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Edited Transcript of BMRI.JK earnings conference call or presentation 17-Jul-19 10:00am GMT

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

Jakarta Jul 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank Mandiri (Persero) Tbk PT earnings conference call or presentation Wednesday, July 17, 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

* Donsuwan Simatupang

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

* Hery Gunardi

PT Bank Mandiri (Persero) Tbk - Business & Network Director 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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* Anurag Rajat

JP Morgan Chase & Co, Research Division - Analyst

* Jayden Vantarakis

Macquarie Research - Head of Research

* Joshua Tanja

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

* Laurensius Teiseran

Crédit Suisse AG, Research Division - Research Analyst

* Salman Ali

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

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Presentation

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Operator [1]

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Hello, ladies and gentlemen. Thank you for standing by for PT Bank Mandiri Tbk 2019 Second Quarter Results Conference Call. (Operator Instructions) Please note that we are recording today's conference call, Wednesday, 17th of July 2019.

I'll now turn over the call to Mr. Yohan Setio. Thank you. Please go ahead.

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

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Thank you all for joining us. We would like to begin the meeting now. I would like to mention a few points before we 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 of Bank Mandiri or from within the webcast itself.

Second, in the interest of both analysts and investors during our conference call or webcast, I would like to ask all of you in the room to please speak clearly into the microphone when asking or answering questions.

I would now like to introduce Pak Hery, our Director of Small Business and Network to begin the meeting.

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Hery Gunardi, PT Bank Mandiri (Persero) Tbk - Business & Network Director and Director [3]

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All right. Thank you, Yohan. First of all, I apologize, Pak Tiko was not able to be here today. Let me continue (inaudible).

So we actually appreciate all of you joining us today, discussion of Bank Mandiri first half 2019 financial results.

I would like to spend the opening section of this earning call by elaborating our focus on sustainable growth before giving more detail on recent financial performance.

So we have been prudently growing our loan portfolio at a moderate level, slightly above industry growth, while optimizing our profitability by shifting the portfolio mix into segments with better risk-adjusted returns.

Despite our slow growth in third party funding and our shift to our risk portfolio that translated to much better asset quality, we have been able to manage our net interest margin resiliency better than other players in the industry. We attribute this achievement to proactive asset liability management that focus on optimizing liquidity management and revamping the structure of our funding base more into transaction risk funding customers

As a result of disciplined risk management, our asset quality has been consistently seeing improvement. Credit cost now already at 1.5% and should continue to decline closer to our midterm aspiration at around 1.2%.

At the same time, we keep being prudent by gradually building up our NPL capital ratio to 147%. Having asset quality back on track, Bank Mandiri's senior management team is now investing a lot of resources to capture opportunity in digital banking space. One of the most visible results in our Mandiri Online platform were the 2.5 million active users and still has a lot of room for further improvement, supported by our 24 million deposit customers.

In addition, we just recently launched e-wallet label as LinkAja, together with other state-owned enterprises, this initiative focusing on delivering solution to meet changing customer need will ensure not only market share growth but also financial inclusion deepening.

So 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 out the architecture to enable us to capture tremendous growth in Indonesian e-commerce sectors.

We will launch several major digitalization projects this year, which will keep us ahead of the competitors. To support this, we are also in the process of hiring around 500 programmers, building our internal competitive advantage in IT area.

Bottom line, we managed to grow our ROE from just below 10% in the quarter 2016 to 14.2% annualized 2019, purely came from return on asset improvement while keeping leverage low at 6.2x with 21% capital adequacy ratio.

We view overall macroeconomy condition is on the right track to get better, supported by better macroeconomy indicators and the impact of successful general election, of course. Government will still focus on the continuation of infrastructure development in addition to attracting more foreign direct investment. These are significant tailwinds to our mid-term growth trajectory.

Our economists maintain forecast of current account deficit this year at 2.6% due to the effectiveness of various government effort in managing the pressure from higher import.

As our CAD forecast is very close to the government division of CAD safety level at 2.5%, combined with benign inflation environment, we estimate Central Bank will cut benchmark rate by 25 basis point this year to 5.75% and another 25 basis point next year. This is also supported by growing expectation of faster rate cut in the U.S.

In liquidity side, we expect market liquidity will gradually improve as Central Bank has been supportive by starting to cut reserve requirement ratio and being more active too in repo market. In addition, other players in the industry are also starting to lower their loan growth target which should reduce pressure in deposit competition.

So we want to be Indonesian best and ASEAN-prominent bank. In order to achieve this, we will solidify our position as the #1 corporate bank in Indonesia. We deepen relationship with corporate clients to capture not only lending but also funding and transaction banking opportunities. In addition, we also leverage our relationship with corporate clients to capture business opportunities, along with the value chain, sector-wise infrastructure, FMCG and health care are in our preferred list. We identified that consumer and micro segment are our key growth drivers.

In the consumer side, we will focus on mortgage and automotive. Despite our slowdown in property launching and automotive sales, we still see a lot of room to grow our market share in this product.

Our Micro loan will grow through a focus on low-risk salary-based loan. This is a very profitable product yet with a higher barrier to entry as the key to win in this segment by having the biggest payroll account base in Indonesia.

Bank Mandiri is an SOE bank as well as the biggest wholesale bank in Indonesia, so we have natural competitive advantage to win payroll account, both from civil servant and also from the private sectors employee.

The banks and their management team has been investing a lot of effort to revamp our distribution model. Previously, our branches focused on funding and bancassurance only, while lending was managed by centralized SBU. Now we gradually build up our people capabilities in the branches to do both lending and funding side.

As a result of this, asset quality in repo segment, such as SME, become much better as loan origination came from the -- on the grown employees with better understanding of their customers. In addition, our funding structure also become more stable as it come from lending customers who are doing transaction through us through branches as well.

To achieve our 2020 target, the management team has been focusing on strengthening the fundamental in the past 2 years, mainly on risk management and IT capability. We have several digital banking initiatives this year. One of the most important one is the payment where we keep upgrading features in the Mandiri Online launching of LinkAja e-wallet application to tap into fast-growing e-commerce sectors. We already initiated -- initiate collaboration initiative with e-commerce players such as building API to link our business with them, providing financing to merchants as well as distributing our retail products such as credit card through e-commerce platform.

In the past 3 years, we have been shifting our portfolio to segment with more attractive risk-adjusted returns, mainly corporate consumer and salary-based Micro loan. As a consequence of this shift, NIM has been gradually lower, but our bottom line profit has been growing softly due to significant asset quality improvement. Relative to others players in the industry, our NIM direction are more resilient in the past 3 years, thanks to proactive asset liability management effort.

The composition of higher risk segment, commercial SME has declined from 38% of the total loan in 2016 to now only 27% of total loan. We believe this decline reflect most of the bad loan has been taken out from the debt segment, and what remain they are now mostly good quality loan. Our vintage analysis on SME segment shows much better booking quality in the past 2 years.

Currently, our loan portfolio mix is close to what we aim for, with composition of 60% wholesale and a 36% retail as of second quarter 2019 using asset balance. Therefore, we expect less pressure on net interest margin from further shift in portfolio mix.

At the same time, we still expect asset quality to continue to improve as all loan gradually get paid off and replaced by better quality new booking.

On funding side, we are still in the process of fine-tuning the composition of the deposit customer base that will eventually lead to more stable CASA. In both savings and demand deposit, we gradually increase the proportion of transaction-based customers.

I would like now to turn presentation over to Pak Panji, our Director of Finance. Pak Panji, please continue.

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

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Thank you, Pak Hery, and good afternoon, ladies and gentlemen. We keep delivering strong result in first half 2019 as the quality continues to improve with NPL ratio down by 54 basis points year-on-year and 9 basis points quarter-on-quarter.

This came as a result of consistent implementation of better risk management practices. We expect this strength to continue in the next couple of years.

As a result of our portfolio strategy, our return on equity now stood at 14.2%, thanks to 11% growth in net profit. Year-on-year, our NIM declined by only 14 basis points despite competition in the market for top-up funding. We have been carefully managing our asset and liability management to mitigate the impact of rising cost of fund. Quarter-on-quarter, our interest margin slightly declined due to seasonal effect of Lebaran holiday, where banks were being more aggressive to secure liquidity in advance of long holiday.

On monthly basis, our NIM was the lowest on April, and since then, it has gradually rebound. We changed the business unit KPI to focus on daily average of loan and funding instead of simply looking at ending balance in order to optimize our NIM management. This is a strategic move made by management team in order to have a better asset liability management.

By having a more stable and predictable funding base, we could optimize or even reduce the amount of liquidity buffer that we need to carry in our balance sheet. This eventually is reflected into a more sustainable net interest margin.

As you could see on the left-hand chart, the daily average loan grew healthy by 12.1% year-on-year, above the ending balance loan growth of 9.5% year-on-year. The main contributor was coming from the corporate segment with 21% year-on-year growth, followed by micro segment with 24% growth. Meanwhile, on the CASA side, our strategy is to reduce our reliance from one-off volatile depositors. We prefer to increase the diversification of our funding customer by tapping more into transaction-based and regular depositors. This will be a new baseline for us to grow market share in CASA.

Temporarily, our CASA growth will look weak due to some portion of unsustained base at the beginning of last year. But in the long term, it is a strategic move to have a more sustained CASA base. The small contraction in demand deposits came from FX side due to interest that increased in FX time deposit that triggers some shift from demand deposit to time deposit.

Our loan growth in June slightly slowed down by 9.5% year-on-year due to less effective working days before Lebaran festivities that affect booking volume in retail products. We want to highlight that our asset quality continued to improve since 2016, with NPL currently at 2.6% from 3.1% a year ago.

Our end-of-period CASA ratio was stable at 64.4% with 5% CASA growth and less aggressive growth in time deposit. We managed to deliver 5.6% NIM, in line with our guidance of 5.6% to 5.8%.

Note that the lowest point for our NIM was on April. And since then, NIM has been gradually recovering along with continued loan repricing. Our cost-to-income ratio at 43.8% was well within our guideline of below 45%.

Operating expense growth was well controlled at only 6% year-on-year. We are committed to improving internal efficiency by doing a lot of process automation and effective management of human capital.

PPOP growth looked weak at 1.1% due to one-off other income last year from tax case settlement amounting to IDR 1.1 trillion. If we take out this one-off income, our PPOP grew by 6% year-on-year.

Finally, our earnings after tax increased by 11% year-on-year to IDR 13.5 trillion.

The bank's consolidated loan grew by 9.5% year-on-year with the strongest growth come from micro and subsidiaries. The Micro loan growth was mostly coming from salary-based multipurpose loan, a low-risk product that contributed to 63% of Micro portfolio. SME segment continued to show positive growth at 4.4% year-on-year.

Year-on-year, commercial segment was still contracting by 7% as part of our bank-wide strategy to improve risk management standard. However, on quarter-on-quarter basis, the segment started to grow again by 2% quarter-on-quarter. We continue to maintain a strong balance sheet there for much room for growth. Year-on-year, our loans grew by 9.5% faster than the growth of our deposits at 5%.

On nonloan earning assets, we optimized our yields by shifting from lower-yielding interbank assets into marketable securities, bonds and loans. Our equity stands at IDR 190 trillion, and this remained the highest level of capital in Indonesia. We continue to prudently managing our capital by paying a 45% dividend payout while maintaining a strong capital adequacy ratio of 21%.

We manage our asset liability management by looking from macroprudential intermediation ratio, or MIR, instead of loan-to-funding ratio, or LFR, as it gives a more complete picture of how we are funding our entire earning asset using all available funding option, not only deposit, but also wholesale funding. This strategic change in managing ERM is important, especially as loan-to-deposit ratio in the banking system has reached almost 100% level, pushing banks to be more creative in term of funding sources that could optimize net interest margin.

Our loan-to-funding ratio and macroprudential intermediation ratio stayed at an elevated level of around 96% in June. We did not jump too aggressively in expensive deposit competition in second quarter because we have enough liquidity buffers. As a result, our NIM was not impacted as badly as other banks.

Despite of general perception of tight liquidity in the system, Bank Mandiri's liquidity position was still good with net level funding ratio and liquidity coverage ratio at a high level. We maintain NSFR at [111%] and LCR at 170%, higher than regulator's requirement of 100%.

In second quarter 2019, we disbursed loan of IDR 179.3 trillion bank-only, grew by 13% year-on-year. New loan disbursement were dominated by the corporate segment at IDR 126.1 trillion or 17% year-on-year growth.

The commercial and SME segments together disbursed IDR 35 trillion, representing an increase of 18% year-on-year. The increase mostly came from commercial segment. Note that the new 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 8.9% year-on-year. Weak net premium income from incident subsidiaries was because of increase in claim reserve fund first quarter 2019 due to lower bond year, but the 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 Indonesian banks, both in terms of nominal amount and contribution to total income. At this level, growth is more challenging, especially from conventional sources such as admin fee. Therefore, we work hard to grow noninterest income from new channels, such as wholesale banking as well as from our core strength as the whole bank grew more sophisticated treasury solution products.

In first half 2019, we grew core noninterest income by 5.9% year-on-year. Noninterest income from bond trading declined because of high base effect, where last year, we took opportunity to realize gains in bond portfolio during favorable market conditions. We expect situation will improve in second half, with expectation of lower bond yield.

Other noninterest income declined by 26% year-on-year due to a one-off income from tax case settlement last year amounting to IDR 1.1 trillion. Excluding this, our total noninterest income and core PPOP should have grown by 5.7% year-on-year.

With disciplined cost control, OpEx growth was quite manageable at 6% year-on-year. As we guided, provisioning expense continued to improve, decreasing by 21% year-on-year, translating to credit cost of 1.5% in first half 2019 as compared to 2.2% a year ago. Bottom line, our net profit after tax grew by 11% year-on-year.

Our core fee income grew by 5.9% year-on-year with main contributors came from, number one, investment banking subsidiaries; number two, retail transaction; and number three, ForEx business.

Despite of ATM consolidation and National Payment Gateway implementation on debit cards, risk transfer and retail transaction fees managed to grow by 8.5% year-on-year due to strong growth in fee income from Mandiri Online, our digital banking platform. Admin fees declined by 3.2% year-on-year from loan admin fee side due to market competition, while deposit admin fee was still growing.

The noncore portion of noninterest income declined because of one-off other income amounting to IDR 1.1 trillion last year and because of narrower bond yield movement this year. In total, our fee income represented 29.6% of our total operating income.

Our cost-to-income ratio in first half 2019 was 43.8% consolidated and 40.6% bank-only. We have been able to control G&A expense such as occupancy-related expenses of our physical network decreased by 3% year-on-year.

On personnel expense, we also maintained the number of employees so that personnel expense only increased by 6.5% year-on-year, roughly in line with minimum wage adjustments stipulated by the government. Overall, total OpEx grew by 6% year-on-year.

We continued to maintain a strong capital ratio at 21% as of June 2019. Our capital adequacy ratio is well above Bank Indonesia's minimum for our risk profile at 9% to 10%, plus additional Basel III requirements. Our common equity Tier 1 on a bank-only basis stood at 19.9% at June 2019.

Despite of upper capitalized position, the bank's consolidated ROE continued to rebound due to strong profitability mainly from lower cost of credit. Our quarterly bank-only NIM at 5.44% in second quarter 2019 was stable year-on-year but declined 11 basis points quarter-on-quarter.

Cost of fund increased in second quarter due to competition for funding where other institutions were aggressively offering special interest deposit. We believe this was partly seasonality as banks tried to secure funding before long Lebaran holiday.

On asset side, we continue to do loan repricing mostly in wholesale segment. On monthly basis, the lowest NIM this year was on April. Since then, NIM has been gradually recovering.

Our corporate loan book continued to grow. Year-to-date, loan disbursement in corporate segment was dominated by telecommunication and electricity sector. On the other hand, year-to-date net contraction in Commercial segment mainly came from coal mining and [threat-related] sectors. On coal mining, we gradually shift our exposure from midsize players doing coal support business into big coal producers with stronger cash flow and more stable revenue stream, with offtake agreement from their end customer.

Next, I would like to update you on the progress of our wholesale transaction banking initiative. This is 1 of the 3 pillars of our strategy. The number of transactions through our cash management services continued to grow rapidly. We rolled out our cash management platform in 2010. And as of June 2019, we have more than 27,000 users, representing an 18% year-on-year increase.

The bank completed 126 million cash management transactions in first half 2019, an increase of 57% 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 infrastructure, both in terms of reliability of processing as well as customizing it to cater to focused sector.

Our deposit franchise enable us to maintain a stable retail deposit base with retail CASA ratio at 70.5%.

On the right-hand graph, our rupiah saving deposit and rupiah demand deposit average yield is 1.1% and 2.4% across the portfolio. Rates on our savings account remained relatively flat year-on-year. We believe the increase in demand deposit rate was temporary.

As part of changes in our end strategy focusing more into daily average funding, we want to pursue more aggressively on cyber funding. For savings account, we increased the deposit audit diversification by shifting deposit composition mix into lower-tier deposit, which usually is less demanding in terms of pricing as well as less volatile in term of fund flow behavior.

Rupiah time deposit rates at 6% in second quarter 2019, slightly increased quarter-on-quarter, is below the industry average rate.

Overall, our third-party funding base is growing healthy. In addition to that, we also actively use other sources of funding including bond issuance and bilateral loan from regional banks.

I would now like to turn the presentation over to Pak Donsuwan, Director of Retail Banking, to discuss our Retail Business and transaction in greater detail.

Pak Donsuwan, please.

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Donsuwan Simatupang, PT Bank Mandiri (Persero) Tbk - Director of Retail Banking & Director [5]

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Thank you, Pak Panji. I will continue. Consistent with our strategy to grow retail book faster, the total retail portfolio comprised of SME, micro and consumer loans, now accounts for about 35% of the bank's loan portfolio. The biggest driver for retail banking growth came from Micro loans, which increased by 20% year-on-year, mostly coming from our Micro loans to fixed income earners, an attractive segment from risk/return basis. Consumer loan grew by 4.8% year-on-year, above industry average, despite of weak industry sales in automotive and housing.

SME loans continue to saw positive growth at [4.4%] year-on-year, with healthy asset quality after implementing service -- selective customer targeting strategy focusing on existing CASA customer and value chain on corporate clients.

Our Micro Banking grew by 22% year-on-year and represented 50% of total bank-only loan. We actively pursue growth in salary-based loan, growing by 25% year-on-year, representing 63% of total Micro loan. We believe through better collaboration with wholesale banking and government and institution group, we could grow the salary-based loan to 70% of total Micro loan by 2020. We also help the government to channel subsidized Micro loan that grew by 33% 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 2.5% year-on-year as compared to 7% contraction in the previous quarter.

Our consumer loans grew by 4.8% year-on-year. Mortgage loan increased by 4.1% year-on-year, with payroll customer and first homebuyer as our primary target market. As a consequence of this strategy that focuses on asset quality side, average ticket size of new mortgage

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in credit cards would have seen the growth momentum continue to improve as we realign our strategy and implemented business process reengineering, rising by 18.4% year-on-year.

Auto loan book through Bank Mandiri grew by only 1.4% year-on-year as some customers shifted to booking through our Syariah subsidiary. If we include the auto financing in Bank Syariah Mandiri, it still grew by 6.6% year-on-year.

I would now like to turn the presentation over to Pak Hery.

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

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Thank you, Pak Don. Come back again, yes?

So ladies and gentlemen, I would like to -- a few slides to describe how the electronic channel bring positive impact to the business of Bank Mandiri.

As part of our digital transformation, we focused on reliability to drive operational efficiency in the long run. At the front end, we continuously enhanced Mandiri Online stability as our platform for customers' interface. Since its launching, Mandiri Online has been very well accepted by our depositors as shown by the numbers of active users that grew exponentially, reaching 2.5 million active users with average of 52 trillion transaction value per month in first half 2019.

We actually still see ample room for growth in term of the numbers of active users as we have close to 26 million deposit customers in total.

We keep improving features and the reliability of Mandiri Online where the users could easily view their deposit and loan data, paying bill to more than 1,000 institution and even do top-up for E-Money, our flagship prepaid card.

Our prepaid card also shown very significant progress with main use case to pay for toll roads and parking. Right now, there are close to 18 million cards outstanding with IDR 1.29 trillion transaction value per month in first half 2019, bringing us to control almost 80% market share in prepaid card segment in Indonesia. This is the good indicators that customers are actively using our prepaid card to do their day-to-day transaction and activities. We are committed to maintain our leadership in digital banking space in Indonesia to deliver the most value for our client.

The next is our e-channel transaction, continued to show strong growth annually, reflecting customers' preference to use our bank for their transaction business. From time to time, we strengthen our retail transaction banking capabilities by launching newer version of mobile banking application called Mandiri Online. The user of our mobile Internet banking continue to grow, as we can see on the right-hand graph. Currently, we have more than 8.3 million mobile banking subscriber and 2 million Internet banking user. The transaction value conducted via our mobile banking platform also saw a strong growth at 53% year-on-year.

I would like now to turn presentation back to Pak Siddik, our Director of Risk Management, to discuss our asset quality further. Pak Siddik, please.

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

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Thank you, Pak Hery. As we have shared with you in the last few quarters, we've been doing a lot of transformation on the fundamental of risk management from front end to back end through better policies, analytics, business processes, internal control and tight supervision.

We'd like to highlight that the credit risk analytic portion has been paying a crucial role in our journey, mainly through more effective portfolio management guideline and disciplined monitoring.

Our wholesale portfolio management guideline defines which industry sectors we want to be overweight or underweight within our portfolio. The guideline is being regularly updated at least twice a year by incorporating various input from sector experts, including our economist team as well as the analysts at our Mandiri Securities Company.

For the retail segment, we leverage on advanced statistical analysis to dynamically adjust our risk acceptance criteria in order to optimize our booking portfolio quality. Just as important as the underwriting itself, the disciplined monitoring process is essential to achieving better asset quality. We've created a quite effective early warning system, especially for our wholesale business, by doing very rigorous monthly monitoring processes as well as quarterly stress testing, enable us to actually identify potential higher-risk accounts or formidable accounts where we can actually do early actions.

From all these aforementioned processes and improvement, we've continued to deliver strategic improvement on -- in '19, where NPL and credit costs has gradually declined as we've made significant progress in the areas of this transformation.

Our overall asset quality has continued to improve as we guided at the beginning of this year. The consolidated gross NPL ratio has improved to 2.67% from 2.7% in the prior quarter. Despite the lower credit cost, we continue to prudently build our NPL coverage to around 147%.

Special mention loan is currently at 4.6% as compared to 4.7% in prior quarter. We saw some reduction of special mention loan in commercial banking segment due to improved quality of the new booking vintages.

Now we look at some of the more detailed information on NPL. The bank-only NPL in June was IDR 19 trillion, declined by about 10% year-on-year in terms of nominal amount, implying a bank-only NPL ratio of 2.6%.

We've continued to added -- to add more resources in our Special Asset Management team, led by Pak Budi Setiyanto, to manage the problematic accounts in a more effective way, even before they're going to NPL and to enable the business unit to focus on growing new business.

The write-offs accounted for about IDR 2 trillion during the quarter, implying a decline about 27% year-on-year and [38%] quarter-on-quarter.

The formation of new NPL in wholesale and retail were in line with our expectation and earlier projection, declining 25% year-on-year and [4.50%] quarter-on-quarter.

Next slide, please. This slide is actually quite interesting, and we are quite proud of it. Our consolidated credit cost showed consistent improvement from 2.2% in the first half of 2018 to 1.5% in first half of 2019. You can see here the trend of the mix of the portfolio of various SBUs going from 2016, 2017, '18. First half of 2018, as compared to the first half of 2019. You can see that over in the last, I guess, 3 years or almost 3 years, the mix of between bank-only versus subsidiaries, the mix has actually gradually changed. We've actually added more, I guess, the subsidiary has grown a bit faster so that the bank-only proportion has declined from 89.5% to around 86.9%. And you can see that the growth are coming from Mandiri Taspen, growing very fast from 0.7%, now 2.1%, and we believe this still has a lot of room to grow in the future, especially as we tighten our collaboration [as seen here] with PT Taspen.

The Mandiri Tunas Finance has grown 1.6% to 2.2%, and our youngest subsidiary basically will be focusing on the motorcycle and used car financing has also grown a bit.

And on the right-hand side, we see actually the trend on the cost of credit. You can see that commercial banking, we've actually been able to gradually reduce the cost of credit to around 2.7% now as compared to back to 5.1% in 2016.

SME, from the peak of 5.1% to 4.5%, and we are now at 3.9%. I think we should be able to sustainably maintain this kind of trajectory going forward.

Micro, as Pak Hery has alluded before, we continue to increase the mix of the payroll-based personal loans, which has been growing 22% to 30% a year, and these are lower-risk product because we have the payroll, we have the auto debit. And as a result of the changing mix in Micro, we have been able to reduce the cost of credit from 4.1% back 2016, where we had -- we used to have a bigger mix of the KUM, which is a Micro productive into much lower now at 1.8%.

Consumer segment has been quite stable at around 2.2%. Yes, and Bank Syariah Mandiri, also, that's so far, we've continued to make good progress to manage the credit problem we used to have back in 2005 -- '15, 2016. Now first half, actually, is only 1%, and for the first time, I think the NPL rate in Bank Syariah Mandiri is below 3%.

Mandiri Taspen, also a low-risk product because we have the pension payment every month for automatic deduction. Mandiri Tunas Finance been also 2.3%. Mandiri Utama Finance, this is a higher-yield product because we're actually targeting more of the motorcycle segment and used car loans. As a result, we have more room to actually accept now or take more risk. As a result, even at a cost of credit of 6%, we are still quite profitable.

Next slide. Okay. So now we're talking about the restructured loan book. The restructured loan book ratio is stable at 7.4% of the total loan. We continue to proactively do a restructuring. We now have quite a robust watch list in process in place where at least every quarter we review the whole book again. We have an automated analytic tool, what we call an alert, where we actually use some 80 parameters to actually scan through all the portfolios within Commercial and Corporate Banking, and the system or the tool will kick out the list of accounts which actually trip the parameters in these some 80 variables. And our team, the business team and the risk team, will go through one by one and together decide which one that has to be categorized and watch listed, which one is actually -- is an aberration. And there from then we actually categorize to green, yellow, red and then decide on action items for each of the items. And based on that, then we reproject the -- whether it is the [call to NPL] provision, write-offs, upgrade, downgrade, collection, recoveries for the rest of the year, every month.

So we would like to make sure that if there are downgrades or SML write-off, that has to be identified earlier. They cannot come as a surprise to us.

So we do continue restructuring. But as you are aware of, the regulator doesn't allow banks to actually remove the restructuring flag until the loan is fully paid off. So even if the account has gone back to normal, prospect is good, the restructure flag cannot be removed. So that's why the balances may continue to be high, but we want to make sure that the categories that we have within the restructured books will continue to improve from 5, 4, 3, 2, 1, for example.

And then the right-hand side, actually show -- how much of the restructuring actually goes back into delinquency, and we've been able to maintain that at a low level.

Next slide, please. Another indicator of improvement that we've made in risk management selection processes are reflected by how much we can collect back from our written-off loans. And as you can see from the graph here, that we've actually been able to collect around 37% of the written-off portfolio in the first half of 2019. But just to make sure that you guys read this chart on the top left-hand side correctly, the write-off is actually accounts written off during that period while the recoveries are the recovery cash collected during that period, but the account may have been written off in prior quarter or prior year. So we actually monitor the recovery rate for each product by vintage of year of write-off to make sure that we continue to track. For example, accounts written off in 2012, how much is being recovered or collected in 2013, '14, all the way to now to ensure that we continue to track the recovery rate for each of the product and segment. And we compare it year-to-year to make sure that we have the right level of effectiveness of our collection team and special asset management team.

And also, the low net risk slightly improved to around 10.1%. The annualized NPL formation, which is the chart or the table on the bottom right-hand side, has improved across segment with the biggest improvement coming from commercial and SME segments. Despite of a strong growth in Micro, the NPL formation is also getting better as we focus the growth into lower-risk product on the salary-based Micro loans. So overall, the NPL formation is in line with our earlier projections and expectations.

I'd like now to turn over the presentation back to our CFO, Pak Panji, to discuss our subsidiaries and the rest of the year guidance. Pak Panji, please.

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director [8]

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Thank you, Pak Siddik. Bank Syariah Mandiri continues to be the dominant bank in the Syariah segment. In the first half 2019, total financing of Bank Syariah Mandiri increased to IDR 71.5 trillion or grew by 14.6% year-on-year. We are starting to see positive results from our transformation of Bank Syariah Mandiri with the nonperforming financing ratio declining to 2.89% from 3.97% a year ago.

In first half 2019, Bank Syariah Mandiri finally increased NPL coverage ratio from 72% to 105%, which is a level we deem sufficient for an asset-based lending bank like Bank Syariah Mandiri. Hence, credit cost in 2019 should be normalized to much lower level compared to 2018.

Mandiri Sekuritas supports our corporate clients with investment banking and capital market services. Mandiri Sekuritas trading volume grew by 74.8% year-on-year. Mandiri Sekuritas is among the largest equity-trading firm by volume in Indonesia with a 6% market share.

AXA Mandiri Financial Services has developed a wide trends of bancassurance products to cross-sell across our customer segments. AXA Mandiri has been the most ROE-accretive subsidiary with 43.7% return on equity in first half 2019. Bank Mantap or Mandiri Taspen is part of Bank Mandiri's plan to develop the pension-lending segment. It has been growing its loan book by 37.6% year-on-year with 0.7% nonperforming loan, delivering net income growth of 21.6% year-on-year.

Even though it is -- even though it's relatively short history, Bank Mandiri Taspen already show a 17.5% return on equity in first half 2019. Mandiri Tunas Finance has emerged to be a significant player in auto financing with total outstanding loans of IDR 45 trillion, growing by 10.6% year-on-year with 18.3% annualized return on equity.

So ladies and gentlemen, by seeing the chart that [we relate to you that now] all of the ROE of our subsidiary, we have 12 subsidiaries now, is really a very good figure. You see the ROE of the Syariah, 13.2%; Sekuritas, 14.8%; and then AXA Mandiri, 43.7%; Mandiri Taspen, 17.5%, Tunas Finance, 18.3%.

This is a kind of proof that Mandiri has the history and Mandiri has the capability of developing a subsidiary business.

To conclude our presentation, I would like to review our guidance. Our loan growth at 9.5% year-on-year is slightly below our guidance. Note that if we manage the loan growth using daily average balance, the year-on-year loan growth would be 12% year-on-year. As we observed gradual improvement in commercial and SME segment, we still maintain the guidance for loan growth at 10% to 12%.

So ladies and gentlemen, this is also part of our strategy since these 2 years that we are no longer using ending balance instead of debt, we use the average [nuts and bolts], the loan as well as the funding, which is the deposit.

Our net interest margin at 5.6% in first half 2019 was in line with our full year target of 5.6% to 5.8%. We have seen net interest margin gradually recovers from its lowest point in April this year.

The efficiency ratio was 43.8%, within our guidance of below 45% level.

The NPL ratio was 2.6%, within our guidance. Cost of credit in first half 2019 was 1.5% better than our guidance at 1.6% to 1.8%.

At this point, we maintain our guidance as it is while observing for further development on the macro side.

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 [9]

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Thank you, Pak Panji. For the Q&A session, we will take questions from the room first, then followed by questions from the dial-in. Operator, could you please queue questions from the dial-in and hand the call back to me?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Please continue, Mr. Yohan.

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

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Thank you. Any questions from the room? Okay. So we have [Sebastian], Jayden and Laurens, please. Starting from Sebastian .

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Unidentified Analyst, [3]

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Now I just have a couple of questions. First one is could you give more color on progress of the Krakatau Steel restructuring?

And the second one is, well, recently there's this Duniatex just defaulted. So just give some colors on the risk of the cross-default impact on Bank Mandiri and whether -- yes, well, how much concern you have on that?

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

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Shall we take down the second question first. Second question from Jayden, please.

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Jayden Vantarakis, Macquarie Research - Head of Research [5]

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I have a couple of questions. I guess the first one is a follow-on to the last. The currency has been strengthening, palm oil process remained a bit soft. So I imagine the rupiah earnings for the palm oil sector are a bit softer. Can you comment on any risks you're seeing in that space and maybe also on textiles which has similar dynamics? There was a lot of treatment on risk before. So it would be great to hear some color on that.

Secondly, comments on M&A. I think recently the management made some comments on looking at targets in Southeast Asia. I don't know how you'd find a bank that generates the same kind of return on capital, that you are here, but talk us through your thinking.

And then my final question is on pricing. You mentioned that you've had some success in lifting pricing over the last couple of months, which has helped to improve the NIM, which is great. But if we do see a rate cut, which I guess you're predicting and is now being expected by the market, what happens then?

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

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And last question from Laurens for the first round.

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Laurensius Teiseran, Crédit Suisse AG, Research Division - Research Analyst [7]

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This is Laurens from Crédit Suisse. I have a few questions, actually, related to asset quality. Number one, is that if I look at your guidance for the full year, we are actually expecting an increase in credit costs in the second half because you're guiding for 1.6%, 1.8%. We're at 1.5% now. If you could please guide us, as in, you've displayed a very nicely and helpful slide on Slide 30, but you could guide us on which of the segments, if not sectors, that you would expect an increase in credit cost during the second half of '19?

My second question is on your overall consumer aspiration. You're expecting consumer to be 30% of your portfolio. It seems that right now, it's still behind that, and that consumer growth has been quite weak in the past couple of quarters, 4% year-on-year. Maybe you can give us your strategy on which segment of the consumer, is it mortgage, auto loans, that you are going to boost in the next couple of months, if not quarters? And how do you plan to do that?

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

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Let me probably start off responding to some of the questions. First, I think on Krakatau Steel, latest progress is that on the July 12, the MRA, the master restructuring agreement, has been signed by Mandiri BRI, BNI, BCA and the LPEI, which is the Eximbank. And the rest of the other private banks, which are CIMB, ICBC, DBS, Standard Chartered and OCBC are still in the approval process. So we hope to be able to get them to sign everything within the next week or so. We are quite hopeful that Krakatau Steel will be able to get all the lenders to sign this MRA, and we are still sticking with basically the scheme of restructuring which probably most of you are aware of. I think the 3 tranches where the first tranche actually will come from the source of the BAU operations, which are sustainable.

The second tranche will actually -- the payment will come from the plan sale divestiture of the noncore assets in the next few years, and we've actually lined up buyers already, including Pelindo and PLN, so we'll track those also closely.

And the third tranche is actually a revolving working capital, which has in the fifth year and eighth year with some corporate action they were planning for, we are working with the ministry there so we need to get the support on this tranche 3 as well. So I think we are hopeful and the majority of the groundwork in completing the master restructuring agreement should already be detailed.

So we'll get these banks to actually sign the rest of the MRA as soon as they get internal approval, including the approval from their parent company abroad.

On Duniatex, I think Duniatex, I'm sure everybody was surprised as we did also. Duniatex, we actually -- our relationship with this company dated back in 2002. Yes, since 2002, and it has grown over the years. And the last, I think line increase that we gave them was actually 2015. Since 2015, we did not increase our exposure to Duniatex and started basically working with them to actually get them improve how they manage the company because the biggest -- one of the key issues in Duniatex is that the intercompany transactions or that there were -- financial statements is individual. They don't have consolidated financial statements. So it's very difficult to clearly understand the financial performance of the group overall.

So this account has been in our watch list for some time already. We've actually made a projection for the account that we know will probably be okay, continue to have enough cash until later this year or early next year, and we've actually worked with them to actually doing restructuring and improvement, et cetera. But actually, they -- unfortunately, the cash flow problem probably happens earlier than later.

And just as an update, as of December 2018, we had an exposure of IDR 3.5 trillion. And within 7 months, we get them to reduce it to IDR 2.2 trillion today. So in the last 7 months, we actually got payment for IDR 1.24 trillion

(technical difficulty)

with reduction of the noncash loan limit of [LCN] treasury line as well as the payments coming from their operation from January to June. So we've actually -- they've been able to make payment on this one, and we actually have projection and discussion with them to continue to have a reduction of the balances until after the end of the year. So -- and today, our exposure stood at 2.2. We are, I think, the #2 biggest after Eximbank. And then in terms of security -- collateral coverage, fixed asset, close to 160%. So we are fully covered. So we are -- we have been meeting with the owner of Duniatex Group since early this week, so we're gathering information and trying to actually come up with good solutions. But it's probably -- be some time before we will be able to share with you the final, I guess, solutions because there are some 40 lenders involved in this account. So we'll update you as the story unfolds. Yes.

And then the next one, I think on the CPO -- question on the CPO sector. So we -- CPO, our plantation sector is the largest concentration risk that we have in our portfolio. Today, it's 10%. But we do have a long experience, long track record performance in this industry sector because of our expertise. And the majority of the portfolio or accounts that we have in this portfolio are probably in the top-notch companies.

We are very selective in adding new exposure in those CPOs. In fact, the limit for exposure to CPO sector is being reviewed and approved by the Board every quarter because this is the single-biggest exposure and the Board wants to make sure that we do have the best-quality accounts in our book. And we have a quarterly stress test exercise on account level to understand that if the CPO price goes to a certain level, which account would have issues? And then we go back and meet with the owner of these companies and show the calculation and make sure they agree with the numbers. If they don't agree, then we have a discussion. If they agree, then we ask them, "So if this was to happen, what would be your, I guess, way out or do you have other sources of fund to actually continue to service the loan?" So we have been able to get assurance from all of these on a few accounts that might be an issue if the CPO price continue to go down. But we are quite confident on the quality of the CPO sector.

Textile, it has been on our negative, this sector, for some time. So we do not plan to actually add anymore accounts. We actually are phasing out or exiting many of our existing exposure. The latest one we have is Duniatex.

And then -- okay, and probably I'll cover the other one also, the cost of credit first, and then before going to the other one. So the cost of credit, 1.6%, 1.8%. We've actually made this projection since last year. We actually -- or we're projecting that between quarter-to-quarter, end of last year, until end of this year, we'll be gradually decreasing our cost of credit and achieve around 1.6%. But actually, there's some creditor prices happen in the first and second quarter that we actually came out better than our cost of credit.

So it's not that in the third and fourth quarter we continually increase. I've asked Pak Panji whether we could lower also cost of credit, but being a CFO, he said, "Well with the debt level, we'll give you a nice surprise, hopefully, in [some area] at the end of the quarter."

Hopefully, there's no more surprises. But what is probably promising is that the retail book, which is SME, Micro, mortgages, auto, credit card, all of them has shown consistent improvement in vintage booking quality, in 30-plus, NPL, write-offs, provisions. So some of the saving that we had in the provision for retail between January to June are being used to honor additional provision that we had to cover.

For example, Krakatau Steel, today, we had -- we already have IDR 1.8 trillion of provision. By end of the year, we hope to continue to increase this IDR 1.8 trillion to around IDR 2.5 trillion. And by early next year, to around total between IDR 4 trillion to IDR 5 trillion. So hopefully, by early next year, the big portion of the tranche -- all portions of tranche C and a few portion of the tranche A and B will be covered fully by provisions in Krakatau Steel.

Duniatex will also, once we have more information, will definitely determine how much provision we're going to take after we also reevaluate the fixed asset collateral that we have to make sure that we can -- how much can we recover actually from the fixed asset than any net of debt will cover through on [short] positions. So I think we are quite confident we will probably hopefully come to within that target, 1.6%, 1.8%. It can be lower as well.

And I think on the consumer growth, today, as Pak Hery mentioned, Pak Panji mentioned, Pak Don mentioned, our engine will continue to be in KSM, the payroll-based loans. And then credit card, I think expect we will continue to outgrow our competitor for the rest of the year. Mortgages and auto loans, we want to make sure that we actually be in line or higher than the industry growth even though the real estate market and auto loan sales has been quite soft these days, but we want to actually try a few strategies. The business team is working with Pak Hery's team, for example, for MUF, to offer motorcycle loans to our KSM payroll base because again price of the loan amount of motorcycle is around IDR 20 million. So adding the monthly installment into the existing personal loans, it's insignificant. So we tried everything to actually take advantage of the big payroll base that we...

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Hery Gunardi, PT Bank Mandiri (Persero) Tbk - Business & Network Director and Director [9]

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Let me respond to the second question from Jayden about the M&A, merger and acquisitions. So mainly, the ASEAN expansion, of course, yes. So we would like to explain that the context of the ASEAN expansion news in the media 2 weeks ago was a question about ASEAN banking integration framework. During the meeting in House of Representatives here through a few banks also expanding and everything in the different area.

It is a very broad statement from us regarding expansion to ASEAN. The execution of it and impact to Bank Mandiri is not in the near term. So -- but I think we're still far away from this plan. Even though the expansion -- inorganic expansion is still in our business plan, but we're still looking what something -- a good opportunity for us to capture the opportunity in the market here.

As publicly listed company, we are always transparent to capital market for any material or foreign actions. So basically, to expand the business, we are right now still having main focus in the organic growth area. Proactively, inorganic growth is always a risk in our business plan in order capture opportunity in market. If there is a good one, we try to elaborate.

So we're not going to do inorganic growth if it's not creating value or some other. And doing so, we exercise this very evaluation process. So what I think here, if you look at -- into the excess capital where we have here in our book, Mandiri have quite a strong muscle to do the merger and acquisition, but we have to select which one the target company, whether in local, market or the ASEAN market. But when is it? It depend. It's not in the near -- near term. Thank you.

And then Pak Don would like to elaborate consumer -- consumer growth?

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Donsuwan Simatupang, PT Bank Mandiri (Persero) Tbk - Director of Retail Banking & Director [10]

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I will elaborate more about mortgage. We divide mortgage into 2 categories. We name it employee and self-employee. We have problem in loan quality in self-employee. We therefore focus more on improved loan quality. In employee segment, we grow very well. But the ticket size is very small. The impact to the loan growth is not really support to achieve our target. But we have a big initiative improving our portfolio in consumer loan. We have a business process reengineering. This is one starting from credit card, if you see our credit card grow very strong, above market, and the loan quality also very good.

The second release we'll have mortgage. Today, we will start the BPR release to -- in mortgage. And hopefully, for the next couple of months, the impact will be also positive in mortgage loan growth, and we will start again back to self-employee up for having our new loan underwriting machine in mortgage.

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Hery Gunardi, PT Bank Mandiri (Persero) Tbk - Business & Network Director and Director [11]

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Pak Panji would like to respond in term of pricing.

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director [12]

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So regarding the pricing, like we explained on April, actually we keep on continuing to do some repricing on the loan, on the corporate commercial as well. You are right regarding the opportunity that the (inaudible) rate will be lowering down, maybe 25 basis point.

So it is a kind of chasing the opportunity, and then it is the last call before we could do optimizing all of the repricing before by Indonesia really realizing [a rate count].

So still, we are trying to fulfill the rest of the balance -- the rest of the plan that we have in our loan book. But to be honest, since the debtors -- the borrowers, they know already that the interest set will be going down. So it is a tougher negotiation for -- at the time being, but there is a room, especially for the U.S. dollar because the U.S. dollar liquidity in the market is not really available. What I mean is not so many foreign banks that will be giving the U.S. dollar loan to the borrowers. So it is still the opportunity for Mandiri to do some loan repricing, especially on the U.S. dollar.

So the other thing is when the Bank Indonesia really cut 25 basis points, then this is very good impact for Bank Mandiri because several of the special return deposit portfolio will be repricing down because it is now tied to the reference rate. So when it's cut by 25 basis point, at least, the portfolio of the special on the time deposit also will be lowering. I mean the cost of funds will be lowering, especially for the rupiah time deposit special rate portfolio. It is now around 6%. So if it is cut by 25%, then I think it will be lowering down the cost of funding on the deposit -- term deposit total. I mean the total cost of fund of rupiah term deposit.

So that will be the thing. So I think there is still an opportunity to do some repricing for the loan rupiah portfolio, the last call, and -- but there is also a tailwind coming from the adjustment of the special rate of the rupiah deposit. Because during the April, May and June, there is a lot of the rupiah term deposits coming to our portfolio funding. It is also that makes the cost of fund a little bit higher and make a kind of pressure on the bank-only NIM. But as you see, still, we could maintain it. So that is my last thoughts.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [13]

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Thank you. Now we're going to take a question from the dial-in, please.

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Operator [14]

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We have our first question from the line from Anurag Rajat of JPMorgan.

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Anurag Rajat, JP Morgan Chase & Co, Research Division - Analyst [15]

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I have 3 quick questions. First, a follow-up on Duniatex. I just want to check. You mentioned it's on the watch list, but I want to check what's the current classification of the exposure? Is it SML? Is it NPL? Or is it [pass]?

Second, can we get an update on IFRS 9? What is the expected capital impact, if you have any update there?

And third, your LDRs have been rising. And I just wanted to check, where do you expect the LDR to stabilize? How high can it go? That's it.

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk - Director of Risk Management & Director [16]

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What was the last question?

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Anurag Rajat, JP Morgan Chase & Co, Research Division - Analyst [17]

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The LDRs have been rising, so I just want to get a sense of how high can it go, what level it can stabilize at.

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director [18]

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So regarding the IFRS 9, now the system is parallel run. And then we still are committed with the figure expectation forecasting that it will be consuming 1% to 2% of capital adequacy ratio. And then most likely, it will be around 1.5% of capital adequacy ratio on 2020.

And then on the loan-to-deposit ratio, I think -- still because the growth of the deposit in Indonesia is only 6%, so I think it is better now that we are seeing the liquidity, a terminology, not only to loan-to-deposit ratio, but also seeing the ratio intermediary -- macroprudential intermediary, as well as the loan to -- I mean liquidity coverage ratio, which is LCR, as well as the net stable funding ratio. It is 3 -- I mean both -- I mean 2 of the indication, the LCR as well as the net funding -- net stable funding ratio for Bank Mandiri is really good. The LCR is at the level of 170%. And then the NSFR is around 117%.

So again, if the equation is around the loan-to-deposit ratio, I should say that since the growth of the deposit in Indonesia is around 6%, so it is hard to support the growth on the loan expense in Indonesia. So it seems to me that it will be at the level above 94%-something. But it's better for us to see the liquidity based on those 2 indicators, like the LCR as well as the NSFR.

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk - Director of Risk Management & Director [19]

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Okay. On Duniatex, as I mentioned earlier, they have reduced the exposure from IDR 3.5 trillion in December '18. The IDR 3.5 trillion consisted of cash loan of IDR 2.4 trillion and noncash loan of IDR 1.1 trillion which is the treasury line and LCs. They've been paying so that the cash flow now has become IDR 1.6 trillion and noncash loan is IDR 600 million -- [IDR 660 million]. So they have been current. So the classification is 1. Total exposure now is IDR 2.2 trillion, combined cash loan and noncash loans. We'll have gained -- we'll have to add provisions. Today, provision is only 1% of the total exposure. So maybe within the next 1 or 2 weeks, we'll decide on the classification, exposure. We'll also discuss this with our supervisors at OJK to make sure that at least the approach we're taking will be consistent across the other [37] lenders who also have exposures to this account.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [20]

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Okay. Next question will come from the dial-in?

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Operator [21]

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Yes, we have our next question from the line of Joshua Tanja of UBS.

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Joshua Tanja, UBS Investment Bank, Research Division - MD, Head of Indonesia Research, Head of Indonesia Equity and Bank Analyst [22]

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I have 3 questions. Given the deleveraging of the loan last 3 years and the LDR that has going higher, I just want to know what is the latest interest rate sensitivity with, let's say, 100 basis point reduction in interest rates to the bank's NIM?

My second question, still on the IFRS 9. What's the current thinking of the 2020 cost of credit once you are fully complied with the IFRS 9 by January 1, 2020, guiding 150 basis point to Tier 1? So the question is on the cost of credit directions relative to your guidance for 2019 currently of 1.6% to 1.8%.

And thirdly, just to clarify. You mentioned in the commercial loan segment that the disbursement of the loan grew 18% year-on-year even though the outstanding commercial loan growth was actually negative 7%. Thus, I want to clarify and confirm that part.

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

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Yes. I think first the question on projection for cost of credit in 2020 post IFRS 9 implementation in January. Our -- we will need to get back to you on this one because what's going to happen between now and December, we'll continue to update the calculation based on more actuals until December. And during that period, once we also identify the key drivers of the increases in provisions for each product and each segment and each customer, we are going to change the business strategy in various products and segments, for example. Today, we don't really care much about the unused credit limit and credit cards or in other revolving loans, but that's a significant part of IFRS 9 provisioning strategy.

So what do we want to do on these existing accounts and new accounts in 2020? So some of this strategy will be implemented starting July until December by our business team, by product, by account. So towards closer maybe by October/November, we will be in a position to have a good projection methodology for 2020 under IFRS 9. So we will make sure that we optimize the provisioning strategy then for next year once we take the one big hit into capital in January. I think that's it.

Oh, on the commercial loans. We'll double check the numbers but because what happened a few times since late 2018 and 2019 -- early 2019, we did resegmentation of the commercial loan book where we move a number of big accounts from commercial into Corporate Banking as well as the special asset. So that the comparison may not be apples to apples, but Yohan will be getting back to you to make sure that the numbers -- for example, if we look at the resegmented portfolio back into commercial, I think the negative number will become much smaller, but I think -- let us get back to you to make sure that at least the numbers are correct.

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director [24]

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So regarding the loan-to-deposit ratio as well as the deleveraging, so we are really seeing that this is again an opportunity for us to have the net interest margin getting improved or even higher because we will have a cost of funding lower. So that is really good for the bank, I think.

So yes, I think -- how much? But we cannot do some calculation. We will catch up to you later. But it is really a very good opportunity as well as the tailwinds coming because, like I mentioned at the beginning, the cost of funding will be lower.

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Joshua Tanja, UBS Investment Bank, Research Division - MD, Head of Indonesia Research, Head of Indonesia Equity and Bank Analyst [25]

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Can I just confirm that actually, that Bank Mandiri today -- that if Bank Indonesia increased the rates or reduce the rates, then your net interest margin actually, if you're doing nothing else, is going to come down and going up vice versa. So it's quite different than in the past. The rate cut is actually increasing your margin positively. Can I just confirm the direction?

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director [26]

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Yes. We also have a source of liquidity because we have, on our portfolio, the variable rate government bonds, which is amounting around IDR 20 trillion, so it will be due both this year and next year. It will be adding up some of the -- our cash. So it will also becoming one of the sources of doing some more lending. And then regarding the lending rate, I think it will be depending on the competition in the market. So that is my additional information.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [27]

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Thank you. Just wondering, Salman, did you still want to raise your question? Maybe last question.

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Salman Ali, Citigroup Inc, Research Division - Head of Research for Indonesia and Director [28]

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I think everything has been -- almost...

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Ahmad Siddik Badruddin, PT Bank Mandiri (Persero) Tbk - Director of Risk Management & Director [29]

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Or Salman, we can have coffee together outside, no?

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Salman Ali, Citigroup Inc, Research Division - Head of Research for Indonesia and Director [30]

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So I just have one question. It's about your fee income rate. If I look at your fee income, excluding your ForEx gains, it's almost flat. And you still have 12% loan growth. And when I look your peer group, they're all growing the fee in double digits. So why is Mandiri lighter considering all your initiatives in your digital banking, your consumer loan, yet still you are the worst performer among the 4 banks?

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director [31]

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So regarding the fee-based income, actually, this is because the, number one, the one-off nonrecurring income, IDR 1.1 trillion, coming from the bank's cases that we won on the Supreme Court. And the other thing is we have also do some front-loading last year on the bond portfolio. But again, here comes the possibility of a rate cut and then we are seeing that some of our portfolio on the available for sale on the bond also have a kind of -- what do you call it -- it is really in the money. So I should say that here's [rotational] here. So I think there is a probability also that we could gain some more on the -- especially bond portfolio realization from the portfolio that we have.

On the FX, I should say that actually the combination of the transaction that we have, the swap transaction as well as the transaction with the clients, which is we act as the intermediary, it is still running. So I'm quite positive that our treasury will still have the chance to optimize this kind of opportunity since the trend of the interest that is going lower.

So about the others, it is about the Mandiri Online that already have been giving us a very good [signal] year-on-year. For the fee base coming from Mandiri Online -- 1 second, it's around what, IDR 380 billion, is it? So it is also becoming sources of the Bank Mandiri in gaining kind of a fee-based income, compensating the ATM rate that we have that -- it has already been organized by the (inaudible) at the end.

So a combination of that. Still, there is room for improvement. There is room for Bank Mandiri to optimize and do the best during these last 6 months.

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Salman Ali, Citigroup Inc, Research Division - Head of Research for Indonesia and Director [32]

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Yes. Well, my question was excluding the bond portfolio, excluding the ForEx gain and cash recovery. All other [heads], if I look at them, they are not growing. So why is it other banks are growing the same thing at double digits? So my question was excluding the bond portfolio and cash recovery with ForEx saving. Why are they not growing?

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Panji Irawan, PT Bank Mandiri (Persero) Tbk - Finance & Strategy Director and Director [33]

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Yes. Actually, there is a kind of fee-based income should be coming from the bond currency, coming from the LC, that's really -- now the client, they're shifting the move. Previously, they would like to do the LC business. Now they do really a kind of cash basis transaction. So due to the kind of changes in the client preference, so that's why from the credit financing, we do, what do you call it, we lose some part of the income coming from those kind of [sunset] product I think. Because due to the several digital payment transactions, it is no longer preferable to do a kind of LC business or those kind of transaction. But mostly on the trade transaction.

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Yohan Y. Setio, PT Bank Mandiri (Persero) Tbk - Group Head of IR [34]

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Thank you for the Board of Director of Bank Mandiri for the earnings call, and thank you for everyone to attend our earnings call.

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Operator [35]

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