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Edited Transcript of BNGA.JK earnings conference call or presentation 30-Jul-20 7:00am GMT

Q2 2020 Bank CIMB Niaga Tbk PT Earnings Call

Jakarta Jul 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Bank CIMB Niaga Tbk PT earnings conference call or presentation Thursday, July 30, 2020 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

* 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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* 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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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 Director; Pak Lee Kai Kwong, Head of Finance, [SPAPM] Director and CFO; Ibu Vera Handajani as Credit and Risk Management Director; Lani Darmawan as Consumer Banking Director; John Simon as Treasury and Capital Market Director; Pandji Djajanegara as 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 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 [2]

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Thank you, Sal. (foreign language) Good afternoon, ladies and gentlemen. Thank you for joining us today to discuss our first half 2020 financial performance with the senior management of the bank. It's been almost 5 months since we had our first COVID case in Indonesia, and it has been a pretty interesting ride over the past 4 months. I hope all of us are blessed with good health in this challenging time and productively contributing to national economy. Let me take this opportunity to express our appreciation to the government and all parties, especially the doctors, medical staff and volunteers who have been putting all efforts in reducing the COVID-19 pandemic and helping recovery process for those who are affected.

Moving on to Page 3 on the key highlights. On this first half of 2020 performance, we have successfully shifted our CASA ratio to about 61% as the CA portion grew close to 18%, and the SA portion grew more than 15%. Our loans, however, contracted 2.3% year-on-year, the pension shifted on the asset quality.

Our operating expenses decreased by 2.8% year-on-year and has brought our cost-to-income ratio below 48%. NPL ratio, however, has elevated by about 100 basis points year-on-year, and PBT declined by about 15%, and it's mostly attributed to higher provision expenses. ROA and ROE stood at 1.28% and 8.74%, respectively. CAR, the adequacy ratio of our capital, and liquidity remained very strong with CAR close to 20% and LDR hovering around 89.8%.

Those are the key highlights of our performance. And before we take you through more details on the financials, I'd like to share with you on the -- a little bit on the macro, what we've been doing during this COVID-19 crisis and what we'll do beyond this COVID-19.

So we go to Page 4 just quickly. As all of you know, the impact to our economy is quite significant, a substantial decline in GDP growth, negative in the second quarter and much different than it was since last year. Sharp depreciation of the rupiah in the beginning of the year. Exchange rates, however, has strengthened, partly because of the dollar weakening theme as well as a few of the stimulus that's been released by the governments.

BI has reduced its repo rate to about 4% in July, however, declining business activities are showing as a result of the pandemic, affecting growth and asset quality of the banking industry as a whole.

As a result, we have identified and executed our strategy as per the following on Page 5. Our first priority is the employee health and welfare. We've identified activities and policies such as split operations, work from home, regular cleaning of our offices, distribution of vitamins to all staffs and allowances and many more initiatives for our staffs across the nation. And I'd like to emphasize the importance and the engagement of staff. It's very, very difficult to adapt to new ways of working. Hence, we feel the need to engage our staff to ensure they feel secured and supported all throughout. We're doing many, many activities around engagement and communications, motivational videos, town halls, e-magazines. We've conducted surveys in trying to figure out how else we can support them during this time.

Next priority, obviously, is asset quality. As you can see, we've executed many activities and policies, along with our engagement and communication with our customers. We'd like to ensure we're doing our best to support their businesses as well as their financial needs. Part of the support is a customer release program I'll share with you all later on.

Moving on to Page 6. Operations and cost management is an obvious priority. These are things that are within our control, hence we put a lot more efforts to ensure that we manage it properly. We also put a lot of emphasis on capital and liquidity management. Our LCR is actually very healthy at about 175% NSFR, also above 108%, just to ensure that we're well capitalized and have the necessary liquidity to weather through this crisis. Despite the pandemic, we continue our transformation and digitalization strategy but we see the relevance in carrying the initiatives in the current situation.

Ladies and gentlemen, those are our priorities we identified and executed, and then I'm delighted to share with you, without us knowing, The Asian Banker has recognized and announced our efforts during this COVID-19 crisis and they have voted us the most helpful bank in Indonesia during the COVID-19 crisis. This recognition has motivated us even more to continue and execute our priorities and remain helpful for all stakeholders.

Going on to Page 7. This is the 5-pillar strategy that we launched about 4 or 5 years ago, and I think it's still very much relevant in today's environment. Playing to our strengths, we'll continue to grow our consumer SME segments and increase productivity in the corporate and commercial segments, CASA, CASA, CASA, to expand the CASA franchise, and this has really bore fruit over the past few years, resulting in about 61% CASA ratio as of today. Discipline in cost management. We've been executing many, many activities and we'll do more in the next coming quarters. Preservation of capital and balanced risk culture. We ensure that we're well capitalized, and we're going to continuously leverage in analytics and technology to manage the risk. And the last one is leveraging our information technology and we've always viewed this as a core strength of ours, and we're going to continue to push in this direction.

With that, now I'll hand over the presentation to Pak KK to share our financial results. Pak 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 [3]

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Thank you, Pak Tigor. Okay. I'm going to share -- good afternoon, everybody. I just want to share with you our first half 2020 financial performance.

I'll start with the balance sheet, right, and I'll talk to something that we're positive about back in the middle of the page of Page 9.

Looking at the deposits. Deposits grew only 3%, that's what we really like about our deposits is the composition. We are shifting our deposits a lot more towards the lower -- the cheaper cost CASA. CA has grown 18.7% (sic) [17.8%] and SA has grown 15.5%. These are almost industry-leading growth numbers.

Time deposit is down 13%, but it's where we want it to be because a lot of it is shedding off all the expensive time deposits. So I'm overall very happy with the customer deposit composition right now.

On the loan back, Tigor mentioned a little bit about the loans contracted, 4.2% year-on-year and 2.3% -- sorry, a month -- quarter-on-quarter at 2.3% year-on-year. But we do see some volumes or disbursement coming back in recent weeks. So hopefully, these numbers will continue to be maintained at this level and not see any more slides in the coming quarters.

And I mean, because of the exact liquidity that we have from the growth of our CASA book, we see -- we are putting a lot more into government bonds. Bonds and markets -- marketable securities have gone up almost 50% from where it was last year. So we are trying to enhance our views from bonds and marketable securities.

On an overall equity, after dividend payment, May is still at about IDR 40 trillion. Not too far from there, it was pre-IFRS 9 one-timer back in June, was at IDR 41.5 trillion, now it's about IDR 40 trillion again.

Come next to Page 9. Okay. We saw interest income contract loaded quarter-on-quarter 1.5%, year-on-year about 3%. So as the contraction of the loans growth we attributed to this lower interest income. But what we are seeing also at the same time, interest expense, in spite of the growth in the deposit, has actually come much faster than the contraction in the interest income. So overall, net interest income on a quarter-to-quarter basis, up 2.2%, mainly attributed to a much more lower cost of deposits. Noninterest income are stable in spite of this challenging times. Noninterest income quarter-on-quarter is down about IDR 200 billion but if you look at it, at year-on-year we are pretty much -- in fact, we are better than from a year ago, that 6.1% up from a year ago. It's a fairly consistent contribution from the noninterest income, and we have a book that can counterbalance the weakness of other parts of the noninterest income lines. But for this quarter and the last quarter, a lot of the incomes are coming from the treasury trading as well as FX and derivatives book when the different businesses and the CA as well as wealth management lines.

On operating expense, this is the controllables that continue, and we believe we're managing it -- are doing a good job managing this. Operating expense year-on-year, quarter-on-quarter is showing a downward trend of 2.8% and 2.4%, respectively. We have done structural changes to our expense programs. We have also instituted short-term expense controls to manage this number to a level so that our overall operating profits remained sustainable. So on a quarter-to-quarter, pre-provision operating profit was down slightly 4%. Year-on-year, it's still higher than from a year ago, about 3%.

Now the shift of our income statement is really determined by the provision expense, right? You can see quarter-to-quarter, it's a 65% increase whereas the year-on-year is still about 35% increase. So as a consequence of this heightened provision expense, PBT contracted 41% quarter-on-quarter and net PBT is down by 35% quarter-on-quarter. So I'll spend a little bit more time on the provisions in a little later.

So for the key ratios here on Page 11. So I'll tell you what we like first. CASA ratio, I mentioned this, is up to 61% now, we are 53%, 54% last year. Loans-to-deposit ratio, a lot more liquidity flowing into CIMB Niaga. We are about -- at below 90% now, right? We are always trending around 95% to 97% in the past.

NIM is also something encouraging. After, I think, 3 consecutive quarters of regressing, we strike -- we have seen a turnaround. Again, this is attributed to the shift from TB to CASA, we're going to more -- the cheaper funding route. So what we continue to monitor very closely. Obviously, it's asset quality. NPL ratio is up to 3.89, 1% higher than last year, but 85 basis points higher than a quarter ago. Gross impairments, up to about 5.1% now.

Let's move on to the next page. Okay. Just a little bit more information on deposit growth. Deposits, again, I mentioned that this is a [structured debt] so we [progressed] in the last few quarters, deposits mainly gaining strength as in CASA showing deposits, CASA ratio going up to 61%.

Loans growth, a little bit more breakdown on page 13, right? Weaker across all segments, consumer semi, commercial and corporate quarter-on-quarter. Mortgages looks like it's stabilized. And I think we are getting a little bit more disbursement now in the third quarter. Total loan as well, we are seeing higher assessment of this trend. It's actually turning around of our consumer. We have not seen that yet for SME and commercial at this time.

Let's move to earnings on Page 14. Earnings, looking at operating income, PBT and ROP for the last 5 quarters, we're still trending about IDR 4 trillion per quarter in operating income. But what is really hurting us this quarter is really the provision expense, right, after running about IDR 1.30 trillion to IDR 1.4 trillion of PBT each quarter in the last 4 quarters, we are down to IDR 841 billion and IDR 600 billion of that is actually attributed to the heightened provisions.

Year-on-year, we are pretty much there in terms of operating income, slightly higher compared to a year ago. But PBT, again, because of the higher provisions year-on-year, is showing a contraction. So ROE for first half of the year stood at 8.74%. In the last quarter, it's 6.91%. So this is the NII slide on the chart on the bottom. NII, it's pretty stable, just about the IDR 3 trillion to IDR 3.1 trillion mark per quarter. And what we like about this is that we're turning around. The NIMs are actually recovering after 4 -- 3 consecutive quarters of contraction. NIMs for mid-quarter, it's 5.8% averaging. For the first half of the year, 5.05%.

Okay. A little bit more detail on the next page on the noninterest income. Noninterest income, like I said, a good counter balance between various income lines. If you look at the first half of last year versus the first half of this year, you can see quite big swings, a lot more contribution coming from FX and the returns as well as a gain or the trading book gains on marketable securities. So a lot more treasury income -- come back to us from a year ago. What we are weaker is on the recovery incomes from the return of loans, the CAs definitely because of lower transaction volumes, CAs-related income is lower, bancassurance is also lower, other fee income, which includes the wealth management product sales has also come down, all right? In addition to that, also a range of the utilization fee from the corporate and commercial segment is also lower. So good showing for treasury to counterbalance the businesses in the other income lines.

On operating expense, we actually [moved] quite a bit to control that expense. We pulled ourselves, we have to stay below 40% in our cost of income ratio. On the overall, we managed to do that. Personnel cost is down to 3.6% quarter-on-quarter, even though it's up 3.1% year-on-year. But for the other expenses, which are a lot more controllable to us, we have managed to drive it down to 8.7% year-on-year. But still quarter-on-quarter -- but for the quarter, it's moved down 1%. The work is not done. There's a lot more for us to do because we know that the second half incoming fight is still going to be challenging, and it's going to be very challenging for us to keep the expenses low and maintain the volume -- our percent cost-to-income ratio.

Okay, next page, Page 16. So perhaps this will be the page you have moved questions for us, asset quality. I'm just assuming on the June '20 numbers, right, and compare it to a quarter ago. Gross NPL was up 90 basis points, right, 2.03% to, I think, 2.89%. And if you look at on the right side, and that isn't attributed to, we are quite happy with the results of the consumer SME and commercial, right. We saw NPL moving up in the first quarter, and we tried to really manage it within the same range, right. So consumer has come up slightly from 2.2% to 2.5%. SME actually improved a little bit from 2.7% to 2.6%. Commercial, really try to keep it down to below 5%, now it's 4.9%. Corporate has moved up from 2.6% to 4.6%. This is actually attributed to just one call -- whole name, right, that has pushed this up. And because of that, the whole NPL number has gone from 3% to 3.9% bank-wide.

So you look at the bottom, loans by collectability from a quarter ago, and special mention, actually right now because of the same name, right? And now the extent of NPL, the number of our special mention came down to NPL and [brand] up. But overall, the current -- the loans in the current bucket remains strong at about 91%.

On the next page, Page 18. This is a snapshot of what we have done as of 30th of June on total restructured loans, IDR 22.8 billion of our borrowers have sought restructuring. On the right side, you see there that the composition of these loans -- that the restructured loans are coming from, corporate bank -- corporate accounts has us for about 5.6%; commercial about 18%; SME about 18%; consumer nonauto about 14%; and the biggest proportion of percentage actually coming from on the auto loan side.

Next page, please, on capital ratio. Yes, we're still looking very strong at about 20% CAR, both our IFRS 9, which is -- compared where we were a quarter ago, not too different from where we were ago pre-IFRS 9 in June 19.

Next on Page 21, just the breakdown of the consumer balance sheet. And consumer banking is -- have been very successful in shifting their portfolio, shifting the deposit balance to CASA for sharing time deposits a year ago. But we're not turning away deposits -- we want to manage the cost or the price of the deposits. In CASA, we're taking a lot more in that 18.5% -- or 18.3% growth year-on-year. And

on loans, like I said, we are seeing some traction now. We have new good disbursements coming in especially for mortgages and auto loans. Cost of some hits, lower transactions in the last quarter. But we will see that there is opportunity for it to rebound very quickly.

So next. On SMEs. SMEs -- so it's a deposit story, as deposits up year-on-year 25.5% on CASA, right, even though time deposits start to shift with expensive one. So again, the focus is not so much on loan as it's on building a transactional operational relationship with our borrowers, hence a more focus is on the deposit growth of the CASA growth and to build a relationship with our customers. Loan that's contracted 3.2% quarter-on-quarter, year-on-year is about 7%.

Next on commercial banking, not too dissimilar to what we are doing in SME, although more focused now on the CASA space. Of course, given this time, a lot more -- a lot less disbursement for working capital. And also for investment loans, we are not seeing an uptick just yet. But we've been very cautious in regarding our new loan assessment of commercial bankers. So we are happy perhaps because of -- around the few extent of what this pandemic would cause to the economy before we say anything -- any growth in the commercial banking space. And for corporate banking, again, our continued focus (foreign language) CASA, CASA, CASA get -- in all 4 segments, growing CASA very well. And loans were actually improved quarter-on-quarter, especially on working capital, right. I'm sorry, on investment loans. Working capital, again, we did not expect working capital to grow anyways to above 12.9% quarter-on-quarter.

I want to spend a little bit more time talking about the digitalization of our business. And basically our transformation, which we are a digital bank, right? So we are continuing to invest a lot in building our digital infrastructure. And we are not only building this infrastructure for our customers. We're also building this infrastructure for employees as well, right? So we are enhancing our platform. We are moving into cloud solutions, building big data infrastructure, heightening our security -- data security systems. And also our engagement with customers, we're trying to revamp also how we will interact with our customers going forward at the transaction level, at the product level, at the servicing level.

A lot of this development is actually done in-house. We're improving our Octo Mobile. We have also rebranded our CIMB Clicks to Octo Clicks. We have started using mobile as -- for our subsidiaries, CNAF, CIMB, Niaga Auto Finance business where almost all of our loan origination is coming through a mobile app.

The BizChannel which is the Clicks version of internet banking for the nonretail segment is also going through some transformation. And for employees also, right? Digital doesn't mean that it's only for customers and helping customers, but we are also improving our talent across organization to be more adaptable to 3D data, digital disruption and even for design.

And a lot of our internal processes have been supplied. We have substantial sale in hit comps already that we have realized since we started this journey of digitizing a lot of this back-end processes from 18 months ago. We have now also have apps for our employees. Apps, we call them sales tools, we call them [Octo Branch Needle], sales tolls that will help a customer engage much better with their customers. So we have a team now of more than 200 developers in-house that will help us continue to build our journey, and making us a little bit more digitized and engage much better with our customers.

So some of the (inaudible) is on the next stage is the user base of digital channel. Octo Mobile, we continue to see strong traction, a 15.5%, good number of users and the deposit base of these customers, we always attribute it back to how much can we grow from these customers? The customer is exactly 3%, but their deposit balance are growing. Overall, as Tigor said, 37.4%. Those are the engaged Clicks, users of Clicks are showing the same trend as well. This channel, 10%, but the deposit base of these customers were 21%. So we continue to believe in our strategy in digitizing our channels to build a strong CASA base.

Lastly, on Syariah Banking. Our Syariah efforts commitment continues and we move to Page 32. Okay. Syariah Banking continued to stay strong, but also not stopped by the pandemic. Quarter-on-quarter, we saw a slight contraction of 4% on the PBT. But overall, year-on-year, we're still growing about 18%. Deposit-wise, a strong showing that in CASA, right. Traditionally, we grow a lot faster in time deposit. Overall composition is still very much a time deposit play, but we are moving a lot faster if we're growing CASA in Syariah. Financing had a flattish quarter-on-quarter, but year-on-year commission of a 21.5% growth.

Okay. That's just a snapshot of the financials. I'll pass it back to Pak Tigor for his final remarks.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [4]

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Thank you, Pak KK. So (foreign language), ladies and gentlemen, before we go to Q&A, I'll just have some -- a few things on the final remarks on Page 34.

We do recognize that we faced significant challenges in the first half of the year as expected. And we do understand that the second half of the year will continue to be challenging. Our main priorities will continue to be employees' health and welfare as well as business continuity of our customers. Liquidity, asset quality and cost management are still our main focus going forward. We continue to drive our 423 programs, particularly on customer journeys, digitization, productivity improvement and finding new opportunities beyond COVID-19 crisis. And we are very much engaged with the government to ensure that we play our part to revive the national economy.

In summary, second half of the year will still be very, very challenging, and we're prepared to face with our priority strategy with all the supports from the stakeholders and obviously, from our team.

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

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Questions and Answers

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Unidentified Company Representative, [1]

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Thank you, Pak Tigor. Now let us open Q&A session.

(Operator Instructions) Rich, maybe you can help us on this. May we have the first question, please?

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Operator [2]

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(Operator Instructions)

Sure. The first question we have is from the line of Robert Kong, Citi Research.

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Robert P Kong, Citigroup Inc., Research Division - Director & Deputy Head of Regional Financial Institutions [3]

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I have 3 questions, please. First of all, can you give us some guidance on your total COVID-19 asset quality credit costs? So I'm not sure whether you're looking to take those credit costs all this year or maybe over the 2 years, but if you can give some guidance on the total credit cost that you expect to book. And can you put that into context, particularly how much more do you think the loans for restructuring will rise? I think that chart that you showed earlier would say that on average, it's about 12%, 13% right now is the restructured loans. I think some of the other Indonesian banks are already at 20%.

So if you could put it into the context of where you think that's going to peak in also your peak NPLs? The second question is a simpler one, I hope, which is could you give further guidance on your NIM outlook, whether you can sustain above 5%? Particularly in relation to that, how many more rate cuts are you expecting internally in terms of driving that NIM forecast?

And then the third question refers to Slide 15. It's no surprise that the core fee lines were weak. And the market type gains were strong. If you could give some color as to what you're seeing incrementally on core fees now that the market or the economy is slowly reopening and also the sustainability of the windfall gains. So those are the 3 questions.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [4]

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Thanks, Robert. I'll take a stab at this and maybe KK or others can help.

I'll take the last one first in terms of the noninterest income, in how sustainable is the markets and the FX and derivatives. We'd like to keep it that way at these levels. But obviously, depending on the volatility on the market, there's a little bit of a -- on the good side that we're in, in the first and second quarter. But I just don't know how that's going to be in the third and fourth quarter. But what I -- what we do know is the level of activities in terms of the regular fee income such as the -- whether it's payment exchanges, whether it's wealth management, whether bancassurance, it's still not to the level that it was before pre-COVID even though things have picked up a little bit. So I think if this level will reach about 40% or 50% to where it was, I think that's the sort of situation that we're seeing in the market today.

With regards to the NIM, we try as much as possible, try to keep it at about 5% or right above the 5% mark. But we understand that there is more of a push on the interest rates to be lower from the loan side as well. So as much as possible, we're going to continue to grow our CASA to push our cost of fund even lower. We've been successful so far to keep it at this level, about 5%. And we'd hope to keep it that way. But there is a risk that this could go below that 5% sort of threshold.

And the first one in COVID-19, how much -- what about the restructured accounts and so forth. So if you could see, most of them would be hovering about -- most of our business units will be hovering about 14%, 17%, 18%, except the corporate account, which is about -- still about 5%, 6%. There is still requests pending in some of each, and some of them in syndication, some of them are a little bit more complex. But we expect probably we will get to around the 18%, 20% level for all across. So I understand that most of the industry is about 20% level. We're slightly below that, but we think that this amount that we do have, it's probably going to inch up maybe in 1 or 2 or (inaudible). However, the volume of requests have significantly decreased since this thing started in March or April.

Now with regards to the credit cost, this is the 64 million-dollar question, right? I mean I think a lot of these accounts, frankly, I've never in my career, I've never done a stress test where some of the cases' revenues just go to 0 within like a month, right? Okay? So in terms of viability of these companies, most of these companies or almost all of them that we put in this COVID-19 restructure were actually very good companies, solid companies, paying companies before, but it just got hit into this situation.

So hopefully, most of them do recover. We don't know how long, depends on the state of the economy, depending on the sector, depending on the industry, depending on the geographical location. But we hope that most of them will survive, but maybe some of them won't. So I think that's what we got to figure out in the next a couple of quarters. In terms of credit costs, how much would this mean to us, and how do we have to pay.

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Robert P Kong, Citigroup Inc., Research Division - Director & Deputy Head of Regional Financial Institutions [5]

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Maybe I could just clarify just a couple of points. Based on your history, when you look at restructured loans, what would be the normal lapse into NPLs? Because obviously, we've had restructured loan trends for a long time. What will be the normal lapse read into NPLs based on history? I know that this is a very unusual situation, but at least we can start with a historic data point.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [6]

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Yes. I mean this is extremely different, Robert. I mean, if you looked at our restructured loans, whether it's in the retail side, on the nonretail side, a big part of it actually just goes back to [Cronig] depending on the situation, right? This one, I had -- we just don't know. And I think I would be guessing too much into it if I put a number, how much of this, whatever, 15% to 20%, what we're going to end up with of COVID-19 restructure will go to NPL. Most of them, I can tell you, most of them are working with us in a very good pace. A lot of them actually were hesitant to come in just because there's a stigma on the restructuring and so forth. But a lot of them are actually in good faith are trying to do what's the best. And let's see.

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Robert P Kong, Citigroup Inc., Research Division - Director & Deputy Head of Regional Financial Institutions [7]

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Okay. Just a final point on the clarification. Could you just say what your first -- your second quarter cost of funds is versus what it was, say, for 2019? Just how much has it moved down?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [8]

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KK, that number? I think it moved down by about...

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [9]

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Yes. Cost of funds, we don't have it here. I think cost of funds was at 3.98%, if I remember correctly. From my recollection, I think it's down about 56 basis points when we validate in the year.

So 3.97% -- so the [3.94%] is what we ended up in June, it was [4.25%] back in June, right, Tigor? Yes.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [10]

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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 [11]

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Yes. So maybe just to add on to what Pak Tigor has shared, because you asked the question about the credit cost attributed to the COVID-19. Obviously, you can see from our presentation that with the second quarter credit cost of 3%, year-to-date cost is down 2.26%. And also, as we speak now, I think the different governments are also announcing different stimulus or relaxation package, so it becomes increasingly hard to get -- nail down on a number. But we do see deteriorating a little further to maybe between 2.5% to 2.8% for the year.

I think this -- it was indeed attributed to the impact of the macroeconomic factor where we built into our loss provisioning models. And some of these models is suggesting that the PDs as well of the LGDs will continue to increase in the coming months, right? And so just the model of loans itself will cost us additional provisions on all the collectively assessed loans. On top of that also, we are also assessing the collateral values of some of these loans, right, in the pandemic crisis, the valuation may be different. So they have the management overlay that we have to think on -- add onto our provisions right now.

So we still see a heightened level of provisions because of this. But maybe because of the stimulus also, it may not be as bad as it may turn out to be. But maybe some of these provisions will flow into the second -- even into 2021. That's my take on that.

On NIMS, I think we have continued to project our NIMS above 5%. I mentioned it a little earlier, we have excess liquidity. And in the past, this excess liquidity has actually given us a (inaudible). We have gotten a lot more aggressively to box -- thinking out of the box at least also on some of this negative carry. And the regulator also has reduced statutory reserve requirements. And also starting next month in August, giving a little bit of interest on the statutory reserves, so that will help contribute to what's maintaining the NIMs that we have.

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Robert P Kong, Citigroup Inc., Research Division - Director & Deputy Head of Regional Financial Institutions [12]

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So you're guiding 250 to 280 basis points credit cost for this year?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [13]

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250 to 280. Yes. Again, hard to pinpoint a number because a lot of announced a stimulus. We do not know what else is coming down the road, but I would say that is mainly attributed to models as well as perhaps I mentioned, overlay to top up.

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Robert P Kong, Citigroup Inc., Research Division - Director & Deputy Head of Regional Financial Institutions [14]

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Okay. So the 250 to 280 is for this year only? It's not a total credit cost? It's what you think you'll take this year, 2020?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [15]

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Yes. I think I would say, Robert, just to make sure that there's no misunderstanding. I think that's probably a very preliminary guidance if it is one. Depending on how things really turn up in the next few months, that number could even be a bit higher.

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Operator [16]

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(Operator Instructions) The next question you have is from the line of Harsh Modi from JPMorgan.

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Harsh Wardhan Modi, JPMorgan Chase & Co, Research Division - Co-Head, Asia Financials [17]

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Two questions. I'll go one by one. First is loss given default. In last 5 years, can you give us what was your LGD? And to the extent we can break it up between consumer, corporate and SME, commercial, that will be great.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [18]

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Thanks, Harsh. I don't have the number with me. Maybe KK or Vera? Do you have that with you?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [19]

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Not this instance. I will have to call somebody to give you that number. And yes, we had this readily available. I just need to get somebody to send me those numbers. We do have it available.

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Vera Handajani, PT Bank CIMB Niaga Tbk - Risk Management Director & Director [20]

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Yes, we have to get back on that one. We have it. We don't bring it here.

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Harsh Wardhan Modi, JPMorgan Chase & Co, Research Division - Co-Head, Asia Financials [21]

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Sure. Sure. Sure. The second one is on cost control, fantastic cost control this quarter, partly because a lot of ground crews are not working and people are working from home. In terms of absolute amount of cost, given that for the 23, it's still ongoing, and it looks like it's working quite well.

What number should we think of for rest of the year, in the same to IDR 2.1 trillion level or significantly higher? And any upper quota that is? And next year, what is a number we should think on an absolute cost?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [22]

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Okay. Maybe -- go ahead, K.

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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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Okay. Can I take this one? Yes. Cost we're running about a IDR 2 billion level right now, but I can see it ...

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

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Trillion.

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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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Go even lower to about IDR 2 trillion level. In fact, we are trying to go even lower than that. Guys, if you want to maintain a 40% cost-to-income ratio. Lots of things that we have done structurally to control cost structurally means that it's a permanent savings, things like reviewing and adjusting contracts, repair and maintenance contracts, lease contracts, outsourcing contracts, centralizing operations. We are doing a lot of that as we are continuing to push all these structural changes, right?

On the short-term, expense control. This may come back, but we are deferring a lot of big IT and even non-IT CapEx spend. On the personnel side, obviously, a lot less training. Training itself, it's -- we are required to spend 5% of our budget within training, 5% revenues is on training. And now we are not doing as much. We have suspended hiring than less critical function even for employees that have departed or retired.

So we are also working on more effective marketing, canceling events. Of course, there can't be a lot of events. Some of that attributed to quite a big savings this year. Some may be, I would say, 50% are structural that will not recur, and 50% that is maybe deferred, that may come back at a later time.

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Harsh Wardhan Modi, JPMorgan Chase & Co, Research Division - Co-Head, Asia Financials [26]

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Got it. The next question is on restructured loans. let's say, what you thought you would do, let's say, in April. It's probably April, what you were thinking with your pipeline and what we have actually done right now, has that been worse or better than expected? And how much more do you think the restructuring will be remaining from that?

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

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Yes. I think, Harsh, I think last time when we did our call 3 months ago, I think if I'm not mistaken, I'd say maybe about 15% to 20% or something like that. And maybe end up by 25% by the end of the year.

So far, it's been around there. I think the corporate one is a bit lower than what we expected so far. And that's probably going to inch up, given some of the more complex and everything. But largely, I would say, it's probably a little bit less than what I had expected in the beginning. Because when the volumes came in on March and April then grows, I mean, we literally worked around the clock, 24/7, just handling all these requests. And we just thought that this would never stop.

But things have actually slowed down in terms of the requests. So I part. (inaudible)

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Harsh Wardhan Modi, JPMorgan Chase & Co, Research Division - Co-Head, Asia Financials [28]

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What led to that? What led to that services delta?

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

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What led to the slowdown of the requests?

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Harsh Wardhan Modi, JPMorgan Chase & Co, Research Division - Co-Head, Asia Financials [30]

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Yes, yes. What you have probably all done? It was a positive surprise. So what led to that? Why do you think that incoming became lesser?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [31]

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I think a couple of things, right? One is when we just started and every -- when there was a lockdown, some lockdwon, [PSBB] so to speak. The level of activities is almost 0, right? There's almost no activities whatsoever from all across. It started from hotels, restaurants, tourism and so forth. It quickly marked into the whole retail sector, manufacturing and so forth.

So once the government started opening, I think there's a little bit of activities being felt. And I think -- I mean, Lebaran is supposed to be -- the Eid is supposed to be like the big thing -- festivities, but it didn't happen. But still, I think it created a little bit of extra activities during the lockdown, right?

So I think now that we've seen things sort of opening up a little bit more. Malls are opening up, the retail stores are there. Granted that the COVID cases continue to creep up, I think a lot of people are getting their cash flow situation a little bit better than it was in April.

I think that's a big part of that.

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Harsh Wardhan Modi, JPMorgan Chase & Co, Research Division - Co-Head, Asia Financials [32]

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Yes. The final one, if I may, and probably the tougher 1 is how do you decide when to foreclose? I think -- what I'm thinking if you take just purely an economic view and say, if you foreclose today and sell collateral, do you have the market for it? And would you rather extend and pretend, and hope that in 2 years' time, you'd get better outcome? Again, it's super tough right now and you have a (inaudible) time but how -- just a tougher one, how are you thinking about, especially the large corporate? And then across the board, where you think it's more up to pay that between -- and how would you go about that?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [33]

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Very good question, Harsh. The way I would answer that is in twofold. One, with regards to our good, solid customers that's been with us for a long time, and they've never had any issues with us, as much as possible, we're here to help them, right? And my view is however you treat your customers during the toughest of times, they will definitely remember for years and decades to come. So I think for those customers that had no issue whatsoever and we gave them this relief program. We deal with them. We give them this, whether it's moratorium, whether it's some relief from their payments, I think we've tried to work with them. So we're not going to foreclose any of those at this point.

For those customers that have been not so good customers for whatever reason just because they've either had cash flow problems to begin with. It could be the willingness is there, but the ability was not there. What we do is we don't put them under the COVID program, but we do try to restructure them, but they would flow into the staging. So then we let them flow into the staging. We take the provision, we take the impairment. However, for those still solid in terms of character type of customers, but without the ability, given the situation -- because everyone's impacted by COVID. Whether you've had issues in the past or you don't, everyone's impacted. So we take the hit but not necessarily foreclose per se.

Now for those customers that are noncooperative and not having the ability to serve their obligation, obviously, those are the guys that we'll take a tougher stance on. So we'll take the hits on our books on those, but we'll take a tougher stance with our negotiations. I understand in terms of the foreclosure and so forth, we might need to time it. But it would be -- we would not hesitate in taking harsher sort of actions against those.

So I don't know if that answers your question, but I think that...

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Harsh Wardhan Modi, JPMorgan Chase & Co, Research Division - Co-Head, Asia Financials [34]

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No, no. That gives me a sense. What I am -- the follow-up to that (inaudible) is that if, let's say, you do classify somebody as (inaudible), 2 guys in the industry, 1 guy has a better track record, better character, you put it, other guy has had issues in the past. Can you choose to initiate legal proceeding that we need to one and not do it at against another. As in, what I'm trying to understand is there is no direct flow-through from NPL classification to foreclosure proceedings, and you can time it at your will. Is that fair?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [35]

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Yes. I mean we tried to find it in our -- obviously, given the market today, we tried to the best of our knowledge and our ability to get the best recovery for those. But foreclosures per se is one of the options, and we do it if we need to. But obviously, depending on the market, we might choose to wait. But without choosing to wait on other actions with this borrower.

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Operator [36]

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(Operator Instructions) The next question we have is from the line of Danny Goh from Crédit Suisse.

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Danny Goh, Crédit Suisse AG, Research Division - Director [37]

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I have a couple of questions. Maybe I'll just go one by one. The first one is actually on your loan deposit ratio. It seems quite low relative to where you've been in the past. So just wondering whether you have a target that you aim to get to. And maybe does that give you some room to actually scale back a little bit on your deposit growth?

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

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Yes. I mean I think as we all know, we're not really focusing on loan growth, but we are still focusing on business. And the direction is quite clear to the team that we are focusing on funding. So especially transactional funding on CASA, we don't mind getting more. So even if it traditionally, in terms of trying to maximize our NII, obviously, we want to go up the curve to about 95%, 96%. But given the situation, reserving liquidity, I think, is king in today's market. Plus, if we get the low-cost funds in CASA, I don't mind getting them all day long.

So yes. So Danny, if it comes out to be that we are going to continue to be flushed with CASA and our LDR becomes 85%, so be it, right?

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Danny Goh, Crédit Suisse AG, Research Division - Director [39]

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Okay. The other question is on special mention loan timing. There was an improvement quarter-on-quarter. Can you just help us understand the movement in the special mention loans quarter-on-quarter?

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

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Yes. I think part of it, unfortunately, I think part of it has moved to NPL. So you can see the NPL has moved up by about 80-odd basis points. But partly is also really engaging with our customers and really looking at our DPDs and looking at our situations all across from the consumer, SME, commercial and corporate space, just to ensure that these customers are actually paying on time, right?

In the beginning in March, there's a lot of -- it's all new, this COVID thing in March is very new to everyone in terms of a lot of our customers are not sure what this means to them and everything is closed, what this means when their stores are not able to operate and so forth. So I think that a lot of confusion in March and we engaged with our customers quite closely to make sure we really understand the situation and chasing -- frankly, chasing for all these DPDs.

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Vera Handajani, PT Bank CIMB Niaga Tbk - Risk Management Director & Director [41]

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I think if I may answer.

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

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Yes. Yes, Vera, please.

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Vera Handajani, PT Bank CIMB Niaga Tbk - Risk Management Director & Director [43]

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So, yes. Overall, our asset -- it's true, is improving. Pak Tigor has mentioned that there is a small part that moving into the -- there is some part that moving to the NPL. But if we are looking at on the overall basis, our low-quality loan between March to June has also shown improvement. I think it's between -- from 13% to 12.52%. So there is an improvement on the overall things. And we -- when we enter the second quarter with the COVID, we intensify all the efforts. So that shows you that. But at the same time, you also conduct the COVID stimulus R&R. So this also helped to sustain the special mention.

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Danny Goh, Crédit Suisse AG, Research Division - Director [44]

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Okay. And then just an asset quality-related question. The credit cost increased quarter-on-quarter. Is that largely because of the core loans that you mentioned that actually turn NPL?

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

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I think -- go ahead, K.

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [46]

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The co-loan, this contributes somewhat because we have already provided for it quite sufficiently, but as you see it at the top of the level. In the second quarter also, we basically updated our macroeconomic factors in our provisioning models. And that is, I think, perhaps the biggest chunk that we saw in provisions. Of course, our delinquency in or some sectors -- segments has also increased. That's contributed accompanying from stage 1 to stage 2. So hence, attribution of the provisions are a lot higher.

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Danny Goh, Crédit Suisse AG, Research Division - Director [47]

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Right. So would you say that the bulk of the impact from adjusting for the macro environment has already been taken in, in the second quarter? Or is there more significant hits to come in the next couple of quarters?

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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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I would say we have taken a few -- two types of it. And I can give you a number, it's of [IDR 400 billion] that we've taken. And I feel that the model actually projects the higher opinion in LGD, I think I'll be like, put in another IDR 200 billion or more in the coming months, in the next 6 months. It's going to spread across the next 6 months.

So we continue to build the same model and the same forecast in the economic sector that we are likely have won.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [49]

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Right. So it depends on -- the so many factors here, Danny, right? But the EMEA's is not -- we're all learning this in this new significant changes in EMEA. But it's not just a onetime hit. Depending on your portfolio, given the PD sort of shift that we're going to take more hits in the third and fourth quarter.

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Danny Goh, Crédit Suisse AG, Research Division - Director [50]

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I see. And on the coal exposure, how much of that -- is it as a percentage of your total loan book currently? And what's the NPL ratio and loan loss coverage for those exposures?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [51]

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Well, I mean, coal, I mean this is -- coal, actually, we've been running this down in terms of the portfolio. So right now, our coal portfolio is less than 1.5% across all segments, another thing, and with this particular name that has quite a chunk of it, but we've provided most of what we need to provide on this one.

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Vera Handajani, PT Bank CIMB Niaga Tbk - Risk Management Director & Director [52]

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Yes. Our coal is -- for the total nonretail is [1.5] but bank-wide, it's only 1.1. Pak Tigor mentioned those is where we have a concern. I think we -- and it's simplified by the COVID. That's why in the second quarter, we just decided to put it in impact, and we have put a significant provision as well to support it.

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Danny Goh, Crédit Suisse AG, Research Division - Director [53]

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I see. Okay. Yes. And just lastly, I mean, just a very quick question on the expenses. I noticed that you've actually seen a very large drop in first half other expense item. Can you just help us understand what are some of the moving parts in there?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [54]

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Yes, expense item. So let's go back to the spend directly chart. So if you look at this other expense line, right, from last year to this year, it's come down 8.7%. Other expenses (inaudible) at quarter-on-quarter we're still trying to bring it down. I mentioned that, that's on a structural term, we take a little bit more time to realize. The really short-term ones are things like suspending hiring of any staff that has exited the organization. The immediate one would also be really tightening themselves on marketing and promotion, canceling events. We also discovered that new wins of working the social and economical. We have seen a lot less traveling, tranport expenses and communication. A lot of premises that we have also in the past month, we have negotiated a new contract that was effective immediately, usage of utilities, these are all coming down. And has attributed mainly some of these reduction, and we can see more of that coming in.

So on some of these things where we have renegotiated contracts, some may take in immediately, some may kind of later part of the year. So those that are already seeing the realization, of a lot of these outsourcing contracts, things like driver's leasing of cars, security guards, in fact, even outsourcing the replenishment of offsite ATM machines, these are all some of the structural changes that we have made.

So baby steps. We continue to reap the benefit in the coming quarters.

Okay, back to the hardest question on LGD, as is why I got this. (inaudible) LGD is about 80%, This Corporate Banking is 80%. Commercial banking is about 65%. SME is about 17%, largely secured. Mortgage LGD is about -- but for consumer banking market, about 26%, auto is about 75%, credit card costs are unsecured loan a lot higher at 93.5%. And personal loans is about barely, it's about 92%, 93%. One more smaller portfolio pension loans about 36 -- 37%, sorry.

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Operator [55]

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There are no further questions from the line. (Operator Instructions)

The next question we have is from the line of [Abi Guzman]

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Unidentified Analyst, [56]

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I have a couple of questions. I think the first one, could you repeat earlier your LGD? You mentioned corporate banking was 80%. Was that right? Or is it 18%?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [57]

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88%.

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Unidentified Analyst, [58]

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88%. And your SME?

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

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SME was largely 16 -- 17%

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Unidentified Analyst, [60]

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7? 1-7?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [61]

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1-7. Correct.

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Unidentified Analyst, [62]

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All right. And then I think my question will be on the balance sheet growth because I think you mentioned earlier that in terms of the loan growth, you are not focusing so much on the loan growth. But I think during the presentation, you mentioned slightly about like the consumers' part has been picking up. I'm just wanted to find out more ever since the PSB got lifted or eased, have you been saying like more demand on the loan side? And also, I think there were a couple of news go on saying that finance ministers might put like some form of liquidity in like -- in the banks, the non-SME banks. Would that mean that you might -- if that were to happen, there could be more lending be put out for like SMEs to help those sectors? So that's my first question.

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [63]

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Yes. The thing with SME, actually, and actually now corporate, what the government is doing, that's one sort of model that they're trying to do. They give money to some banks and it just so happened to be SOEs and they're expected to unlend. But the other one is the guaranteed scheme, right? So the guarantee scheme, whether it's SME and now corporate is being launched as well. So I think most likely, the nonstate-owned bank participations is going to be through those kind of schemes instead of receiving the -- just deposit from MOF fund and lend it to the customers.

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Unidentified Analyst, [64]

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Right. And if that's the case, would you expect that the loan growth probably could be stronger?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [65]

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Say that again? Sorry, Abi.

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Unidentified Analyst, [66]

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Sorry. Is that were to happen? Would you expect like loan growth to be stronger as where you are?

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

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I mean, look, the way I see it is the demand in itself is not really robust. I think people are still trying to gauge what this means to them. So if you look at the whole industry, for example, 20%, let's say -- let's call it, 20% is restructured because it is COVID. 80%, they still don't need this relief, which means they are at a much better liquidity position. But I think most of them do experience a decline in their sales. Right?

So if you have a business and you have a decline in sales, most likely, unless your sort of receivables or inventory base changes by a whole lot, most likely, our working capital should come down, right? So -- and investment loans are probably nonexisting in today. I mean I'm talking general terms, right?

So I think the demand will still continue to be muted for a little bit. And maybe there will be some pickup on this guaranteed scheme, but I'm not sure that's going to change the overall loan growth for the industry.

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Unidentified Analyst, [68]

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All right. That's helpful. And then I think my second question is on the deposits. So the CASA growth has been pretty strong. But I think that could be partly driven from like maybe people are not really spending and therefore, like you can see that CASA is growing stronger. But so where -- I'm interested to find out more in terms on what would be your effort in actually growing CASA further? So in case like we post CASA so economic activity pick up a bit better, should we expect like CASA actually starts to fall? I mean, I understand that there are probably a lot more liquidity in the system, but just trying to understand how do you actually plan to grow CASA further?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [69]

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So if you look back at about 3, 4 years ago, our CASA is about 42%, right? And we've been growing structurally in terms of our -- both in terms of the KPIs, our organization, our setup, our capabilities, to ensure the CA portion, the current CA portion from the transaction banking perspectives, whether it's through value chain, SME and the commercial space, through this channel and so forth as well as the SA portion, the savings accounts for our consumers. Now maybe this COVID sort of accelerates our plans on growth because last year, we're about in the 50s, in the mid-50s and now we're reaching up with a fixed handle. Maybe it sort of gave us a little bit of a push, but I think the strategy that we've been doing, we're going to continue to do, which is growing our transaction capabilities in the nonretail space as well as digitization on the retail space, right? So just -- I mean, like, we just launched our Octo Clicks about a month ago, and that goes in tandem with our strategy with the Octo Mobile, with our mobile banking strategy. And as we find out those people that really are active in those digital platforms, that our CASA is exponential to those that are, right?

So our strategy to push on digital platform will continue to be enhanced and I think, over time, we're going to hopefully continue to creep up on this CASA ratio.

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Unidentified Analyst, [70]

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Understood. And in terms of a digital strategy, I think probably like during the PSDV, probably you might have seen like an increase in the transaction. Is that like a sustainable increase, you think, in terms of the digital transaction?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [71]

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I think what it does, this whole COVID actually forces people to get comfortable with digital platforms, right? Just to give you a little bit of flavor, and I think -- I don't know if Lani is here, maybe he can sort of jump in. But for example, for decades, banks have been very comfortable using telesales, whether to convert their purchases to sort of installments, to offer special sort of cases for new to bank or existing to bank offering different sort of products. But what we found is -- just to give you a sense, some of the purchases that want to be converted to installments. We've found, actually, a lot of them are actually done through our digital mobile banking because it is easy. So you just go through a transaction, you click it, and you want to do 3 months, and so on in 6 months, 9 months, 12 months, whatever you want. And then boom, your installment is done. Instead of some guy calling you what you're watching a movie or you're having dinner, whatever, you don't pick up and you get hassled by this guy. So a lot of these types of transactions. And as a result, actually, we save a lot on our telesales. We don't need as many telesales as we did before, but we tried to move that behavior to be online.

So these kind of things, I think, will change behavior but at the same time, will be part of the structural cost savings as well.

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Unidentified Analyst, [72]

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Okay. My last question, I think you mentioned earlier that when you do stress test, there are a couple of like means that like probably directly impacted and revenue fell to 0 in within 1 month. How big a percentage of like your book within those categories?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [73]

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I think, our book fortunately, we've been having a pretty robust risk management sort of procedure, whereby we really monitor -- even before this COVID, right, from a few years ago, we monitor how much do we want to have in each industry, each location, each sector and how much do we want in the top-tier and so forth. So we're pretty spread out.

So I think the biggest hit, as everyone can see, it's probably like hotels in Bali, right? And who knows if they're going to recover next year, in 2 years or even 3 years to go back to where it was in 2019. So just, for example, on those kind of exposures, our exposure is fairly small. It's somewhere in the -- I think it's below 50 basis points or something like that on our whole portfolio. So I think we're pretty spread out, which is good. But at the same time, this COVID-19, it's pretty -- unfortunately, it really hits everyone, right? There's no sort of focus on each specific sector, everyone gets hit, even though some get hit a lot more.

So I think we'll see how this recovers. Like I mentioned to Harsh, some of the activities are reopening in the big cities and some of our clients are getting the benefits of that reopening. But we'll see because some of the infections rates continue to be high.

Thank you. Just one thing, guys. I think I want to get back on this LGD questions. Let us get back to you. I know some numbers were mentioned. I just want to make sure that we do have the right numbers for everyone.

Let's not sign it in blood yet. But let us get back to you appropriately on those numbers.

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Vera Handajani, PT Bank CIMB Niaga Tbk - Risk Management Director & Director [74]

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I just want to add a little bit, Pak Tigor, on how these questions related to our confidence related to the increase of digital transactions from customers. I think we are fairly confident that this will be increasing further because the situations with pandemic with the -- some of the limitations for people who are fixed on partial lockdown by PSDN, et cetera. It's for customers and people practically to move to digital. And they start to fill the -- to be more comfortable. And in fact, it is more accessible, easy and cheaper for them as well to use digital. So I think it will continue further to build more confidence for customers as well. Yes.

In terms of experience and related to the current situation, it is also making sense and the customers start to realize that, that from health and safety purposes, that digital transaction, especially when governments already have now opened some of the commercial area like restaurants, department stores, supermarket. And this is one that we communicate to the customer, we educate the customers on transactions with healthier ways, because they don't need to punch in, touch anything. Use the QR capabilities that we have in Octo Mobile to purchase things, to transact. And I think in -- within the majority of the brands, the capability of QR payments and QR transactions, it is still very limited, and we are the 1 who wants to pioneering this.

So we are also promoting health and safety in terms of doing banking transactions. Thank you.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [75]

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Thank you, Vera.

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Operator [76]

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The next question we have is a follow-up question from Robert Kong from Citi Research.

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Robert P Kong, Citigroup Inc., Research Division - Director & Deputy Head of Regional Financial Institutions [77]

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Apologies. Two very quick questions, I hope. One is just going back to the cost of fund. I wrote down that your cost of funds for the first half is 3.94%, but I -- for some reason, I didn't write-down what your cost of funds was last year, 2019. Could you just repeat what that was, so I can see what the change?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [78]

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4.25%.

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Robert P Kong, Citigroup Inc., Research Division - Director & Deputy Head of Regional Financial Institutions [79]

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That's for the full year 2019?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [80]

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Oh, that's for the first half of last year.

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Robert P Kong, Citigroup Inc., Research Division - Director & Deputy Head of Regional Financial Institutions [81]

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Okay. So you've actually moved down about 30 basis points year-on-year then?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [82]

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Yes.

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Robert P Kong, Citigroup Inc., Research Division - Director & Deputy Head of Regional Financial Institutions [83]

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Do you have a sense of how far you can take that lower in the second half? Or some sort of target?

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Lee Kai Kwong, PT Bank CIMB Niaga Tbk - CFO, Head of Finance & Strategic Procurement and Admin Property Management and Director [84]

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I don't have a number for you just yet. But I believe we are still aggressively taking this down. We have, in the past couple of months, reduced our -- have delayed even further our cap -- our rate even further. It that has come down from about 6% now to the 5% level already in the last, maybe 3 months. So a lot of this, the pricing will come very quickly in the coming months. So we do foresee a much more lower cost of funds going forward.

In the second half, also, we will have several bonds maturing. Those bonds are from maybe 7 to 10 years ago, but we actually came about a 9% to 10%, we will not be replacing those bonds. So the cost of funds will also be lower going forward.

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Robert P Kong, Citigroup Inc., Research Division - Director & Deputy Head of Regional Financial Institutions [85]

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Okay. And my final question is just wondering, have you had any interactions with the new CEO at the group level. Has he indicated any thoughts on the S-23 strategy, how it might be reviewed and so on and so forth? That's the question.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [86]

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Sure, Robert. I think, obviously, we've had a number of discussions within, and I think it's refreshing to have someone coming from the outside to look at things. And I think we will be coming out with the -- especially given COVID and everything with the -- it's sort of like a revised or enhanced Forward 23 strategy soon. It's in the works. And I think we'll let you know once it's ready.

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Operator [87]

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We don't have any further questions at this time. (Operator Instructions)

No further question at this time. Presenters, you may continue.

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Unidentified Company Representative, [88]

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Yes. Pak Tigor, is it fine then we can actually close this call?

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [89]

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Sure.

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Unidentified Company Representative, [90]

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Okay. Ladies and gentlemen, that ends our session for today.

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Tigor Marsahala Siahaan, PT Bank CIMB Niaga Tbk - President Director & CEO [91]

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But before we -- yes. Just before we close, I think, I will just quickly. I think just to makes remarks. Thank you, everyone, for dialing in. I think for Niaga, we just talked about it 1.5 hour, which is great. There's a lot of questions, a lot of interactions, and I appreciate that. Thank you very much.

So as I mentioned before, I think there is a lot of challenges in the first half and many more, I think, in the second half. The asset quality remains our focus and continues to be a priority for all of us. And we know that this means in many, many instances that we are helping our clients as well. So we need to protect the bank's books. But at the same time, we're here to ensure that the appropriate clients, clients that have been with us for a long time, clients that are with us for the years to come, we're going to continue to work with them side by side.

The credit costs will remain our focus for the next couple of quarters. I would say that it's still going to be elevated in the second half. And we are yet to quantify how much that would be in the third and fourth quarter. But I think, given the situation, given the portfolio, given the environment, we think that will continue to be elevated. So what we can control is, like I mentioned, is our costs. We continue to look at every single items to ensure that -- whether structural or opportunistic, we're going to continue our costs. We're going to continue our CASA to ensure that we can continue to press on our cost of funds. And where appropriate, we are trying to ensure that our noninterest income will creep up in the second half of this year.

So again, thank you very much for your support. Thank you for the interactions. And I wish you a long weekend at least in your corners, since it's a holiday tomorrow. Thank you.

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Unidentified Company Representative, [92]

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Thank you, Pak Tigor. 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 presentation, which will be announced approximately 18 months from now.

Thank you. Stay healthy, stay safe, and have a great day. Over to you.

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Operator [93]

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Ladies and gentlemen, this does conclude our conference for today. You may all disconnect.