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Edited Transcript of BNGA.JK earnings conference call or presentation 15-Aug-19 7:00am GMT

Half Year 2019 Bank CIMB Niaga Tbk PT Earnings Call

Jakarta Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank Cimb Niaga Tbk PT earnings conference call or presentation Thursday, August 15, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Lee Kai Kwong

PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director

* Lianawaty Mihardja

PT Bank CIMB Niaga Tbk - Management Reporting & Analysis Head

* Tigor Marsahala Siahaan

PT Bank CIMB Niaga Tbk - President Director & CEO

* Vera Handajani

PT Bank CIMB Niaga Tbk - Risk Management Director & Director

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Conference Call Participants

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* Harsh Wardhan Modi

JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials

* Jin Han Chin

DBS Vickers Research - Analyst

* Teng Siang Huang

KAF-Seagroatt & Campbell Securities Sdn. Bhd., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the CIMB Niaga 1H '19 Results Conference Call. (Operator Instructions) I must advise you that this call is being recorded today, 15th of August 2019.

I would now like to hand the conference over to your speaker today, Ms. Lianawaty Mihardja, Management Reporting and Analysis Head. Thank you. Please go ahead.

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Lianawaty Mihardja, PT Bank CIMB Niaga Tbk - Management Reporting & Analysis Head [2]

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Thank you. Ladies and gentlemen and all participants, welcome to the conference call of PT Bank CIMB Niaga Tbk. Our agenda today, 15 August 2019, is to disclose the bank's first half or second quarter 2019 financial results. The company's presentation materials was released and is now available to download in our website, investor.cimbniaga.co.id. This presentation will be presented by Pak Tigor Siahaan, the CEO of CIMB Niaga; and also along with the members of the directors and other senior management. The total time for this call is about 1 hour, which will begin with a presentation by our CEO followed by a brief question-and-answer session.

Ladies and gentlemen and all participants, today, we are pleased to introduce Pak Tigor M. Siahaan as President Director; Pak Lee Kai Kwong as Finance and SPAPM Director; Ibu Vera Handajani as Risk Management Director; along with other executive members.

Ladies and gentlemen, we draw your attention to the disclaimer to say that some statements made during this conference call may be forward-looking in nature and that actual results could differ materially from projections during today's call. This presentation is not intended to form the basis of any investment decision with respect to CIMB Niaga, neither this presentation shall form the basis of any contract or commitment whatsoever.

Now without further ado, I would like to turn this presentation over to Pak Tigor for his remarks. Pak Tigor, the time is yours.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [3]

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Thank you, Liana. Good afternoon, ladies and gentlemen. Thank you for joining us today in the first half financial results announcement along with our senior management of the bank.

Today, I'm pleased to announce that CIMB Niaga recorded a strong PBT growth of close to 11% year-on-year to about IDR 2.7 trillion or about 8.4% higher than last quarter. We see that the operating environment continue to be challenged by global tension which might affect the domestic growth trajectory going forward. Amidst all that, CIMB Niaga reported an improved operating income underpinned by increased NIM at about 5.4%. This compared to our first half NIM of 5.09% in 2018.

We continue to rebalance our balance sheet, and the loans growth in key focused areas are showing good traction, which is mortgages at about 13.5%, cards is about 10%, and SME is at about 4.3% (sic) [4.1%]. Auto loan recalibration initiatives have also started to show positive quarter-on-quarter growth in second quarter 2019.

Our focus and efforts on asset quality improved with lower gross NPL ratio by about 52 basis points year-on-year to now below 3%. Gross impairment ratio is also down to about 3.17% from above 4% in the previous year.

Higher ROA and ROE, at about 1.5% and 9.75%, is showing in the second half, respectively. Our quarterly ROE hit above double digits in second quarter 2019.

The CAR is also showing very good progress, rising about 190 basis points to about 20.5% with CET 1 at about 19.28% (sic) [19.38%].

The second quarter of 2019, we distributed 20% of our PAT as dividends, as proposed on the last AGM.

Why don't I hand it over to KK who is going to talk about the financials in more detail. KK?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [4]

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Okay. Thank you, Pak Tigor. Good afternoon, everybody. I'm just going to run through the income statement -- the consolidated income statement with everybody, as Pak Tigor alluded to you earlier.

The trends looked pretty good for CIMB Niaga across most of the financial key ratios. Let's start with the interest income. Interest income improved by 8.7% year-on-year, gaining almost close to IDR 1 trillion (inaudible) interest income. Interest expense, however, also increased mainly driven by the interest rate since the second quarter of last year.

So on an overall, our net interest income is up -- net income is up 5.7%. I want to say that we want to continue to manage better if the operating expense -- operating expense stood at 5.7%. Given that's 0 JAW, interest -- operating income and operating expense are running at the same pace.

Provisions, however, improved -- increased slightly to 2% -- increased slightly by 2%, giving us the overall PBT of 10.6% and net profit of 11.8% year-on-year.

On the balance sheet, loans grew 2.6%, mainly coming from the consumer segment; whereas deposits, it's up 4%.

Some of the key ratios. ROA, Pak Tigor mentioned, we are up at the 1.51% level. What we are more impressed of is on the NIM side. NIM is up 30-some basis points to 5.41%. Cost-to-income ratio, we kept it flat to last year even though we had 3 quarters of negative JAW, we've kind of caught up to come back to parity level against cost growth. CASA level declined. There are some challenges in CASA. We do have some runoffs in CASA, bringing CASA levels down to 53.89%. Loan loss coverage, it is above 100%. Cost of credit increased slightly, and we'll go to those a little bit later.

Okay, Page 7. Quarterly earnings, looks good across the last 5 quarters on all operating income, PBT and net profit line. Net profit has been up for the last 4 -- last 5 quarters consistently together with PBT as well.

Next page, on Page 8. One of the key drivers of the improved financials is the optimizing of our NIM. NIM has come up 32 basis points from 5.09% to 5.41% over the last year. We continue to manage the NIM through a series of actions to help us improve the overall [use] from our loans as well as the lower cost for our deposits.

Our noninterest income on Page 9. We added 6.3% on noninterest income. A big part of it comes from our arranger and syndication fees which increased 97% year-on-year. One of the businesses that we have invested in, this is in relation to cards that's on the merchants acquiring business. We've had quite a lot more merchants, and that's showing in the car-related income. So overall, yes, up 6.3%.

Operating expense, on the next page. Yes, operating expense, we kept it at 5.7% year-on-year growth mainly attributed to personnel costs which are up 10.3%. We continued to invest in human capital, more into digital disruptors, designs and getting the right personnel into a more digitized business. So overall, up 5.7%, in line with our revenue growth.

Okay, next page, Page 11, on loans growth. Loans growth was driven by the consumer business. Two businesses that showed significant improvement is the mortgage as well as the credit card business, both on double digit. Another point to note is the auto loans. Auto loans, which has been declining for the last 8 quarters, has finally turned around this quarter, adding 1%. So we expect the auto loan recalibration period to be past this, and now it's moving forward growing this business. SME grew 4.1%. Commercial loans, we're -- commercial banking, we're still being very selective and -- on who we want to do business with. It contracted 2.8% as we are only focused on Tier 1 commercial means that we will grow this business going forward. Corporate banking is up 2.1%, giving the total of 2.6% growth on loans year-on-year.

Asset quality, we are always focused on this one. And you can see the significant changes in the asset quality over the last 5 quarters. NPL ratio was down from 3.39% to 2.87%. We continue to also provide the cover for all these NPLs. And impaired ratio is up to 90% -- the coverage ratio, sorry.

So next page, on Page 13, asset quality by segment. The one that's showing an uptick on a quarter-on-quarter basis is on corporate. That's attributed just to one NIM. Other than that, all the other segments, commercial, MSME and consumer, have shown improvement.

Next page, 14. Capital ratio added close to 200 basis points to the capital ratio, going from 18.60% from a year ago to almost 20.6% this year, attributed mainly to better profits on a year-on-year basis. Equity levels is up to IDR 41.52 trillion.

Okay, let's go to the segment specifics, business specifics. So the momentum of the consumer business continued to drive lower profitability of CIMB Niaga. In particular, the mortgage business is one area that's driving the balance sheet up 13.5%; credit card, as I've mentioned, up 10%; auto loans has also turned around; personal loans, which include pension loan, other and multipurpose loans, has also turned around on a quarter-on-quarter basis. So it represents the -- or the consumer represents the biggest growth in the loans balance sheet.

Next page, on mortgages. Mortgages outpaced industry growth. Industry, I believe, was about 12%. We are running at about 13.5%. Quarter-on-quarter, we're up another 2.3%. Our market share remain stable at 6.5%. NPL ratio, yes, we have increased slightly but are flattish against a quarter ago. So we maintain ourselves at the Top 5 mortgage lenders in the sector.

Auto business, just a quick one. It's just showing a turnaround in our balance sheet, growing from 6.11% from a quarter ago to 6.17%.

Similarly, the unsecured business. The unsecured business is mainly driven by credit cards. While the number of cards in circulation has fallen, but the overall receivables from credit cards have improved 10% year-on-year.

Our strength lies -- next page, please. Our strength lies in our digital banking capabilities. Two digital banking capabilities that we are particularly proud of is Clicks as well as Go Mobile. And we are also seeing a change in trends as well. While the number of users are moving up on Clicks, the number of -- the growth in Go Mobile is even much faster. In the -- from the start-up this year, the number of users are up -- active users in Go Mobile has now more than doubled the number of Clicks transactions. So that's illustrated -- happily illustrated in the picture -- in the chart.

MSME. MSME grew 4.1% year-on-year. So the micro linkage business has remained flattish whilst the SME business grew 4.1%, which is also attributable to some write-offs that we did in the second quarter.

Our commercial loan, we said we remain selective. Year-on-year, that did not show any growth yet. Overall, 2.8%.

And in corporate banking, total loans is up 2.1% year-on-year. There is evidently the shift from extending investment loan for more -- a lot more of the SOE infrastructure projects has given the increase of 11.9% year-on-year (sic) [quarter-on-quarter] and 24.3% year-on-year for investment, whereas the working capital, in fact, is down by 18%.

Syariah Banking, also one of the focus areas in CIMB Niaga growing 32% year-on-year. Deposits is keeping pace with the growth in loans at 37.6%.

So on an overall, we are quite encouraged with the first half financials performance of CIMB Niaga. The growth momentum is there especially, in particular, consumer bank and SME bank. We are also -- we also welcome some of these regulator actions, things like the rate cut as well as the liquidity measures, which include the 7-day reverse repo rate and also the GWM reduction, statutory requirement reduction.

So in our transformation, we are actually gaining a lot of traction. It's now underway now. The transformation focused a lot on CASA balance growth, transaction banking, data analytics, improving customer experience and continued focus on managing asset quality. Operations efficiency also are some of the focus areas that we are looking at, developing human capital -- 3D human capital as well as automation.

One of the key things going into the second half of this year leading to 2020's implementation of our IFRS 9 initiative is well underway also, and we expect a smooth implementation of IFRS 9 standards.

Okay. Thank you. I'll pass it back to you, Pak Tigor.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [5]

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No, I think we'll just take Q&A, and I think we'll hand it over to Liana.

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Lianawaty Mihardja, PT Bank CIMB Niaga Tbk - Management Reporting & Analysis Head [6]

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Thank you, Pak KK and Pak Tigor. Now let us open the Q&A session. Before raising your question, please mention your name and your company. Operator, may we have the first question, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We do have our first question from the line of the company RHB.

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Unidentified Analyst, [2]

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I'm (inaudible) from RHB. I have a question regarding the NPL on the commercial segment. The NPL in the commercial segment has significantly improved. Can you tell us -- can you give us a color on what you did differently in the commercial segment? That's my first question. And on the second question, the NIM on the second quarter has been improving as, if I'm not mistaken, you guys have been repricing loans, especially on new loans and with the cut-off with benchmark rates going forward. Can you give us a color on NIM going forward?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [3]

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Let me take a stab at -- first on the NIM, and I will go to the NPL. Thank you for the questions. So on the NIM, as we guided in the first quarter as well, that it is actually a very tough environment. Especially, if you can see in the interest expense line, it actually increases. So what we've been trying to do is we're trying to align ourselves to ensure that we're getting the right return for the right risk. Hence, there are some adjustments on the pricing. There are some adjustments based on risk-adjusted pricing that we've been doing. And as a result, we've been able to increase many of our loans portfolio to reflect what we think we should be getting for the returns. However, as we have also guided that the environment is also very competitive. So I don't know how long we're going to be able to keep this uptrend in NIM, but we're trying to hang on as long as possible. So as much as we like to do it, obviously, we'd like to have this trend to continue. But I think at some point, it will not continue upwards, but hopefully, we'll continue to keep it above the 5% level that we've guided all this time.

Now with regards to the commercial banking segment, this is a segment that we've been focusing on with regards to loan workouts, recovery and all kinds of workout business. So this is showing a good trend for now. Our recovery is getting good traction. We are also -- as you can see, the growth in our commercial portfolio was also not -- actually, it's a little bit down, but that's okay. We want to focus more on the loan workouts and the recovery on this segment until we get our comfort level that we're going to continue to grow this business going forward. Is that okay?

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Unidentified Analyst, [4]

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Yes.

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Operator [5]

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We have our next question from the line of Harsh Modi from JPMorgan.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [6]

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A few questions just to understand both NIM and asset quality better. Did you sell some of the commercial NPLs during the quarter? That is one. Second, in terms of yield difference between the investment and working capital loan at corporate book, how much is that? Are you making much higher yield on the investment loans? And third is I can't gauge from the presentation, but how much has your cost of fund reduced in last quarter and how do you see that going forward?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [7]

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Thanks, Harsh. Thanks for joining the call. Just a couple of things. No, we did not sell assets in the quarter. So the improvement that you see in the second quarter, the first half, nothing to do with asset sales or anything.

Now with regards to the corporate yields, partly what we've been reducing, and you see that in the investment and the working capital breakdown, is a very low-yielding working capital. In the past, that's been like it's a 1-week money, 2-week money and so forth. So we've been reducing that. And we've been lengthening a little bit of the tenor to get a little bit of a yield pickup but not necessarily 1 week to 8 years, but it could be like 3 months, 6 months and so forth to get a yield pickup that deservedly so.

Now on the cost of funds, in terms of quarter-on-quarter, I think it's pretty flattish. But from year-on-year, obviously, there is more of an uptick in the cost of funds.

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Vera Handajani, PT Bank CIMB Niaga Tbk - Risk Management Director & Director [8]

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Sorry, if I may.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [9]

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Yes. This is Ibu Vera from risk.

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Vera Handajani, PT Bank CIMB Niaga Tbk - Risk Management Director & Director [10]

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To clarify Pak Tigor's comment about the assets, so apart from the usual recovery efforts that may involve some level of discussion with investor or third parties, it's not really portfolio asset sales per se.

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [11]

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Right. Sorry, just to understand that working capital and investment deal, because you have had a massive shift in the mix in last 12 months, so I want to understand, is -- has the yield on this corporate loan portfolio, which is kind of flat at IDR 70 trillion year-on-year but massive shift, has it gone up? Or has it stayed more or less similar in last 12 months?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [12]

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So Harsh, actually...

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Harsh Wardhan Modi, JP Morgan Chase & Co, Research Division - Co-Head, Asia Financials [13]

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The reason I'm asking this is investment loans are mostly, as you said, to SOE companies, right? So I'm just trying to understand with SOE company, do you -- are you able to make up the credit spread enough to lend -- to get some kind of NIM pickup.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [14]

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Yes. So the NIM pickup, actually, what we discussed last time is we looked at the whole portfolio. It's not only in the corporate side but also in the commercial and SME portfolio. And what we did is we are able to adjust the return on most of this portfolio. There's a lot of pushback obviously on some of them. But most of them, we are able to adjust them to ensure that the risk-adjusted return is there. Now if you look at the corporate portfolio in terms of the working capital and investments, there is a shift, but it's not like -- it's not earth-shaking type of a shift. It used to be -- last year, it used to be close to 53-47. Now it's 42-58, the other way around. You have working capital at 42%, and the investment now is 58%. So it's still within the sort of thinking that we have around 60-40, percentage-wise. There is a yield pickup here, Harsh, but also all across the portfolio when we adjusted our return.

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Operator [15]

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We have our next question from the line of Rachel Huang from KAF Research, Malaysia.

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Teng Siang Huang, KAF-Seagroatt & Campbell Securities Sdn. Bhd., Research Division - Research Analyst [16]

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I just wanted to follow up a little bit on the corporate NPL, which I think is on Page 13. There was an uptick, and it's relating to -- is that one particular account? Is there any details -- any further details on this corporate account that's gone bad?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [17]

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Yes. We don't share the details of the exact account, but actually, this is one account that we've been monitoring for some time, and it did fall to NPL in the second quarter. But if you can see, in terms of the impaired ratio, actually, it hasn't really changed. So this was pretty much impaired already. So if you look at it from the impaired perspective, it hasn't really changed. But in terms of the collectibility from the account perspective, it changed in the second quarter.

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Teng Siang Huang, KAF-Seagroatt & Campbell Securities Sdn. Bhd., Research Division - Research Analyst [18]

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Right. And is this related to the commodity segment or the textile segment? Because as I understand it, there could be a couple of accounts in the -- either the steel or the textile segment.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [19]

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It's actually more on the -- more on commodities.

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Teng Siang Huang, KAF-Seagroatt & Campbell Securities Sdn. Bhd., Research Division - Research Analyst [20]

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Sorry? I didn't catch that.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [21]

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On the commodities.

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Teng Siang Huang, KAF-Seagroatt & Campbell Securities Sdn. Bhd., Research Division - Research Analyst [22]

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On the commodities, right. And how much has been provided for in this -- for this particular account?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [23]

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We've adequately provided for that account.

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Operator [24]

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(Operator Instructions) We have our next question from the line of Jin Han Chin from DBS.

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Jin Han Chin, DBS Vickers Research - Analyst [25]

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Jin Han Chin from DBS. Okay. Sir, a couple of questions. One would be the previous narrative for NIM was a tighter liquidity environment going into second half on the back of retail bond issuances, I think, sucking up liquidity from the market. So I'm just wondering whether this narrative still stands for the rest of the year and whether your 5% NIM -- whether there's any kind of upside or downside to that guidance probably [in excess]. And just my second question would be on overhead growth, what we can expect for the full year. Did I hear it correct you said you should track revenue growth?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [26]

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Yes, in terms of the -- if you look at the OpEx -- you're talking about the OpEx overhead expenses growth, right?

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Jin Han Chin, DBS Vickers Research - Analyst [27]

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Yes, yes. That's right.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [28]

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Yes. Well, so far, we've been -- aside from the personnel expenses where we were investing in our people, the digital side, the 3D and so forth, we've been actually keeping our expenses pretty much under control. So if you look at the page -- what is that page?

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Vera Handajani, PT Bank CIMB Niaga Tbk - Risk Management Director & Director [29]

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10.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [30]

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10, right? So the other expenses were about 1.5%. But if there is opportunity for us to invest in human capital, we are. So as a result, the expense growth is about 5.7%. There's JAWS at about -- just a hair above 0% given revenues growth of 5.7%. So I think -- we hope that we will be able to track this expense growth very tightly going forward in the second half.

Now to your first question with regards to the NIM, yes, we see this -- the liquidity will continue to be as we expect in the first quarter narrative. Our NIM, we've been able to expand our NIM despite this liquidity situation. But however, the second half I think will be a bit tougher. The intention is we're trying to hang on as much as possible and as long as possible with this kind of NIM. Hopefully, it will be stable, but there is a risk that it will slightly come down. But it's still going to be above 5%. We view this in the next half of the year.

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Operator [31]

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(Operator Instructions) We do not have any questions at the moment. I would like to hand the conference back to our presenters today. Please go ahead.

Thank you. That concludes our conference for today. Thank you for your participation. You may all disconnect your lines now. Thank you.

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Lianawaty Mihardja, PT Bank CIMB Niaga Tbk - Management Reporting & Analysis Head [32]

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Ladies and gentlemen, that ends our session for today. Thank you very much for your participation in our conference call today. We will be updating you again for our next analyst meeting presentation which will be announced in early quarter. Thank you.