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Edited Transcript of BNGA.JK earnings conference call or presentation 8-May-20 7:00am GMT

Q1 2020 Bank CIMB Niaga Tbk PT Earnings Call

Jakarta May 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Bank Cimb Niaga Tbk PT earnings conference call or presentation Friday, May 8, 2020 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* John Simon

PT Bank CIMB Niaga Tbk - Director of Treasury & Capital Market and Director

* Lee Kai Kwong

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

* Tigor Marsahala Siahaan

PT Bank CIMB Niaga Tbk - President Director & CEO

* Vera Handajani

PT Bank CIMB Niaga Tbk - Credit and Risk Management Director & Director

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Conference Call Participants

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* Ben Shane Lim

Macquarie Research - Research Analyst

* Danny Goh

Crédit Suisse AG, Research Division - Director

* Harsh Wardhan Modi

JPMorgan Chase & Co, Research Division - Co-Head, Asia Financials

* Robert P Kong

Citigroup Inc, Research Division - Director & Deputy Head of Regional Financial Institutions

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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 First Quarter 2020 Results Conference Call. (Operator Instructions) I must advise you that the conference is being recorded. I would now like to hand the conference over to your first speaker today, (inaudible). Thank you. Please go ahead.

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Unidentified Company Representative [2]

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Thank you, Allysa. Ladies and gentlemen and all participants, welcome to the conference call of PT Bank CIMB Niaga Tbk, or CIMB Niaga. Our agenda today, 8th of May 2020, is to disclose bank's first quarter 2020 financial results. The company's presentation material was released and is now available to download on our website. This presentation will be presented by Pak Tigor Siahaan, CEO of CIMB Niaga Tbk; Lee Kwong, CFO of CIMB Niaga; and also other directors and senior management of the bank. The total time for this call is about 1 hour, which will begin with a presentation by our CEO, followed by a brief Q&A session.

Ladies and gentlemen and all participants, today, we are pleased to introduce Pak Tigor M. Siahaan as President and Director, Pak Lee Kwong as Finance and Scoping Director and CFO; Ibu Fathurrahman Djamil, as Credit and Risk Management Director; Ibu Lani Darmawan as Consumer Banking Director; Pak John Simon as Treasurer and Capital Market Director; Pak Pandji Djajanegara, Syariah Banking Director, along with other executive members of the bank.

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 decisions 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 very much, Pak [Sal.] Good afternoon, ladies and gentlemen. Thank you for joining us today to discuss our first quarter 2020 financial performance. I'm together here, along with the senior management of the bank. I hope all of us are blessed with good health in this very trying times. And let me take this opportunity also to express our appreciation and support to the government and all parties, especially doctors; medical staff; volunteers, who are fighting to prevent this COVID-19 from spreading further and the recovered from those that are infected. Let's hope that this will be over soon.

Ladies and gentlemen, moving on to our first quarter. We're pleased to share that despite the challenging environment, we managed to record PBT, profit before tax, of IDR 1.4 trillion, which represents 11.2% year-on-year growth and a 10% Q-on-Q. The growth was mainly driven by 11.5% growth of noninterest income and 2.7% year-on-year reduction in operating expenses. Our PBT contributed to higher ROA at about 1.5% or 8 basis points higher than last year and higher ROE at 10.6% or about 110 basis points higher than it was last year. As we focus on our liquidity, our CASA grew close to 19%, which contributed to deposit growth of about 6.3%. And we are faring at about 60.1% CASA ratio, which is a record high for CIMB Niaga.

In this very challenging environment, we cautiously grew our loan book as we grew 3.3% year-on-year. Pak KK will mention and talk about this further. Most of it is from the FX movements. And we increased our focus on asset quality. Our operating expenses decreased by 2.7%, and this has improved our cost-to-income ratio to below 48%. We managed to maintain our asset quality at similar level as last year's with gross NPL at about 3.03%. Furthermore, our CAR remained strong and within our guidance at about 19.4%. Having shared all the above encouraging results, we see headwinds coming. And hence, asset quality will become our primary focus as our customers have been requesting for loan rescheduling and restructuring in the past few weeks.

Now I hand over the presentations to Pak KK to cover our financials. Pak KK, if you could please continue.

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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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Thank you, Pak Tigor, and good afternoon, everybody. I'm going to share with you the financial position of a consolidated financial statement for CIMB Niaga. I'll draw your attention to Page 4 of the investor deck on the balance sheet. Like Pak Tigor mentioned briefly, loans grew 3.3% to IDR 194 trillion. As of March position, we did have a depreciation of the rupiah on FX constant. Loans were about 1.4% year-on-year and pretty stable compared to the previous quarter. So what we're encouraged about on the balance sheet side is on the deposit -- third-party deposits, that current accounts grew 17% and the savings accounts grew 20%. So we are less relying on the expensive time deposit now. We have selectively let go expensive time deposit. Time deposit dropped 8.2% to about IDR 81 trillion. Overall, customer deposit grew 6.3%, giving us a CASA ratio right now of above 60%. Like Pak Tigor mentioned, is the highest level they have been.

Okay. Next on the income statement, Page 5. Okay. Operating income is up 3.7%. Net interest income remained flattish, up 1%, and it's slightly lower than the quarter before. Where we are gaining growth on the noninterest income, in particular, was the FX as well as marketable security gains. Operating income is up 3.7%. The operating expenses is down 2.7%, giving us a draw of 6.4% year-on-year. So in this trying times or difficult times amidst COVID-19 one of the things that we really focus on is managing the operating expense, selective in our investments and also built a new working culture in which we rolled out a little bit more effort in managing or investing in stuff that will grow -- help us grow in the future. So provision expense is slightly higher, but compared to measures year-on-year because there's 2 different accounting standards compared to last year. So we're up 8.7%, a little lower than a quarter ago at IDR 774 billion. Overall, PBT is up to IDR 1.4 trillion at 11.2% growth.

And some of the key ratios on Page 6. Some of the ones that are giving us a reason to smile is the cost-to-income ratio dropping to below 48%, CASA ratio at 60%. Cost of credit in slightly challenging times like the COVID-19, which has not hit us yet in the first quarter, so we have to see what's going to happen in the coming quarters. So that's a 1.5%, 1%, that is an improvement year-on-year again. Loan loss coverage in the additional IFRS 9 provisions, up to 191%. So all in all, the key ratios have shown a lot of improvements. ROE is up. Okay. So where there are some challenges is on the NIMs. NIMs with the falling interest rates and the loans almost fully repriced after the -- due to the 4 interest rate cuts in the fourth quarter. You can see it coming down from 5.14 from the quarter ago to 5.02. So where we are getting some help is on the deposit composition. We are moving a lot more deposits from expensive TDs to much cheaper transactional CASA accounts.

Okay. On the next page, Page 7, is the quarterly earnings trend. A few key lines here: operating income, PBT and net profit from consistencies here in the first quarter of last year that IDR 4 trillion on the operating income, now that's IDR 4.2 trillion. You can see in the third quarter it's a little higher because at that time, we did have an asset sale during that time that pushed up operating income. Overall, quite a consistent improvement in PBT, going from IDR 1.28 trillion to IDR 1.3 trillion, and then now at IDR 1.4 trillion.

Okay. Net interest margin, I touched a little bit about this. So it has been coming down since the fourth quarter of last year. And we hope to maintain this level at the 5% as and when the deposit prices come down and move from more TD-based to CASA-based funding. On the next page, on Page 8, you see the breakdown of the noninterest income. Fees and commission, these are mainly fees and commission from loans and deposits as well as investments and bonds. So this is down year-on-year about 18%. So where we are gaining from the FX and derivatives as well as the gains from marketable securities. Recovery income is overtaking the hit of much slower recovery from a year ago and from the last quarter. Credit card is still, again, a little bit of traction up about 5% year-on-year, but much slower compared to a quarter ago given the festive season in Christmas. So overall, quarter-on-quarter NII is up and started gain from a year ago.

So on Page 9, one of our main focus here is the operating expenses. Our cost-to-income ratio is coming steadily down, down to 47.78%, while income remain challenged. We challenge ourselves even further to bring the cost down. Personnel cost is up about 3% year-on-year, but anything outside of personnel cost is down by 8.5%. So cost-to-income ratio improved by 3.1% year-on-year. Let's look at the balance sheet now. Deposit growth. Deposits, our main intention really is go into a transformation. I think transformation exchange free era is to bring up the level of CASA at the 1Q, right? We are now at 60-some percent, but we have higher ambitions. We invested a lot in growing our CASA franchise. CASA CAR mainly from the corporate segment and CASA from the retail segment, both are high double-digit at 17.1% for current account and savings account 20%. Time deposit, as we continue to offload them, we have to change the compensation to more CASA dependent for asset funding strategy. Time deposits is down 8.2%, but is at a level that we are comfortable with at this juncture.

As for loans, loan is driven mainly by consumer banking. Consumer banking loan mainly comes from mortgages, credit cards and auto. Mortgages is up about 11.6%; cards with 9%; auto, okay, finally turned around in 2019, up 6.2% and personal loans up 3.8%. So SME commercial banking, we are still very -- being very selective. SME, I'll give you a little bit of detail on the segment that we are growing. And SME is a segment that we want to grow in, it's actually growing quite healthily. As for corporate banking, it's up 7%, [having] actually FX differences. So on a year-on-year, FX constant basis is up 1.4% for the entire portfolio.

On Page 12, asset quality. Okay. Let's look at the gross impaired loans, gross NPL and net NPL. So NPL, that gray line, it was 3.03%. We were at 3.04% from a year ago. We continue to bring it down to the level of 2.62% in September '19. It crept up a little bit and now it's up to 3.03%, mainly attributed to some delinquency. Actually going across several of the segments. At the bottom, you can look at loans by collectability. One of the things you mentioned is the special mention at 8.1%, that is attributed to 1 or 2 big names that they have moved to collectability too. Loan loss coverage increased to 191% after the IFRS 9 one-offs.

So in the next page, Page 13, there's a breakdown of the asset quality NPL ratio by segment. Page 14, capital is still at a very strong level, 19.39%. This is after the impact of IFRS 9 provision, which is about 1.8% to our cash flow. So we're building it up to about 19.39% from a high of 20.47% (sic) [21.47%] before the IFRS 9 provision. Okay. I'll just maybe dive in very quickly to some segment numbers. Page 16, consumer bank running well on both fronts, loans and deposits. Loans, I mentioned earlier, mortgage, credit cards, auto has been performing well. And for deposits, CASA is up 22.8%, and time deposits were up 1.3%.

On the next page, you see a breakdown on the mortgage portfolio growth, still growing strong quarter-on-quarter at 2.5%, year-on-year 11.6%. Bookings coming from 3 separate sources: refinancing, primary and secondary markets. On credit cards, cards in force is up 3%, transaction volume is up by 6.2%, sales volume is up 4.5%, receivables that was mentioned earlier was up about 8.5%.

Auto loans. Auto loans on the CNAF side, the subsidiary is growing at 7.1%. The indirect auto is shrinking a little. So auto, again, the composition from origination from nondealers and dealers, it's coming more from dealers now. A little bit more information on our channel strategy or [usage] strategy. So number of users for Go Mobile continue to increase year-on-year and quarter-on-quarter, up about 17.5% from a year ago. For Go Mobile users, monthly transaction volume or financial transaction volumes are also up about 100% and about 10% year-on-year -- quarter-on-quarter. So one of the things that we do track on this channel strategy is the CASA contribution from the digital assigning customers. The CASA growth for this segment of customers is up about 37% year-on-year, on quarter-on-quarter 13%. The monthly number of transactions was up about 40% year-on-year.

So for SME banking, right, I'll split it down to 2 separate segments: one is the non-retail lending program segment and one is the retail lending program segment, which is the segment that we have been focusing on. So we are doing very, very well over the past 12 months. That is quite a contraction quarter-on-quarter. Overall, we still have about 29% and the segment that we are actually migrating the commercial bank and also let it run off is the non-retail lending segment. That segment is down significantly about 70%. So overall, you see that the segment is down 7%.

Okay. Commercial banking, we are still treading very carefully with this segment. Overall, this segment is down about 4.1% as we focus -- we continue to focus on asset quality on commercial lending. And corporate banking. Corporate banking, we mentioned in the last -- in fact, the last 2 analysts meeting, we are actually focusing a lot more on investment loans, that part is up by 23%. Working capital is down 11.2%. Total, it's about 7%. And then, we are doing very well on getting more CASA from our corporate relationships. It's up about 48% year-on-year, again, having less dependency from the corporate TD deposits.

Okay. Page 28. Syariah banking continues the momentum. It's still growing quarter-on-quarter year-on-year very strongly. Syariah deposits is down slightly as we try to offload expenses TD and some of these TDs are coming in from Syariah (inaudible) little higher. So at this juncture, we're very comfortable with the current situation with Syariah, and we are able to offload a little bit of the TD, but CASA continue to grow very strongly at 32%.

Okay. Maybe I'll just pass the session back to Pak Tigor, who is going to share with everybody what we are doing right now in things of this COVID-19 situation. Pak Tigor?

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

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Thank you, Pak KK. I guess we're on Page 30. Before we go to the Q&A session, let me share with everyone our immediate business focus and guiding us managing our business in light of COVID-19. First and foremost, obviously, employee health and welfare. We put maximum efforts to ensure our employees stay healthy and well protected, including we've done a lot of split operations for critical units and work from home for noncritical units. About 75% to 80% of our staff are actually, right now, working from home. We distributed masks, hand sanitizers and also vitamins for all those employees, especially those who are working at the office. We've done a lot of regular cleaning in all our offices, using disinfectants. We've done a lot of travel restrictions for business and personal travels for our employees. With regard to liquidity, we leverage in our digital channels at this time. And our CASA and deposits program as well as our status as BUKU 4 banks have been very successful in attracting and retaining sticky deposits.

With regards to asset quality, as I mentioned before, this is a major priority for us, given our current situation. Cost management. This is also very key as you can see with debt below 48% and 47.7% in terms of cost income ratio, and we'd like to keep this ratio around those levels. We've launched several initiatives to manage our costs that we have more control on in light of the challenging market conditions. We also worked out closely with the government, with the regulators, with regards to the efforts and policies to ensure continuity in this current business development. With regards to transformation and digitalization, we continue our transformation. And I think we -- what we're doing is we're actually pushing this even further, particularly those related to digitization, customer experience and productivity improvements.

So ladies and gentlemen, before we go to Q&A, I'll just touch on a few words on Page 32 here on the final remarks.

We're delighted with the stronger first Q performance despite very challenging economic and physical environment. We do expect headwinds in the following months, given impacts of COVID-19, hence, a little bit of moderation in the financial performance. Employee health and welfare as well as customers' business continuity are becoming our main priorities, as I discussed earlier. Given the headwinds, our business focus are liquidity, asset quality and cost management. We continue to drive F23 program, focusing on customer journey, digitization and productivity improvement, especially with regards to the liabilities management of the business. And we're in constant dialogue with governments and OJK and so forth to support all their efforts to ensure business and economic sustainability. In summary, we're pleased with the first quarter performance, but we see headwinds are coming, and we're prepared to face the challenges in a very trying time.

With that, thank you, and we'll now take Q&A.

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Unidentified Company Representative [6]

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Thank you, Pak Tigor. Now let us open Q&A session. Before raising your questions, please mention your name and your company. Allysa, 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)

Your first question comes from Harsh Modi of JPMorgan.

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Harsh Wardhan Modi, JPMorgan Chase & Co, Research Division - Co-Head, Asia Financials [2]

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This is Harsh. Thanks for doing this call (inaudible) with special mention plus NPL is about 11%. It has drawn about 400-odd debts from December to March. Are these apples-to-apples comparison? Or are these different numbers and I should not be comparing?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [3]

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So special mention is up almost 300 bps Q-on-Q, is that...?

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Harsh Wardhan Modi, JPMorgan Chase & Co, Research Division - Co-Head, Asia Financials [4]

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Yes.

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [5]

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Harsh, thanks for the question. So as you know, we were still restructuring one of the steel mills in the fourth quarter, so in the third quarter, we moved that loan into collectability to that -- actually moved that into special mention, once the restructuring deal was handed out. So that was the big contribution was in the spike up in special mention.

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

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Okay. And if I think about April to now, May, what proportion of your book have you restructured after first quarter? For example, some of the other large state-owned banks are anywhere between 5% to 10% of loan book have been restructured. They are expecting minimum 20% incremental of the loan book will be restructured by end of the year. What is your expectation of restructured loans. One, what is the current number? And where do you think it gets to by end of the year? What's your working assumption there?

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

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Harsh, sorry, I was on mute. Tigor here. So with regards to the restructuring, as we're facing this, as you know, the scheme in Indonesia is basically opt in, right? There's no -- it sounds like opt out in some countries, regardless of what kind of loan levels that you have. So every single one of these have to be done and individually or in bulk depending on the amount and type of loans, et cetera. So as of now, probably we're not dissimilar to the other banks, maybe about, I would say, about 6% to 8% to 9% is probably what we're going to look at right now. And depending how this thing will shape up in the next 1, 3, 6 months, right? But as of now, we probably look -- this is probably going to be about maybe between 15% to 25% of our portfolio, depending on where things will start to open up with regards to the PSBB, with regards to different cities and so forth. But ballpark figure, probably, around there.

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Harsh Wardhan Modi, JPMorgan Chase & Co, Research Division - Co-Head, Asia Financials [8]

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Okay. Okay. Okay. That's very useful. The follow-up on the coverage then, so if I look at your total loan loss reserve as a percentage of loans at risk, as of March 31, is about 52%. Similar number for some of the larger Indonesian banks is in the 65% to 70% range. Now then if, let's say, let's say, 20-odd percent of loans, incremental loans that restructured, even if you assume a very low incremental provisions on those, assuming a lot of them will get cured, this gives us -- in the starting point of 52% seems a bit too low. For example, Mandiri is saying that on a steady-state basis, on the enlarged loans at risk at the end of the year, they still want 40% plus coverage ratio.

So the numbers that we are looking at is pretty huge. And if I start putting same numbers for your book, I get credit cost anything between 400 to 800 basis points for the year, which sounds seriously big. Now again, I'm not saying that your book is similar to some of the other state-owned banks, but how are you thinking then in terms of adequacy of coverage? And what are the various outcomes that you are thinking about in terms of credit cost this year and 2021?

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

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Yes, Let me take that, then maybe Ibu Vera and Pak KK can jump in. As of now, I think with regards to -- you mentioned this with regards to loans at risk, which includes the special mention loans, right?

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Harsh Wardhan Modi, JPMorgan Chase & Co, Research Division - Co-Head, Asia Financials [10]

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(inaudible)

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [11]

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Yes. Basically on these loans. So far -- well, first of all, with regards to our coverage with regards to the NPL were actually at about 100, and I don't have the number, about 190%, if I'm not mistaken 180% to 190% in terms of coverage. So from that perspective, I think we're pretty well covered. With regards to the -- some of these special mentioned loans, maybe Pak KK or Ibu Vera you might want to -- for some reason I don't have it in front of me here.

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [12]

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Okay. Yes. So maybe I can help out a little bit here. For the special mention loan, given the extension provided by the regulators, right, so it's very hard for us at this juncture to pin down some of the provision levels in the coming months. So we are still receiving requests for restructuring on a daily basis, right, across all segments, and we are trying our utmost best just to review all these cases and ensure that they are really COVID-19-related cases.

And in those instances that we feel that there is no significant increase in credit risk for some of these loans, and this is just a temporary blip due to the COVID-19, then the -- then we expand the R&R. We do not then provide additional provision for these loans (inaudible) provision. So in that sense, it will not increase our credit losses for these loans that we can identify that's affected by COVID-19.

Well, of course, at the same time, there are also other loans that may not be directly impacted by COVID-19 or that does not qualify for a COVID-19 kind of instruction. Those we continue to manage it on a BAU basis, on the merit of the -- whether they are or are not COVID-19-related then we have to assess internally. So at this juncture, a lot of these restructurings that are coming in that we are doing. In fact, almost all of it are COVID-19-related. So the ones that are not COVID-19-related are the ones that we have reidentified and provided for and has been budgeted for already.

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

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And any indication of what the budget for the year is in terms of [the discount]?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [14]

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So our guidance, I think -- spoke about provision was about 1.6% to 8% (sic) [1.8%], but I don't think we can hold onto that guidance. We do feel that -- I have [received] a very wide range, I would say, maybe from 1.8% to a potential 2.3%. And I'm saying 2.3% because a lot of the loans that we are restructuring kind of get a protection, at least until 2021, giving them the chance to recover from the COVID-19 situation. So we do hope that those that have taken up the restructuring can meet the terms of the restructuring. And hence, we do not then have to treat it as a BAU restructuring and deteriorate that stage.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [15]

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So just to add a little bit, Harsh, especially with the smaller names in terms of small outstanding but bigger sort of transaction accounts with regard to SME, consumer, especially, whether it's auto and mortgages and private cards, especially. So we -- as I mentioned here, it's not an opt out scenario whereby everything has to be appropriately sort of approved, right? So there could be situations whereby things are actually going into this approval process, but it's not quick enough so that the -- given the IFRS process, it will already hit the provision. So we are struggling with regards to the timing as well. Because of the volume that's coming in. So there could be some lag in terms of the timing of these provisions, but I think the intention is to tackle these as soon as we can.

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [16]

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Yes. The other thing that we are also [vary] about is that some clients may not be even opting in. They may not be applying maybe until they are more than 30 days in delinquent, and this would be placed in stage 2, right? So the provisions have already called in by then. So we are also currently looking at the delinquency status of all our clients of retail and non-retail to ensure that those who really need help there get the help to meet the -- in terms of restructuring.

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Operator [17]

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Your next question comes from Robert Kong of Citi Research.

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Robert P Kong, Citigroup Inc, Research Division - Director & Deputy Head of Regional Financial Institutions [18]

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First of all, I have to apologize. I was listening to some of your answers to Harsh's questions and my line dropped, so I missed some of the key numbers. So I'm going to revisit that, if I may. I'm sorry to do this.

Can I just double check, you said that over time, you think around 15% to 25% of your loan book will end up being restructured this year. Is that your estimate?

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

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So this is as of the information that we have today with regards to ballpark figure, probably around there.

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Robert P Kong, Citigroup Inc, Research Division - Director & Deputy Head of Regional Financial Institutions [20]

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And you're currently at 6% to 8% now, but that's what 15% to 25%, where you think you will be by the end of the year?

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

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That's the best guesstimate that we have at this point, yes.

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Robert P Kong, Citigroup Inc, Research Division - Director & Deputy Head of Regional Financial Institutions [22]

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And again, sorry, I missed some of the commentary, but you're suggesting that from an original credit cost guide of 160 to 180, you're going to go to about 180 to 230 credit cost?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [23]

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Yes, it's correct. That's what I said. Yes.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [24]

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Yes.

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [25]

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So I'd say up to 2.3% because we are afraid also that there some clients who are already having delinquency are deteriorating, moving from bucket 1 to bucket 2, they will not be seeking help yet and then the delinquency will move it and then we think at a later time. So this provision, when they come in first so it's situation that everybody can opt-out, to actually opt in they have to be [ready for.]

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Robert P Kong, Citigroup Inc, Research Division - Director & Deputy Head of Regional Financial Institutions [26]

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And to be clear, once you've approved this as a COVID-19-related, you will not move -- you will freeze the staging until the end of this year. Is that also right?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [27]

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So yes, we can -- we're actually in discussion with our auditors. They seem to be okay with the idea of it at a particular point in time, let's say, March 31 or February 29. They were DOPD -- DPD, but it took us some time to the client, some times to realize that they need help. We can still move it back to stage 1.

But having said that also in any disruption, not everybody is able to meet the terms of the restructuring, there may be a second restructuring required depending on how long the COVID-19 pandemic will last and then the second restructuring company, then we have to have a second discussion with auditors, will it still be considered a significant increase in our credit risk.

So there's also a lot of discussion that we have with accounting standards. So yes.

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Robert P Kong, Citigroup Inc, Research Division - Director & Deputy Head of Regional Financial Institutions [28]

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So if I understand it, go ahead. Okay. If I understand it correctly, then, it sounds like you may not have a massive rise in the reported NPLs this year because a lot of it will be frozen. But will you see -- are you at risk of a fairly large rise in NPLs at the start of 2021?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [29]

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Well, I think the way I would say that, Robert, I mean, the way that the whole relief is designed, this is a temporary relief, right? I mean, the intention is that these are companies that are actually viable, but because of the lockdowns and all these scenarios, they just can't sell anything.

So I think it depends on the companies and when are they going to be back on their feet. But if these companies supposedly are still viable, strong companies in a normal environment, if we get back to a semi-normal situation '21 might not be a blood bath, right? But depending on how 2021 is going to look like, if 2021 is still going to be similar to 2020, then it will be a very different picture.

So I think it depends on how we're going to see the scenarios and all these things. But as of now, the companies that we put into this COVID-19 relief are those companies that are previously viable. They're actually doing fine. There are no DPDs, good customers. But all of a sudden, within like weeks, they couldn't sell anything.

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Vera Handajani, PT Bank CIMB Niaga Tbk - Credit and Risk Management Director & Director [30]

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Okay. This is Vera, can you hear me now? I got -- I was put on mute just now, and I missed some of the few questions, so trying to call out the issues. Okay, there are a few things here I would like to add, and I think some explanation has been given.

Number one, on the things you mentioned, some of the numbers appear to be high, partially but also a significant contribution is also because of the exchange rates situation. So some of the accounts have been there, but the exchange rate is just amplifying the numbers because we are also looking at those that are actually in U.S. dollar loans. And they are put under restructuring, then the number is actually bigger.

Secondly, as Pak KK has mentioned, 30th of March, actually where Indonesia is slightly later than the rest of the region probably to start giving this COVID-19 relaxation to some of the borrowers. And if we are talking about 30th of March, and Pak Tigor has mentioned as well, is actually opt-in. So some clients have not opted to be in, but they have started to show delinquency. So we are starting it up subsequently, so some of these things have already moved back into the so-called non-special mention situation.

But you're right here, we continue to review where is the potential if you're not above. You give 6 months, it is just freezing while eventually, they will and have a -- and some of this may fall into real problems.

Many of these may require further restructuring or for the lengthening of time beyond 6 months or before end of the year. But many will just need more time, but not -- and hence, it will go, probably, into -- some of this will go into stage 2. So we have a few factors that we look at in this particular debt just to gauge some of the payer vulnerability that we have here. And KK has given you some highlight based on what we have at the 30th of March, where is the likelihood of the credit cost.

From my end, we are looking at, from a sector perspective, from vulnerability of our, say, for example, SME and consumer, whereas the potential pressure point that may come there.

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Robert P Kong, Citigroup Inc, Research Division - Director & Deputy Head of Regional Financial Institutions [31]

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Okay. Can I ask about the net interest margins? It seems a bit surprising that the NIMs have fallen so much quarter-on-quarter. One, because if you look at your net interest income, it's kind of flat. It's not like [managed] income itself dropped a lot.

And also, you had a phenomenal quarter on CASA. So I'm just trying to understand why the NIMs would drop so much in one quarter when the actual NII was okay, the profit was fantastic. Is there any timing differences or any other calculation issues there? And what does it mean for your NIMs by the end of the year? Should we be going below 5% from here?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [32]

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Okay. Let me get that. So let me go back to that page, right? So the NIMs are falling up gradually quarter-on-quarter. I do believe that on the chart, the NIMs from the previous year is the year-to-date NIM. So if you -- you've got falling NIMs, which means that in the first half of the year, it's actually climbing up very nicely. But in the second half, it begins to taper up a little bit. So when you start a new year, you start at the point 0 again, right? So you can see the NIM just dropped off like that because towards the end of the year, the NIMs were already at below the 5.31% level so in quarter 4. So it gradually went down.

So if you remember, in the fourth quarter of last year, there were forward cuts totaling 1%. So the repriceable loans that are floating rate loans got repriced. So some of them, 1 month repriceable, some of them 3 months repriceable. Those loans have all been fully repriced in the first quarter of this year.

And the deposits, which are more longer dated in nature, those 1 and 3 months are fully repriced right now at a lower rate. But the 6 to 12 months and we are still at the higher level, not being repriced yet. So while 5.02% right now, deposit composition moving away from time deposit and getting to CASA will help protect the NIM to about this 5% level.

So at this juncture, I'm still quite confident that we can still maintain the 5%, if not try to improve it a little bit because the loans' repricing is fully reflected, but the deposit repricing has not.

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Robert P Kong, Citigroup Inc, Research Division - Director & Deputy Head of Regional Financial Institutions [33]

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Okay. That's very clear. And then just could you talk a bit about the noninterest income. It was a very, very strong quarter, but there's a big number in there, which is FX and derivatives, which is a multiple of the normal level. It's about 3x or 2.5x the normal level. Could you explain what that number is and whether it's a one-off or whether that's actually the new normal?

And also, could you talk about how general fee activity is from April onwards? Because just like everywhere else, people just aren't spending at the moment.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [34]

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Yes. Maybe I'll take a stab at it, and maybe if KK, you might want to add. But basically, there is big volatilities in the FX in the first quarter, right? And obviously, we don't want to boast too much making too much money on the FX. But the volatility in itself, even though maybe the volume has come down from March onwards, this is when -- when the COVID-19 situation really hit us. But the volatility itself allows us to get much better spread in the first quarter.

Now how is this going to play out? Obviously, depending on how the volatility is going to be, the volume has certainly -- is not where it used to be. But we're still engaged with a lot of the customers with regard to their FX needs. And we hope that there's still some revenues here to be made.

Maybe KK or John you want to -- John, you want to add?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [35]

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Yes. I think you said at all. John?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [36]

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Okay. I'm not sure John is in...

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Robert P Kong, Citigroup Inc, Research Division - Director & Deputy Head of Regional Financial Institutions [37]

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How about the general fee trends from here given the general slowdown?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [38]

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Yes. I mean, in terms of the -- all this -- the fees and commissions, right? The time for fees and all that kind of stuff. And obviously, given the slowdown, that's going to be more challenging with regards to, for example, the wealth management fees and so forth.

Even though in bancassurance, it might be -- it hasn't fallen off the cliff yet, but we're very watchful at those -- at those fee income prospects in the coming quarters.

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Robert P Kong, Citigroup Inc, Research Division - Director & Deputy Head of Regional Financial Institutions [39]

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Okay. Just a final question. I think you were giving an ROE guidance last year. Have you got a sense of where you think ROEs will be this year? I mean, obviously a few things have changed.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [40]

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Yes. I think this is a very difficult question given there's very little visibility in terms of what's going on in the next coming quarters. I think the guidance that we showed, what was the guidance last time we had, about 10% to 12% or 11% to 12% or something like that.

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [41]

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[Yes, 12%.]

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [42]

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Yes. So I don't think -- Robert, I don't think we'll be looking at that. I think, probably, it's going to be in the single digits. But right now, I would -- I wouldn't say where exactly we'll land just because there's so many moving parts right now.

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Operator [43]

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(Operator Instructions)

Your next question comes from Ben Shane Lim of Macquarie.

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Ben Shane Lim, Macquarie Research - Research Analyst [44]

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My first question is with regards to the CASA. It's moved up a lot. And my question is whether this is sustainable. I'm sure that some of this [contribute] to your corporate cost line? So how are you going to defend that?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [45]

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Well, there is both, actually, if you look at the SA itself, we're covering about IDR 65 trillion, which is a record high as well. And that's been coming in consistently. On the CA itself, also not only from the corporate side, but also from the SME side as well.

So I think this has been a multi-year sort of journey, I would say. If you guys recall, about 5 years ago, we were at about low 40s. And we are -- we moved it up to about mid-40s, 50s, mid-50s. And now we're touching on the 6 handle.

Now with regards to the -- where is it really coming from? I think it's all across. Now maybe there's a little bit of a tailwind here given the flight to quality. But I think if you look at the quarter-on-quarter sort of movements, we've really focused on the CASA. And I would say our transformation focus that we sort of started since early last year, a bunch of them are bearing fruit in terms of the process, in terms of our digital capabilities.

I think Pak KK showed how our mobile channel is actually getting a lot of traction from the transactions as well as the users. And we've mapped it out, those guys that are much more active in our digital channels will put a lot more CASA over there. So that constant sort of push has been going in our favor.

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Ben Shane Lim, Macquarie Research - Research Analyst [46]

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I suppose, just asked a question [slightly from me]. I noticed there are some trends where when we head into a crisis, there's a big jump in CASA anyway. I mean as opposed to corporate SMEs, they want to remain a bit liquid and [sure] as interest rate comes down there's less of an incentive. I know -- I am sure some your programs have certainly contributed to this but how much do you think this trend has factored into your high CASA right now?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [47]

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In terms of percentage, I don't know, man. I mean think part -- every bit helps, right? Like I said, the quality is there and I think some of the sort of people that would have spent a bit more probably keep a little bit more in their savings. But also, we're gaining market share from others, right?

So I think all these factors combined have driven us to this level.

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [48]

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Yes. [So as Tigor mentioned in these results] so [it's just not -- we didn't just look into the default enablement] but also targeted becomes more important. We select the segments that we want to build on, are emerging [the few ones] and that resonates with them. So a lot goes about driving as a deposit agenda. So a lot of value drivers that we have built into our transformation to really step towards a CASA growth value line across all the sections that we represent.

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Ben Shane Lim, Macquarie Research - Research Analyst [49]

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Okay. That's helpful color. Can I ask then about the special mentions? I may have missed, it was mentioned earlier, but how much is already provided for that jump in special mentions?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [50]

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Okay. Provision is very defined, maybe [by size.] It all depends on the staging of the loan. So it has a provision model attached to it. So for loans that are in special mention, we would have provided based on what is rightfully to be provided in that -- starting I think [there too] stage one, particularly if they're less than 30 days. So we do have provided, based on that, that is appropriate. And if it's something in that delinquent bucket between 1 to 30 days.

So if it is a special mention in the more than 30 days then it will be a stage 2 provision, and that will be based on, let's say, collateral shortfall or discounted cash flow methodology. So yes, so [defined] and we are happy with the level of provisions, and therefore, all the accounts that are in special mention.

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Ben Shane Lim, Macquarie Research - Research Analyst [51]

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My next question. I know that when [Jandin Group] made a call earlier, they actually changed the proportion of loans that are considered high risk to COVID-19 after [settling their books and they're closing] from 3% to 5.4%. I don't suppose you've had a similar change in this recognition of this high-risk segment as well?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [52]

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Could you repeat that, the -- could you repeat that?

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Ben Shane Lim, Macquarie Research - Research Analyst [53]

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[When January] initially assessed -- a good level initially assessed the COVID-19 high-risk sector exposure, [you also mentioned 3%] the closer look, right? [They got their books] and say they increase it to 5.4%. So I'm just wondering [we gone beyond that] level, whether you guys have done a similar exercise. Yes.

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Vera Handajani, PT Bank CIMB Niaga Tbk - Credit and Risk Management Director & Director [54]

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We have done it but -- yes, go ahead Tigor.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [55]

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[I -- you go instead of me.]

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Vera Handajani, PT Bank CIMB Niaga Tbk - Credit and Risk Management Director & Director [56]

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We have but we need to get back on some of that percentage right now.

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Operator [57]

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Your next question comes from Danny Goh of Credit Suisse.

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Danny Goh, Crédit Suisse AG, Research Division - Director [58]

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A few questions from me. First one is related to cost. I was just wondering whether the cost savings that you've seen in the first quarter, how sustainable is that? Do you see more room for cost to be brought down? And I think when I looked at the cost reduction, it had been classified under nonpersonnel cost. Just wondering whether you can actually share with us a little bit more color on where the reductions have come from?

And secondly, just would like to clarify. I think you had mentioned at the group level that for markets like Indonesia, any rate cuts policy, rate cuts actually have a neutral to positive impact on net interest margin. So I would just like to clarify, based on your sensitivity analysis, whether that is the case. Because I think it was mentioned earlier that compression in net interest margin is actually coming from the rate cuts. So yes, I just would like to get some clarification on that.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [59]

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Yes. Let me take a stab on the cost stuff first and maybe Pak KK, you can help me out. So basically, we understand that this is stuff that we can control, right? So this is the stuff that -- with regards to the revenues, I mean, this is something that's still vague right now in terms of the viability of the whole business and the environment and so forth. But the cost, we do have control over.

So we are looking at all angles. There is a bunch of initiatives on costs, whether it's promotions cost. I mean, given that a lot of people are actually working from home, there's a lot of savings on travel, a lot of savings on promotions that we're pushing through. There's a lot of focus on obviously on transformation, but unnecessary CapEx that we don't feel like it's the right appropriate time. We're going to defer that. So huge bunch of initiatives that we're going through one by one.

Now how sustainable is the first quarter performance in terms of costs? I think this is something that we have to continue to focus on. We do not want to go above the 50% cost-to-income ratio. So as much as we can, we even try to push it lower than the number that we have, just a slight under 48%, if we can.

Pak KK, if you want to add a little bit to that?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [60]

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And -- yes. So it's not something that we just started doing this year. So it's been a journey, right? And we are bearing some of the fruits right now. I think one of the big costs outside of personnel cost that we're really focused on is outsourcing. We do have a substantial outsourcing cost, and that has come down quite significantly.

The other things are mainly on travel activities. The branch closing down. Now we have more savings on the maintenance on facility, on building. We have also, throughout most part of last year [all of the different initiatives being] negotiated for a lower management fee for some of the [computer-] related stuff that we are doing with third parties.

So yes, so we are [move] right now. So if you compare, let's say, from a year ago, it's a lot better. So you ask whether it's sustainable. We're always comparing from a year ago, and the new normal is actually much lower than what we were saying from a year ago. So I am very confident that the cost will remain lower -- outside personnel cost. Everything else should remain the same or lower going into 2020.

So to the second part of your question, on whether rate cuts will then help us, overall numbers. I think we have to see what happens to the deposit cost we have. So when that happened last year, I might have seen a number of benefits from the rate cuts because the stock pricing, the deposits down. But at that time, I think it was end of the year, we couldn't bring it down because of a net rush to liquidity [to us] at the end of the year.

So right now, if [we enter] the foreseeable, let's say, rate cuts, the NIMs will definitely start to come down first because the loans that we price are much faster. But ultimately, can deposit cuts [from new projects] we will see that creep up again. So all I think even with a rate cut, the NIM will not be severely impacted or may not be impacted because there may be a lag before the deposit pick up again after the initial rate cuts.

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Danny Goh, Crédit Suisse AG, Research Division - Director [61]

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Got it. And can I just ask a quick question about loan growth? I mean, I don't know whether this current environment, whether it's something that you'd still be able to give a target on. But just with the -- quite keen to hear your thoughts on how do you see your loan base from here and which are the segments that you'd still be quite comfortable expanding?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [62]

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I would say, Danny, I think I would say, I would -- it will be flattish probably. I don't foresee this to be growing. And I probably don't see this contracting either. So I would probably say that this is going to be flattish from here on out. There could be some FX movement that might be a factor there. But ex FX, without the FX movement, it's probably going to be flattish.

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Danny Goh, Crédit Suisse AG, Research Division - Director [63]

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Okay. And would the -- basically, that number is supported by mainly the household segment?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [64]

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So as of now, I mean, the way that we see it, right, I mean we don't really aggressively go after new loans, nor do we do we see that we get rid of a lot of the loans, right? Some of the loans that might be having difficulties are probably going through the COVID-19 relief program. So we'd have to be entertaining those loans for a little while.

Now with regards to the expansion, I don't really foresee massive expansions in our portfolio. Having said that, with our consumer SME programs, we are still selectively looking at segments, obviously, with very much tighter underwriting criteria, just to make sure that we are still visible in the market, that we're entertaining our target market segment. But we don't foresee big, huge loans to be entertained, at least in the very near future.

Just one more thing to that, Dan. Just one more thing, Danny, just to make sure that, however, we still -- we bucket our clients in the corporate and commercial segments where we believe are the strong winners and survivors despite the slow situations, and we continue to back them up, right? We want to make sure that as much as it is difficult for all our clients, we want to make sure that we're still going to identify the winners, identify those guys that are going to be cleared for virus, and we still want to be visible in front of those guys and help them as the case may be.

Sorry, Vera, is there you want to add?

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Vera Handajani, PT Bank CIMB Niaga Tbk - Credit and Risk Management Director & Director [65]

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Yes, I think Pak Tigor, so we are focusing on existing customers and support them. Some of them may just need time because they also have been making [this core assumption assessment] and therefore, this is also with us. So it doesn't mean that after COVID relaxation, then there will -- definitely we'll go into to R&R. So the company that we have a many of their [CASA up] as well. And also, we have a number of -- especially for the SME and some of the commercial and also the mortgage, the collateral that we have is relatively good in this particular regard.

So those clients, we may still consider to do some sort of like expansion. However, the current market where the restricted movements are imports, it also caused some of these clients reviewing the expansion plan at this case. So that's a -- whether we will expand into new clients will be subject to how prolonged -- how is the situation going to be last in Indonesia, and then we'll take a look again in that particular situation for the next 2 to 3 months on this thing.

The second point is you asked about the [vulnerable] sector just now. We have a look into our -- and again, definition by country or even by bank can be different on which sectors can be [termed vulnerable.] And we have a look into our book, not just with the current [restrict] segments. Those that are initially directly impacted by COVID should be expanded further because some companies or factories will have to cease -- to stop their operations.

So we have look into those things, and we divide that into, for example, like hospitality, tourism, aviation or transportation, some of the consumer manufacturing or the wholesaler or the distributor as well as the automotive are going to be impacted. Plus on top of that, we are also reviewing whether some of the oil and gas that we may have -- or we have and may also be impacted by the volatility of the oil price.

All in all, this so-called FINRA but regardless, the fact that many of them also have collateral with us, and they may not ask for them relaxation, we are talking about percentage of our total portfolio of less than 20%. However, again, those that have come to us with request for relaxation is lower than 6 percentage profile.

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Operator [66]

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(Operator Instructions) There are no further questions at this time. Presenters, you may continue.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [67]

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Ladies and gentlemen, because there are no further questions to this, I suppose this 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 approximately 2 to 3 months from now.

Thank you for calling. Stay healthy, stay safe and have a great day. Thank you.

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John Simon, PT Bank CIMB Niaga Tbk - Director of Treasury & Capital Market and Director [68]

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Thank you, all. Thank you, everyone.

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [69]

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Thank you.

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Operator [70]

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