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|Q.||What is the economy outlook in H2 2010?|
|A.||Indonesia economy will remain strong in 2010. GDP growth is projected to achieve 6.3% by the end of 2010. Rupiah will be stable at around Rp 9000 per USD. However, the inflation rate that reached 6.2% by the end of July 2010 is expected to increase slightly higher than the government target of 5% (+/- 1 %). Increasing food prices during the month of Ramadhan and government decision to increase the electricity tariff started in July will contribute to the higher inflation. If inflation continues creeping up, there is a possibility that BI will raise the bench mark rate by 25 to 50 bps in the second half of 2010.|
|Q.||What is the impact of interest rate increase to BRI NIM and business?|
|A.||In general, the impacts of interest rate increase to BRI NIM are somewhat neutral because:
This balance sheet structure will allow BRI to reduce the impacts of the increasing or decreasing interest rate to NIM.
- From the asset side, ± 50% of earning assets (micro loans, consumer loans and some securities) have fixed rate
- From the liabilities side, ± 58% of the funds are in CASA which is not sensitive to the interest rate.
The higher inflation rate will give impact to our customer. The margin of the borrowers business may be lower due to increasing price which may affect negatively to the repayment capacity.
|Q.||The competition in microfinance increased as a number of banks entering microfinance market. How will BRI protect and expand this market?|
|A.||Microfinance market is still widely open, since there are 15 millions micro businesses don’t have a bank account. Therefore, the BRI micro loan growth remains strong amid increasing competition in micro business.
To maintain its position as the leader in micro business, BRI has taken some actions, such as :
- Open micro outlets to expand the microfinance market coverage
- Penetrate microfinance business in traditional market by opening Teras BRI, a small micro outlet (kiosk) inside traditional market
- Tap feasible but un-bankable micro customers by using micro KUR (loans for un-bankable business guaranteed partly by the government)
- Develop new product features in micro business
|Q.||BRI has expanded its network aggressively for the last 3 years. Will BRI continue to pursue the same strategy in the coming years?|
|A.||As the focus of BRI business is on Micro and SME, until now, opening outlets is still becoming the best strategy to reach these markets. For the last 3 years, BRI has aggressively opened outlets to maintain the dominance in rural and more importantly to strengthen its presence in urban area.
After aggressively opening new outlets for the last three years, BRI will continue to add the outlets but in slower pace and at the same time optimize the existing and newly outlets by adding personnel. For micro business, BRI will focus on traditional market by opening small kiosk, called Teras BRI to serve micro business in traditional market.
|Q.||Why BRI enters the urban market? What is BRI strategy in expanding urban market and how to carry out the strategy?|
|A.||The rapid development of Indonesia will gradually change the economic landscape. Increasing GDP per capita, increasing number of population live in urban as well as the growing economy in the region that change rural area become more like urban are, need to be addressed properly if BRI still want to be the leading bank in the future.
From the historical background, BRI is very strong in rural market, while its presence in the urban is quite weak. To anticipate demographic change because of economic development, BRI must strengthen the urban market without leaving its rural dominance.
Therefore, BRI need to enter the urban market with the following objectives:
To expand the urban market, BRI takes following steps:
- to retain its huge customer base by providing complementary product and service suitable to the need of urbanite
- to increase low cost fund (saving and demand deposit) composition
- to increase fee-based income
- to increase cross selling activities
- opening consumer loans outlets especially in 14 big cities with huge business opportunity of consumer loans
- marketing campaign to deliver the message of BRI capability in serving the urban market
- creating new products and developing product features
- expanding e-channel distribution, i.e.: ATMs, EDCs, phone banking, SMS banking and internet banking
|Q.||What is the rationale to increase corporate loan?|
The rationale of BRI to increase the corporate loans:
- higher yield investment compared to securities
- opportunity of cross selling (trade finance, cash management)
- a gateway to spur SME and consumer loans from the employees and supplier,
For the corporate loans, BRI focus on SOE lending due to:
- lower risk weighted assets (50%) which will provide capital efficiency for BRI
- a lot of SOEs have huge capital expenditure since they become the backbone of Indonesia’s economy
- SOE currently are managed professionally and some are become the leader in the industry
|Q.||What is the logic behind Bank Agro acquisition?|
A number of reasons why BRI plans to acquire Bank Agro include:
- The nature of business, related to agribusiness financing, is matched with BRI’s strategy to finance and develop agriculture business. Agriculture business has a huge market potential due to its role in food and energy security
- Inorganic growth is one of strategies to grow business
- At reasonable price, Bank Agro has a potential value increase
|Q.||BRI has been growing strongly while capital growth is not as strong as business growth, how BRI support its loan growth?|
To support its loan growth, from the capital adequacy perspective, there are several ways have been taken:
- Lowering the dividend pay out ratio (DPO).
- Since the IPO in 2003, DPO is trending down, from 50% to 35%, and most current DPO (2009 financial year) was 30%
- Investing to low risk weighted asset (loan).
- BRI has been investing more its corporate loan to SOE. It is aligned to the goals to save capital.
- Raising capital,
- BRI is considering raising capital if the CAR level approaching 12% and the most likely it will be sub debt issuance to avoid dilution effect of government ownership.
|Q.||Why is BRI cost to income ratio relatively low currently (Q2 2010)? |
Cost to income ratio was quite low because of two factors:
- High growth of net interest income
BRI net interest income increased 23.96% (yoy) and reached Rp13.55 Trillion in Q2 2010, due to its business growth (loan growth 22.56% (yoy))
- Low growth of other operating expenses
BRI is able to increase its cost efficiency. Other operating expenses only increase by 7.08% (yoy) due to:
- outsourced employment implementation for certain function (i.e. front liners)
- transaction cost (relating with IT) decrease, since core banking system fully implemented and all network connected online
|Q.||Why BRI NPL increase amid the improvement of Indonesia economy? |
BRI loan qualities deteriorate especially in medium business. Medium Business segment contribute less than 7% of BRI total loan portfolio. Basically medium segment customers are (private limited liabilities companies) in a transition period from small business moving upward to corporate business. The economic sectors that they are involved are similar to the small segment. They are bigger than small business customer but not as strong as the corporate ones especially in term of finding source of capital and accessing the markets.
The source of problem in our medium size loan coming from:
- Business that have direct impact on global crisis (dealing with export-import business and activities)
- Business that can not compete with the imported product
- Restructured loans that already become current loans but experience difficulties in its cash flow
BRI has been taking following actions to undertake the problems in this segment:
- Credit Restructuring, taken to make NPL back to current category, designated for cooperative borrowers that still have prospective business in the future.
- Credit Settlement, taken to make NPL paid off designated for non cooperative borrowers and/or borrowers that do not have prospective business in the future.
- Assign a Division in the Head Office to closely monitor the performance of Medium Size Business
- Reducing the limit approval authority in the Regional Office loan origination
- Revoke the individual loan approval and all loans must go through committee approval
- Set up a ‘task force’ to help speed up loan restructuring and settlement process
- Stop loans for export import business and loan expansion only for very selective borrowers
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|Q.||What is the impact of liquidity crunch on BRI?|
|A.||Despite the expected high inflation, banking industry has experienced high loan growth since the first quarter. The issuance of government bonds increases the competition in obtaining the public funds. As a result, banks are forced to raise the deposits rate, especially for time deposits. Some banks with high LDR and less favorable funds structure suffered from this situation.
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Liquidity crunch has impact on BRI, however, the impact should be limited due to some factors including:
- BRI, supported by its massive networks, has a good funding base structure to provide liquidity to support the loan growth. A big portion (63%) of BRI TPF is coming from CASA which is not sensitive to interest rate to helps BRI to maintain its liquidity and COF at an appropriate level
- BRI’s role in Treasury Single Account for government budget, also offers an opportunity to improve liquidity as the government plan to accelerate its spending.
- The relaxation of Minimum Reserve Requirement from the Central Bank to 7.5% (5% in Primary Reserve and the rest as Secondary Reserve) has benefited BRI:
- BRI will enjoy lower Reserve Requirement which usually stays at 9%
- BRI holds government bonds which may serves as Secondary Reserve
|Q.||With the fall of commodity price, how will it affect BRI ?|
|A.||BRI has a significant exposure to agribusiness in its total loan portfolio. The business activities in this sector encompass a broad definition of agribusiness : from “on farm” and “off farm” activities; also from “up stream” to “down stream” and for export and domestic market, including palm oil plantation, cooking oil factory, sugarcane, livestock, dairy product, feed mill, fertilizer and pesticide, farming equipment, rice, horticulture, agriculture products trading, etc.
Some of these activities are export oriented market, but most of them are for domestic market.
Among commodities financed by BRI, palm oil plays a significant role. As of September 2008, total loan outstanding reached around IDR 6 trillion (5% of total loan portfolio). Most of the loans go to medium and corporate business and the exposure to smallholders is relatively limited. To finance smallholders, BRI engages in nucleus –plasma program.
In nucleus-plasma scheme, a company (‘nucleus’) obtained license to develop plantation of which will be distributed to the smallholders (‘plasma’). The ‘nucleus’ will receive the loans for establishing the plantation. Upon maturity, the plantation, as well as the loan, will be transferred to the ‘plasma’. The ‘nucleus’ has the obligation to be the loan guarantor and in return the ‘plasma’ must sell the yield (fresh fruit bunch) to the nucleus at agreed price (set by local authority) as source of loan repayment.
Benefits from financing ‘nucleus-plasma’ program:
- The nucleus act as the guarantor so the risk of bad debt can be reduced
- As the plantation for smallholders developed by the nucleus, it will be in higher quality than if the smallholders build their own plantation. In addition to that, the nucleus provides technical assistance for the smallholders to ensure that the plantation is well maintained
- By setting the price of FFB from the ‘plasma’ will protect the plasma from price fluctuation, especially when the price drop.
|Q.||How big is BRI exposure on foreign currency?|
|A.||As of September 08, Exposure BRI to Foreign Exchange :
Assets : equivalent to Rp 26.4 trillion (13% of earning assets), consisting of :
- loans : 44%, for SOEs and other corporates
- securities 15.6%
- placement/interbank call money 12.7%
- Nostro account 25 %
Liabilities : equivalent to Rp 24.5 trillion, consisting of :
- third party funds 60.7%
- Inter bank : 5.8%
- Borrowing and call money 11.8%
BRI was in long position which benefited BRI in rupiah’s depreciation.
Net open position of BRI as of September 08 was 10% (far below the maximum allowed by Bank Indonesia at 20%)
|Q.||The economy is expected to slow down next year. What is the impact on loan growth and loan quality?|
|A.||The government target that the economy will grow at 5%, lower than the target this year at 6.3%, and the Central Bank expects that the loans will grow at 22%. |
BRI will still target a loan growth at 20-25% next year, a slower rate than this year’s exceptional growth. Micro and SME loans, driven by domestic consumption, will sustain this growth. Strong franchise networks of BRI will take important role in Micro and SME loan expansions. Some projects in infrastructure and SOEs lending will also help to boost the growth.
The loan quality is expected to receive some impact from the global slow down. However, due to diversified customers base and small exposure (relatively to total exposure) will maintain a level NPL within the target of below 5%.
With total loan provision in the balance sheet reach IDR 8.6 trillion and a NPL coverage of 190%, BRI has a strong cushion against downturn in business cycle to achieve its bottom line target.
|A.||A new loan scheme, Kredit Usaha Rakyat (KUR), was introduced in the end of 2007. This new loan scheme aims to finance feasible businesses yet do not meet bank requirement (not bankable). Government guarantees 70% of loans through state owned insurance companies and the banks bear 30% of the risk. There are 6 banks, including BRI, participate in this scheme. This 3 year program is estimated to reach IDR 14 trillion. For BRI, KUR provides opportunity to expand the untapped market to add new borrowers. |
BRI has 2 schemes for KUR:
- Micro KUR with loan size up to IDR 5 million and channeled through BRI’s micro outlets
- Non Micro/Retail KUR for loan size >IDR 5 million up to IDR 500 million, channeled through BRI’s sub branches and branches
Since its inception up to September 2008, the loan outstanding of BRI’s KUR has reached IDR7.2 trillion (out of total banks at IDR 11 trillion) with more than 1 million new borrowers and level of NPL is around 0.5%.
|Q.||BRI experience a strong growth in corporate lending for the last 3 years. Does BRI want to shift its business focus?|
|A.||BRI does not shift the business focus to finance micro and SME business. Corporate lending portion to total has increased since the last 2 years, but the portion will be capped at 20% of total loan portfolio. Some reasons for increasing corporate loans are: |
- To accommodate the business growth of medium size businesses that need loan size more than IDR 50 billion
- Trickle down effect of corporate business to spur micro and small business growth
The growth of corporate loans aims at:
- State owned enterprises lending, providing a lower risk weighted assets
- Projects guaranteed by the government
- Corporate with linkage program to micro and small businesses
- Infrastructure lending to help the real sector development
|Q.||BRI’s CAR level is lower than that of the banking industry’s, while BRI growth is higher that of the industry. Will capital become a constraint for BRI to grow and how will BRI overcome this problem?|
|A.||BRI has prepared some actions to maintain CAR at comfortable level 12 % by:|
- issuing sub debts if the market is favorable
- prioritizing growth in segments requiring lower risk weight such micro and small loans (including KUR), SOE lendings, and government guaranteed projects
- Reviewing loan commitment to prioritize loan disbursement for a prepared projects to reduce RWA in loan commitment
|Q.||What will BRI do to anticipate global recession?|
|A.||Learning from the crisis in 1998, now BRI is more prudent in managing its loan portfolio and increases risk mitigation, including: |
- Reviewing loan policy toward well governed and comprehensive loan process
- Applying ‘four eyes principle’ which separate the function of relationship management and credit risk analysis
- Implementing internal Credit Risk Rating/Credit Risk Scoring for a better loan management
- Establishing a Loan Rescue Unit to help solving the medium and corporate loan problems.
BRI has taken some necessary action to limit the impact on global recession, such as:
- Selective lending especially for companies with export oriented market or with high imported contents.
- Increase monitoring on loans in foreign currency
- Increase borrower’s cash flow monitoring.
|Q.||How’s the mechanism in BOD selection? Do they have to sign contract with Key Performance Indicators (KPI) to meet? |
- Candidate of BOD are selected and proposed by the incumbent BOD and Commissioners. The proposal goes to Ministry of SOEs for administrative selection and fit and proper test by Bank Indonesia. If pass the fit and proper test, the candidates will be interviewed by Minister of SOEs and the result will be sent to Final Evaluation Team chaired by the President of Indonesia. The final decision will be based on the Shareholders' Meeting.
- There is KPI monitored by Ministry of SOEs. The monitoring of BOD performance includes vision and missions described in business plan and also bottom line, mainly profit.
|Q.||How’s the composition of new BOD? What’s the background of the new BOD? Why should be there BOD from internal BRI and external BRI?
- Since May 30, 2006, BOD consists of 8 member including President Director. The new appointed BOD member are 7, 5 of them are from internal promotion, the other 2 from external BRI, Mr. Abdul Salam as CFO and Mr. Toni Sutirto as Director of Consumer Banking.
- BOD members from internal promotion are important to continue the bank's vision and missions since they are already with BRI for more than 25 years experiencing various banking field to strengthen bank business.
- The other two members from outside to provide innovation for BRI. Mr. Abdul Salam, previously worked for Bank Indonesia and later on in State Owned Enterprises for SMEs (PNM). His experience as regulator in BI and serves feasible yet unbankable micro borrowers will benefit BRI in complying with the regulation and enhancing customer base in the way that customers from PNM that already grow and turn to bankable become the customer of BRI.
- Meanwhile Mr. Toni Sutirto, previously Director of Commercial Banking of Bukopin, joined BRI with the expectation that he will be able to develop better Consumer Banking (CBK) for BRI based on Bank Bukopin experience which already developed its Consumer Banking. With better Consumer Banking, BRI will be able to provide complete service to its existing customers so that they & their family do not have to find services from other bank when they need as the business grow.
|Q.||Is there any change in BRI’s strategies?|
- No. The new BOD agrees for BRI to stick and focus on its core business of Micro, Small and Medium Enterprises, while taping opportunities available in the consumer banking in urban areas to broaden funding base and to increase fee based income.
|Q.||How is your policy in managing your loan portfolio ?|
- As BRI's core business is in the MSMEs, the loan portfolio will still be focused on these segments. The BOD agrees to maintain at least 80% of total loan portfolio to the MSMEs.
|Q.||Why Consumer banking? What will you do?|
- We see consumer banking is just an addition to our businesses. We still focus our business to micro, small and medium enterprises. Consumer banking is not new for us. We just want to intensify our presence in the business, as we see consumer banking as a profitable business opportunities and we had had all the infrastructure, premises and people, so there will be no new significant investments. We will focus to the funding site of the business, to widen our funding base and to increase our fee based income. The target is to the 10 largest cities, as we see most of the money is in these areas.
|Q.||With the move to consumer banking, does it make your COF increase? Does this move will disrupt and mix your focus to MSMEs?|
- No. We target only low cost fund of savings, not time deposits. The hurdle in the consumer banking for us is in the marketing, so the issue will be in the promotion costs, not investments. As such, we will control the cost, monitoring the incremental investment ratio. There will be no mix in the focus on the MSMEs as there are two directors who each will each oversees each of the segment
|Q.||Who is the closest competitor of BRI in micro business? How does BRI create barrier to entry for the competitors?|
- Actually, there are many financial institutions providing micro credit. However, due to limited operation, size, network, infrastructure and also different target market, there is no significant competitor for BRI micro business
|Q.||Macro economy condition related to the banking industry
With the declining interest rate, will NIM expand?
- Macro economy condition in 2007 is expected to be better than last year. Inflation will be at 6±1 %. SBI rate is trending down to be 8% at the end of 2007. The lower inflation rate and interest rate will be beneficial to banking industry, especially to BRI, since a big portion of BRI’s lending rate is fixed rate (Micro and Consumer Loans). The NIM will be stable at 10-11%. Even though the COF declines and 52% of loans are fixed rate, NIM will not expand due to increase in small commercial NPL.
|Q.||BRI’s Performance in Q1 2007 and target for Q4 2007|
- BRI loans just grew at 0.86% (ytd) in Q1 2007 due to seasonality. The accelerated loan growth will occur in Q2 and Q3 along with the government spending and decreasing of interest rate. By the end of the year BRI will be able to achieve its target of 20% loan growth.
NIM in Q1 2007 is 11.36%, still the highest in the banking industry. The management targeted of NIM at 10-11%.
NPL in Q1 2007 was 5.31%, increase a little bit from Dec 2006 due to the deterioration of SME loans. Some factors are attributed to the deterioration, such as low purchasing power, natural disaster, bird flu, mudflow, etc. The management will maintain the NPL at 5% and improve the loan quality by restructuring the loans.
|Q.||Loan Growth - Do you think that BRI strong loan growth in recent years will be sustainable?|
- Yes, until couple years. If we see loan to GDP ratio in Indonesia, still at 25 %, is quite low number compare to that of other countries. This shows us that there is a lot of opportunity in loan expansion.
|Q.||Loan Growth - With the better expectation in economic condition, will you target higher than 20% of loan growth?|
- The macroeconomic is getting better but real sector development is still weak. We can not expect that the loan growth will increase significantly. The industry is predicted to grow 18%, so BRI loan growth target is still higher than the industry.
|Q.||Loan Growth - Which sectors you will target for this year?|
- Our micro and SME has showed steadily high growth and will remain became the main driver for the loan growth. Agriculture and trading are the main sectors in our loan portfolio. The infrastructure project and agriculture revitalization project provide opportunity for loan expansion in corporate loans as well as multiplier effect to the regional economy.
|Q.||Consumer Banking - How is the development of the Consumer Banking? What are the strategies?|
- We already finished the reshaping of Consumer Banking Directorate. Step by step we will fill out the personnel in line with the business development.
The purpose of our Consumer Banking is to provide complete banking service to our existing customers and to obtain low cost of fund in urban areas. We just launched a marketing campaign (namely “Untung Beliung”) to boost our savings product in the area.
|Q.||Consumer Banking - How much is your capital expenditure for Consumer Banking?|
- There is no significant increase in our capital expenditure as we already spent huge amount for our IT prior to our IPO. The expenditure is mostly for exploitation such as marketing and personnel expenses.
|Q.||Infrastructure Projects - What is the rationale of BRI entering infrastructure projects as the margin is much lower compare to Micro lending?|
- BRI has excess liquidity. In the other hand, real sector growth is very weak. We can not force the micro segment to absorb the excess of liquidity due to the capacity and resources limitation, which may endanger the loan quality. Therefore, BRI seeks the opportunity to use the liquidity to finance the infrastructure project. We believe that infrastructure project will provide a lot of benefits for economic development. There will be trickle down effects for MSME activities. We choose projects that meet our criteria in financing the infrastructure project.
|Q.||Infrastructure Projects - BRI is perceived lack of experience and competencies in corporate loans. How will BRI implement risk management in corporate loans?|
- We conduct risk assessment for the loan proposal. For example for toll road, the credit will be disbursed only after land clearing process is finished. The financing will be directly to the contractors to reduce the possibility of misuses of loans. The drawdown will be based on the completion of each state in the work plan. There is also independent consultant to control the progress of the project. Furthermore, loans for the projects are in syndications, and in most cases BRI is not the leader of the syndicate.
|Q.||Infrastructure Projects - How much does BRI want to have in infrastructure projects? How is the drawdown of the projects?|
- Up to first quarter 2007, BRI has signed loan syndication for financing some toll road projects. BRI share is Rp. 3.4 trillion, out of Rp 11.8 trillion of total syndicated loans.
|Q.||Infrastructure Projects - Besides toll road, what other infrastructure projects will be financed by BRI?|
- BRI also finances airport in North Sumatra and power plant.
|Q.||Provision - The provision expenses last year was quite high and the first Quarter 07 also showed the similar thing. What is the breakdown of this high provision?|
- The high provision is caused by the deterioration of loans due to natural disaster and late adjustment of oil price.
|Q.||Provision - Is the Q1 number the peak or will it increase again and what is the target for the end of year?|
- The number will increase in line with the loan expansion. The provision target for end of year will be lower than last year number.
|Q.||Microbanking - As this segment is very lucrative, how is the competition in this segment? Can BRI maintain high margin in this sector?
- Danamon with its DSP aggressively enters this segment. Even Mandiri also has micro business unit. Other than that, since years rural banks had already existed in this market. The competition surely increase, but the market is still huge. According to the data from Ministry of Cooperatives and SMEs, there are more than 40 million business unit. 99% of which are categorized as SME. Among those, only 15 million are already in the banking system. So, there is still huge potential for this market. The issue is whether they are bankable or not. Bank should be innovative to penetrate the microlending market.
|Q.||Deposits - Last year deposit growth was very strong. How do you achieve that? Will it sustain this year?|
- Last year growth was an exception, our deposit grew at 24%. Normally, our deposits grow at 13-15%. The deposit growth come from government funds for civil servants salary, Aceh reconstruction, subsidy for electricity.
|Q.||Merger and Acquisition - The newspaper mentioned that BRI plan to acquire some banks. What is the purpose of the acquisition and how much money will be spent for the acquisition.
- BRI plans to develop its Sharia business unit by acquiring a conventional bank which will be converted into Sharia bank. The budget for the plan is around 1 trillion for acquiring the bank, injecting the capital and developing the business.