for us to manage the growth of our NII, particularly because at that time, we have to basically shift the portfolio quite dramatically on the corporate side. And we have to defend the yield at the time, so therefore, the impact is the NIIs actually grow but quite low. And the drive to grow in corporate because a lot of them are actually driven by structural disbursement is also happening at Q4. So put on the average side and on the yield side actually come a bit less in the [portfolio] for NII. So in 2019, our plan is actually to grow in a much more wide base, so we will start to grow for several SME and also productive micro from early this year. So if we achieve, for example, 11% year-on-year, the average growth from first quarter is already higher. So you remember, last year, until third quarter, our growth is still below 10% and then it's jumped to 12.4% in year-end. So with more even growth from early quarter and also shifting towards slightly higher-yielding segment, our expectation is that NII growth, even if the credit growth is the same or slightly lower than this year, total NII growth will be higher than last year. So my expectation, NII growth will be around, if we are lucky, will be around 8% to 9%. But if things are getting tough, probably between 7% to 8%, so something between 7% and 9% NII growth. So that, hopefully, is a double compared to this year NII growth and hopefully can also contribute significantly to our PPOP growth next year. On the cost of funds, that probably is going to be a bit more challenging. I think I continue to often question on the dollar part. Yes, we actually experiencing quite significant withdrawal in ForEx side. So therefore, the strategy for 2019 is actually to have also balance from the corporate issuance, so we plan to have either corporate bond or global MTN issuance to actually fulfill some of the gap. But we also would like to make it more flexible because we now notice that since there is a reversal in capital inflow in the past couple of months, particularly this past one month, it seems like there's also a possibility that the local ForEx deposit is actually improving. So we will file for probably around IDR 1 billion to IDR 2 billion, how do you call it, (foreign language) so good news. But I think we will execute IDR 500 million first just to understand what is the dynamic. And of course, to mitigate the impact to NIM, we also would like to increase the -- let me greet our ForEx customer in a more aggressive way. Actually, we already started in the first of January to actually push more increase in our lending rates for our corporate customer. Luckily, in ForEx, there's not too much option, so we have more -- we're getting power to actually improving our lending rate in corporate customers. On question number 2 from Salman, I will ask Pak Siddik to answer. And then other income, I'll let Pak Panji. And for question number 4 for Salman, I think for us, as you know, we have a quite significant capital adequacy ratio at 20%, 21%, whereas our loan target is around 16.5% to 17%. So we have around 3% to 4% excess capital, which we, if we translated that into a nominal amount, will be around IDR 30 trillion to IDR 40 trillion. That's probably things that you see in paper recently, that there is a statement from me that's saying that we have around IDR 30 trillion to IDR 40 trillion excess capital that we can use or deploy to actually do acquisition if there is a significant target that's actually improving our ROE capability. I think there's always a balance between having a increase in our dividend payout ratio. We have input from all of you that we need to actually pop up again our DBO. So we will think about it, whether we're actually balancing it also with increasing dividend payout ratio this year. That is something that we discuss with the ministry. But I think, in terms of opportunity, of course, first, because we don't have to raise fund to write issue if we do an acquisition, then basically, acquisition should be an ROE-accretive process because there's no new issuance that we need to do. Second, of course, when we look into target acquisition, we will look into opportunity for collaboration in term of synergy, especially to actually reduce cost structure. I think the cost structure is important part because I think there Is a lot of room for us to actually reduce cost structure with our scale right now. And the challenge for us actually to grow faster in organic growth is because the liquidity. As you know, we cannot grow to a level of 20%, 25% as we saw in 2011, 2013 because liquidity is just not there. We grow at that level because our fund will be too high. So therefore, we are weighing the pros and cons between growing organically or nonorganically. So nonorganically, I think we will look into, first, complementary business that enable us to actually build certain commercial segment, for example, SME, value chain and so on and so forth; and secondly, to do a substantial cost-efficiency. But it is, to the length that I can explain on that part, but I think there is no particular things that we could discuss -- disclose today yet. Please, Pak Siddik.

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

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Okay. I think the first question's on the -- what we see as a projection for downgrades in 2019. I think bank-wide, in 2018, we closed the total downgrades of around IDR 17 trillion. And then we actually project this year total downgrade around IDR 15.6 trillion, so there will be a decrease from IDR 17.3 trillion 2018 to

(technical difficulty)

Around IDR 5.7 trillion and retail about IDR 9.9 trillion. So wholesale is actually reduction from IDR 7.3 trillion in -- IDR 7.4 trillion in 2018 to around IDR 5.6 trillion, IDR 5.7 trillion in 2019. Retail is flat '18 to '19. Primarily, we have also grown our retail book. And then we actually -- basically, everything is based on automated. Anything that goes into 90 days past due will be actually downgraded to NPL and vice versa. And for commercial itself, I think the downgrade will decrease from around IDR 7.5 trillion in 2018 to around IDR 5.1 trillion in 2019. So we still have a number of accounts we actually are projecting to be downgraded for the rest of the year. We've identified all the accounts. We've taken or we're taking many of the actions to actually save, but some of these we may not be achievable so we projected it for downgrades. In terms of the NPL for commercial banking, so NPL amount, we closed the year to around IDR 15 trillion in 2018. We probably come up slightly lower at around IDR 14.6 trillion at end of 2019. So the downgrade itself, there is a marked decrease. But the upgrades, I think, for the rest of the account that has been in NPL, from IDR 2 trillion or from IDR 1.5 trillion will be around IDR 1 trillion, so we're projecting a conservative amount of down -- upgrades for 2019.

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Kartika Wirjoatmodjo, PT Bank Mandiri (Persero) Tbk - President Director [12]

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A bit on -- just to add color also to answer your question. I think, in commercial, we'll have around IDR 30 trillion -- sort of like what's this year, in which from the IDR 30 trillion, we already mentioned I think a couple of times that around IDR 6 trillion to IDR 7 trillion is the one which is under what we call the [CRM], notice that we have to do -- revise, actually. So this is something that -- that's why if you look into our guidance on our CoC, cost of credit, we never actually -- projecting a very steep downward trend in our CoC. So our CoC is going to be more downward declining trend because we also still digesting the around IDR 6 trillion to IDR 7 trillion commercial. And this is not like definitely becoming an NPL because some of commercial can still occur in the process of doing restructuring. So this is something that's still becoming a difference in where we project our CoC and where we actually achieve it, it can be better or can be worse. But I think, if you look into our profile in what's listed in commercial 3 years ago, this is much, much better. So the rest, IDR 6 trillion to IDR 7 trillion, I think we can manage until 2020. And after that, we will do a more aggressive restructuring and write-off. Right now, one of the reason why there are still a lot of those commercial under NPL, not write-off, is because we are currently doing a restructuring process. And we also do a lot of asset selling, acquisition to actually acquire -- look for somebody to acquire the existing customer who are not doing well, and so on and so forth. So there's a lot of initiative in commercial. I think the general trend is in a good direction. But I think it will take us another 2 years to before we can really push out all this, basically, portfolio that happened in 2014/'15.

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk - Director of Risk Management & Director [13]

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I think one more question, Pak Tiko. (foreign language)

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Kartika Wirjoatmodjo, PT Bank Mandiri (Persero) Tbk - President Director [14]

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Yes, CAR. (foreign language)

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk - Director of Risk Management & Director [15]

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Yes. So basically, the slightly lowering of the CAR is driven by the increase of the risk-weighted assets from credit, yes, and from IDR 626 trillion to around IDR 677 trillion. And because the growth in Corporate Banking is actually faster or higher than the other segment for Corporate Banking, we actually use a standardized approach, so the risk weight is around 50% versus, let's say, mortgages, the risk weight is around 35% max, so that's the reason.

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance Director & Director [16]

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About the other incomes, we have the other income gain coming from the selling of our CAR on the MAGI, Mandiri General Insurance (sic) [Mandiri AXA General Insurance], so we are enjoying IDR 142 billion, that's the gain -- the capital gain. And also, we have capital gain when we sell the Bank Mantap share, it is to IDR 304 billion. We sell the Mantap share from 59.44% to be 51.08%, so it is around 8.30% that we sell. And then that's also providing us with a capital gain. The other thing is the gains coming from the Supreme Court that we won the tax claim, the IDR 1.75 trillion. So totaling is IDR 1.75 trillion because the tax gain is IDR 1.3 trillion, so that's it.

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Unidentified Company Representative, [17]

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I want to add information related to Jovent question, LDR projection around 2019. We actually give the guidance to grow by around USD 10 billion in FX liabilities. We'll be around 102% to 103% LDR on the FX. But we try to have the details planned to have lower LDR on the FX, around 94%, by -- have the additional around 9 to -- sorry, 1% to 2% extra additional over the target of the FX fund target 2019. So for the total, around 90% to 93% of the LDR will be the guidance for 2019.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [18]

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

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Operator [19]

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(Operator Instructions) We have the first question from the line of Melissa Kuang.

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Wei Yi Kuang, Goldman Sachs Group Inc., Research Division - Executive Director [20]

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I just wanted to ask in terms of the excess capital that you say you could apply for M&A. Does it take into consideration the IFRS 9 hit that you will get? Because I do remember you did mention that there could be a 1% to 2% hit in terms of CAR for that? And then secondly, in terms of your write-offs. I guess now we should be at peak in terms of write-off. How much are we going to expect your write-off to fall next -- this year?

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Kartika Wirjoatmodjo, PT Bank Mandiri (Persero) Tbk - President Director [21]

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Pak Siddik, yes, for impact of IFRS and also write-offs.

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk - Director of Risk Management & Director [22]

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Yes. I think the impact of IFRS 9, it's ranging between 50 to 100 basis point and we've taken into account with any possible or potential capital allocation for growth or M&A or other purposes. And we actually plan to do parallel run for IFRS 9 in June. I think we're on -- well on our way between June and July to do parallel run. And we'll do a full-blast implementation in January of 2020, so that should be fine in terms of the capital allocation purposes. The question on the write-offs, the write-offs for 2018 total bank is around IDR 13.2 trillion. And I think, based on our projection of 2019, we're projecting around IDR 9 trillion, so there'll be a IDR 4 trillion reduction 2018 versus 2019. And the write-off is basically primarily driven by retail. Retail segment is around IDR 6.1 trillion. And then, again, commercial banking will be around IDR 2.8 trillion.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [23]

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Operator, is there any next question from the dial-in?

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Operator [24]

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Yes, sir. We have the next question from the line of Kevin Kwek.

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Kevin Kwek, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [25]

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Two questions. One is on the expense growth. Would you be expecting the same single-digit -- mid- to high single digits for 2019 and beyond? And secondly, around the fee side. Could you give some idea of what you expect for 2019?

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Kartika Wirjoatmodjo, PT Bank Mandiri (Persero) Tbk - President Director [26]

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Let me respond to the first one, yes. I think in the medium term, we should expect we are going to a more like mid-single-digit range for our OpEx growth. The last 2 years and also probably next year, we will still having a lot of refurbishment in term our IT infrastructure, so we allocate quite significant CapEx, almost IDR 150 million a year in 2017/'18 and also for this year. That will implicate to our depreciation cost will creep a little bit. But having said that, we also, at the same time, basically helping our branch growth, also LTM and EDC growth, yes, so that actually is likely balancing out the impact. But in the medium term, the plan for us is actually to start reducing the manpower because, right now, in 2018, we start to have zero growth because the number of people who have voluntary retirement is actually matching the number of people who we hire. And with the growth that we reduce in term of new branches and operations, we hope that starting 2019, we will start to have negative growth in term of our total manpower. So once the depreciation growth start to subside and our manpower growth start to show negative growth, then we will start to see a more serious decline in our OpEx growth, which hopefully will start to kick in 2021 onwards. So that, hopefully, we will have a better outlook. And we hope to push our CAR target in the next 2 years to around 40% to 43% because as a result of those action. And bear in mind also, our cost efficiency ratio for 2018 is also impacted by fast growth in distribution for 2 of our newly established subsidiaries, which is Bank Mantap and MUF. If you look into our cost efficiency ratio for bank-only, it's actually 41%. So the 41% to 44% is actually the impact of significant growth in our branch presence and people, equipment in -- particularly in Bank Mantap and MUF. Second question on fees. I think, generally, I think we tend to guide around 10% to 15%. For the core fees growth, I think 10% to 12% is more realistic. We will see the upswing from the noncore part. But I think we are quite happy to see that 2 of the newly emerging core FX, even though some people say it is not core -- sorry, core fee income, is actually FX and recoveries. I think those are 2 that actually becoming a more core operational revenue for us, at least for the time being, especially for recovery because of the large write-off in the past 3 years, which will also still continue until next year. So until 3 or 4 years ahead, I think recovery will be a strong part of our growth in our fees. FX is -- I think our expansion in term of our dealing [room] and also flows from exporters to our credit, that is also very high this year, so we hope that those 2 still continue to drive. The other part of the fees that we are trying to see better growth next year is on the trade and bank R&D. Because last year, we refurbished the whole organization. [Panji Irawan] probably can add a bit on that. It was -- used to be a bit sleepy in term of growth in trade and bank R&D. We hope that by changing the organization and pushing more sales drive there, hopefully, next year will be a good -- a better year. The part of the fees that will be slightly flattened and probably even have a slightly negative, as you know, is the fees for transfers and also deposit and lower admin. Within those 2, we don't see a significant growth. But we also see that -- we are quite actually pleased that the decline in fees from ATM and EDC is actually -- and also from transfer is actually not as fast as what people thought in the beginning. I think 2 years ago, we were quite worried that fees from transfer from admins and from EDC, ATM will decline significant. But apparently, those are still hold up even there is no significant growth in it. Pak Panji, for the other part.

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance Director & Director [27]

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For fees, actually, for the additional information, we have the new core, as explained by Pak Tiko, from the FX fee base. But also, we have new expansion on our servicing unit for the trade financing and also trade servicing by the distribution, around 130 servicing unit that will be affected this year. So we hope we will have additional fees also to support the targeted growth on fees 10% to 15% this year.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [28]

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Okay. Maybe one more question from the dial-in, please.

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Operator [29]

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We have the next question from the line of Joshua Tanja.

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Joshua Tanja, UBS Investment Bank, Research Division - MD, Head of Indonesia Research, Head of Indonesia Equity and Bank Analyst [30]

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I have 2 questions. If I look at the slide on loan spread, on the rupiah on Slide 18, I've seen that the loan yield is still stagnant at around 10% in 2018, whereas the cost of fund has begin to move up of the 3 basis points. Based on the guidance for 2019, how much further actually cost of fund will likely to increase? And my question is, basically, are you going to pass on the entire cost of fund to the -- in terms of loan yield across the product? The second question is more clarification on the noninterest income, and this is on Slide 15. I get about the capital gains in selling some of the shares, but I just want to get the overall impact of the -- if I look at the Slide 15 on cash recovery and other income, in 2018, it was IDR 5 billion and IDR 5.9 billion. It went up 36% and 87%. I just want additional color or clarity on why the numbers actually increased or insignificant -- was significant in Q4, like IDR 2.0 trillion and IDR 2.7 trillion?

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Kartika Wirjoatmodjo, PT Bank Mandiri (Persero) Tbk - President Director [31]

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The second question, Pak Panji. First question, I think, on the way we manage our ALM, yes, this year, 1st January, we actually front-load a lot of our loan interest rate increase to -- across segments. Yes, so basically, we -- 2018, we were quite defensive in actually not passing too much of a cost of an increase to the borrower. But 2019, we already changed course. So in 2019, we actually will start the process of ALM by actually adjusting the credit first and then we adjust cost of funds. So I think the room to adjustment in rupiah for a particular segment, for example, mortgage or SME, will be limited. But I think for corporate, we can have a larger room to actually increase because a lot of them actually still having reference rate, which is based on either average time deposit, or whichever, which already increased. So for corporate, I think it's the easier part. And I think the plan for us is to increase the ForEx more aggressively. Because ForEx, as you see here, the increase in cost of fund is more significant. So we plan to have a second cycle of the increase in ForEx interest net increase in March 2019 to rematch again the cost of fund, particularly once we have to issue global bonds or global MTN. So that's how we see it. But it's a bit difficult, Joshua, to predict whether the trend will be worsening fast or not. But I think looking into BI approach to liquidity these past couple of months, it seems like they are getting more easier. I think the thing that they already achieved their inflation targeting, so they are more relaxed in actually providing liquidity domestically, both by adjusting the reserve requirement in term of average RR but also by continuously providing term repo to the market, which actually, hopefully, will reduce the tension on special rate deposit, particularly towards the balances on there. So if BI continues to have this approach and actually enlarging the term repo to the market, we hope that the spike in cost of fund in rupiah will not be as severe as what we saw last year. And hence, for us, the challenge will be more to pass on more of the cost of fund in ForEx to our borrower. And for ForEx, I think it's easier because mostly this is a commercial and corporate segment. And to be honest, our loan pricing -- and some of them is still much lower compared to the -- on cost if they have to issue bonds as compared to our loan rates. So I think there is a lot of room for us to increase our rates in ForEx. (foreign language)

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance Director & Director [32]

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Yes, on the -- in term of the, Joshua, I guess question #2. I think we will send you the detail through e-mail, and Yohan will do that. For the explanation, still the same with the -- when I answered that the -- there is gain, capital gains coming from the -- selling Bank Mantap, also MAGI, as well as IDR 1.3 trillion for taxes, but the other thing will be sent by Yohan through e-mail.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [33]

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All right. Maybe just to check if there is any last question from the participant in the room? Maybe last question from Raymond, please?

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Raymond Kosasih, Deutsche Bank AG, Research Division - Research Analyst [34]

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Two questions. First one, tell me a bit on the government's plan to -- as of this combined performances. I understand you'll be modeling. How much money do you stake into the venture? And how much investments that you need to participate? That was acquisitions. I believe you can give us more color. If this were to happen, what is the target date? (inaudible) Are you expecting the first half? Fourth quarter?

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Kartika Wirjoatmodjo, PT Bank Mandiri (Persero) Tbk - President Director [35]

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On the initiative with Himbara and Telkomsel, yes, I think it is -- we think it's a good initiative that we combine our capital and also our capability and our merchant base so that we have a stronger payment platform. So basically, this will be launched as a server-based e-money platform, which combine the server-based e-money platform that's already existing from the 4 Himbara bank and Telkomsel. The idea is to pull together the used cases that we each have, also used cases from other SOE, for example, from (foreign language) and so on and so forth. And also leveraging our customer base, so combining the customer base of Himbara and Telkomsel. So with that, the expectation is we can start the server-based e-money platform with a much stronger attraction to the market compared to what we have done in the past, which is not too successful. I think it's now gaining traction in the market compared to our Fintech competitors. And I think the ownership is still under discussion. But most likely, the big players, which is ourself, BNI, BRI will get around 20%. We will -- we don't know yet the calculation because we are now in the process of actually calculating the intrinsic value of each of the business that will be injected there. So whoever actually missed the cash -- sorry, the nonmonetary value in the more intrinsic injection of business then have to deploy cash. So this is something that we are still under evaluation in the more -- evaluation who actually have put cash, who actually is just putting the business inside. So -- but we can have a quite interesting discussion later on this when we have more (inaudible) on this. On the second one, I think there is no target date, Raymond. So no target date at all because it's still very high-level ideas. So I think -- but of course, if there's anything happen, then we will -- and more tangible, we will definitely update you. So until now, there is nothing tangible yet that we can update you.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [36]

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Okay, thank you for our Board of Director for the earnings call presentation. And thank you, everyone, for coming here. If you have any further question, feel free to e-mail or contact me, thank you.

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Operator [37]

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