Second quarter of 2023. Our host today is CIMB Group CEO, Dato' Abdul Rahman Ahmad, and Group CFO, Khairul Rifaie. My name is Steven from the CIMB IR team, and you should have received the analyst presentation and financial statements via email from the investor relations email by now. If you have not, the documents can be found in the IR section of our website, cimb.com. Before we begin, please be informed that this briefing is being recorded. I would like to encourage everyone to include your name and company on the Webex to allow us to identify you better. Note that all participants' lines are currently on mute, and you have the opportunity to ask questions after the presentation by using the raise hand function. At this juncture, I would like to hand over the briefing to Dato' Abdul Rahman and Khairul. Dato', over to you.
Thank you, Steven. First, welcome, everybody, to our half year 2023 analyst briefing. I appreciate you guys making the time, especially for those who based in Malaysia, we are on the eve of Merdeka Day. Let me begin by saying that we are pretty positive in terms of our performance, especially given, I think most of you are aware, of the very competitive deposit competition, particularly in Malaysia. I think we delivered what I would call a pretty robust and positive performance. Firstly, on the income side, we grew 6.7% quarter-on-quarter and 7.4% year-on-year from very strong NOI growth of about 14.4% quarter-on-quarter and 32% year-on-year. This is driven really by markets related and other income.
NII recovered quarter-on-quarter, this is underpinned by loan growth and moderated cost of deposit but really still remains muted year-on-year owing to the compressed NIM because of the higher cost of deposit. We are pretty pleased in terms of both the loan side as well as the deposit side. Loan actually grew 3.3% quarter-on-quarter and 8.3% year-on-year with growth across countries and segment. Deposit grew at 4.4% on a quarter-on-quarter basis and 9.5% year-on-year. CASA, actually, I think after, I call it a weak first quarter, grew 5.7 quarter-on-quarter, leading to improved CASA ratio of 38.5% as some of the regional initiatives that we've been taking start to bear fruit. Next, really, in terms of the OpEx, remains under control despite the inflationary pressure. It grew 2.6% quarter-on-quarter and 6.2% year-on-year.
With the income growing, our first half 2023 cost-to-income ratio improved to 46%. I'd just like to highlight, I think this is a significant improvement from what we were before, I think in 2018, whereby I think we were close to 55%. Provision is contained. It declined 2.2% quarter-on-quarter and 2.9% year-on-year. Our first half loan loss charge stood at about 38, significantly lower than our target. On a reported basis, all of this translate to PBT growing at 11% quarter-on-quarter and 13.6% year-on-year, while net profit improved 7.8% quarter-on-quarter and 26.2% year-on-year. This translate to a return on equity of 10.7% in second quarter 2023, and increasing it to 10.6% for the first half of the year.
On a reported basis, this represent a considerable improvement of about 150 basis points year-on-year. Capital remains strong. CET1 is at 14.2%. With this, I think we are very pleased to announce that we are increasing our dividend payout ratio from 50% - 55% compared to last year. This translate to MYR 0.175 per share or amount to about close to MYR 1.87 billion. That's basically a quick summary of our result. I think Khairul will take us through in terms of the details of the performance. Thank you.
Thank you, Dato', and good evening, everyone. Firstly, in terms of the key highlights, our very robust growth that Dato' mentioned in terms of our revenue growth, both on a QoQ and year-on-year basis is really a result of our execution of the portfolio reshaping efforts and also the diversification that we have within our group. You can see this with that revenue growth by country. You can see on a QoQ basis, the strong growth of Singapore at 19.9%, and also to a certain extent, Malaysia and Indonesia as well, very decent and good growth QoQ, offsetting the moderate growth that we experienced in Thailand of 40 basis points. Similarly, if we look at the year-on-year revenue growth, the strong growth in Singapore and also Indonesia offsetting the moderate growth of stable growth in Malaysia revenue growth.
The diversification in our portfolio really has come through and resulted in our overall group robust operating income growth. Secondly, like what Dato' mentioned, we still continue with our good cost control. We did record a positive JAWS on a year-on-year basis of 1.2%, which resulted in the cost-to-income ratio improving by 50 basis points. Our asset momentum continues to be stronger during the second quarter. Consumer continues its trajectory, whereas in terms of the non-retail side, both commercial and wholesale on a QoQ basis actually picked up in terms of the momentum. Provisions remain relatively stable on a QoQ basis, relatively low at 39 basis points on the quarter. For the year to date number, that's at 38 basis points, well better than our target of 45 - 55 basis points.
Moving on briefly on PBT by segment on slide five. Firstly, in terms of consumer banking, the year-on-year slight contraction on PBT of 5.4% is really driven by the challenging markets environment where the operating income is flattish on a year-on-year basis, and with the expense still continuing to grow, resulted in the PBT slightly contracting on a year-on-year basis. However, on a QoQ basis, the growth of 3.6% is mainly driven by NII. On commercial banking, the strong growth of 33.4% is really driven by both NII and NOI. NOI on commercial banking for the year grew by 15.7%. On a QoQ basis, however, PBT did contract due to weaker NOI and also some conservative provisioning that we made during the second quarter, which showed an increase, i.e., on a QoQ basis.
Wholesale banking on a year-on-year basis, the lower profit PBT is really driven by the absence of a significant write-back that came through in 2022. On a quarter-on-quarter basis, the strong PBT growth is driven by the markets-related income and also other income. CDA and group funding, both on a year-on-year and quarter-on-quarter basis, is really a significant improvement coming through on group funding and also Philippines. On slide six, highlights of PBT by country. Firstly, in terms of Malaysia, the strong year-on-year growth of 13.7% is driven by the markets-related income and also driven by lower provisioning. On a quarter-on-quarter basis, PBT growth was flattish. Despite the stronger markets-related income in Malaysia, that was offset by some conservative provisioning. On a sequential quarter-on-quarter basis, Malaysia provisioning increased quarter-on-quarter. Indonesia, on a year-on-year basis, that was stronger, driven by higher revenues and lower provisions.
On a quarter-on-quarter basis, the strong growth is driven by higher NOI and also lower OpEx. Thailand, the weaker year-on-year number is driven by a lower NOI. We did have an exceptional first half NOI last year in Thailand. Also contributing to this lower PBT is an exceptionally low first half provision last year. This year's level of provision is more at the normalized sort of level. On a quarter-on-quarter basis, PBT grew by 10.3%. Despite the flattish revenue growth quarter-on-quarter, the lower provisions quarter-on-quarter contributed to the PBT growth. Singapore, weaker on a year-on-year basis. Singapore, on a year-on-year basis, very strong operating income growth. However, because of the significant write-back last year, PBT was impacted in terms of the growth year-on-year. Quarter-on-quarter, very strong growth in Singapore. This is driven by top line growing by 20% quarter-on-quarter and also lower provisioning.
Moving on to the next slide on the details of the P&L. Firstly, on slide seven on operating income. If you look at it from an overall quarter-on-quarter basis, we recorded strong growth of 6.7%, and this was driven by the robust NOI growth of 14.4%. NII as well, quarter-on-quarter, recorded very good growth of 3.5%. However, that was impacted, of course, on the NII line by margins continuing to contract by 2 basis points. You can see the contraction has significantly receded compared to the first quarter number. If I break that down into the respective countries in terms of the quarterly margin trajectory. For Malaysia, in the second quarter, margins contracted by 4 basis points, a significant reduction in terms of the contraction. Broadly, cost of funding pressure has somewhat receded, but it is still very much there.
If I break it up into two parts for Malaysia, the loan and deposit book in terms of the margin has broadly stabilized. Where the pressure is coming through is actually on the treasury and markets book, and that is due to the fact that there were better capital markets of related opportunity, which is booked under the NOI line. There is a significant portion of that coming through in terms of the robust NOI growth. Secondly, if you look at Indonesia, as you have seen, on a quarter-on-quarter basis, we did face some cost of funding pressure, margins contracted 19 basis points quarter-on-quarter. Similarly, in Singapore, similar to Malaysia, there is a contraction in Singapore by 15 basis points. Where it is similar is where the pressure is actually mainly coming from the treasury and markets NII.
On Thailand, we managed to expand our margins by about 18 basis points QoQ, and it's mostly coming through on the yield. Overall, you can see the margin on a year-on-year basis contracting by 22 basis points, and this resulted in our NOI growth being fairly moderate, contracting by 80 basis points. A big part of that is driven by the pressure on margins on the P&L book, like what I said, on the quarterly performance, where there's a lot of market opportunity where it's booked under NOI instead of NII. Within the countries, Malaysia and Thailand on a year-on-year basis contracted margins, whereas slightly offsetting that is Singapore and Indonesia where margins actually expanded on a year-on-year basis. Moving on to NOI. If you look at the strong QoQ growth of 14.4%, main driver of that is trading and FX, where it grew, 12.9%.
This is really markets related, treasury markets business driving that growth. The 16% year-on-year growth, we did book a NPL sale during the second quarter, amounting to about MYR 170 million from Niaga. Fees on a QoQ basis was relatively flattish QoQ. On a year-on-year basis, that 32% strong growth on trading and FX, which is mainly treasury and markets within Singapore and Malaysia. On the fees and other income, the strong growth is really driven by other income. Overall, during the first half, if you recall, we had some NPL sale as well during the first quarter in Thailand. In total, during the first half of this year, our NPL sale amounted to about MYR 250 million. Last year, we also had some NPL sale, which amounted to about MYR 70 million.
On the fee side, there was some pressure coming through, which contracted by about 5% year-on-year, and that's mainly coming through from the consumer fee side. Moving on to expenses on slide eight. It is well within our expectation and still very much under control, where it ticked up to 2.6%. The main driver is personnel cost, and it's really a reflection of the higher revenues, and therefore, we booked higher bonuses during the second quarter. You see under admin in general, a significant reduction compared to last quarter, but there was a one-off adjustment in terms of our accruals, where we had no longer required it. There are some one-off reversals coming through under the A&G line. Overall, on the year-on-year basis, we grew by 6.2%, high growth on the personnel side at 5.4%.
It is reflecting the inflationary pressure and also the full half impact of the hiring that we did in the second half of last year. Marketing, in terms of percentage, also showing very strong growth. This is mainly driven by Philippines. I think it's important to note in Philippines, of course, as the revenue starts to grow significantly, the cost escalation has also increased in tandem. Overall, on a net basis, the cost-to-income ratio for Philippines has improved significantly on a year-on-year basis. Overall, if you look at the quarter, our cost-to-income ratio is at 45.1%, a significant improvement in the last quarter. On a year-on-year basis, like what I mentioned earlier, we did record a 1.2% positive draw on a year-on-year basis, and that resulted in our cost-to-income ratio improving by 50 basis points. Moving on to provisions on slide nine.
Firstly, if I explain the table, if you look at debt securities and others on a QoQ basis, this has remained broadly stable QoQ. The loan impairment and commitment and contingencies are within these two lines, there are some overlay adjustments. I will look at these two lines in combination. If you look at the second quarter number, that adds up, these two lines, to about MYR 410 million compared to last quarter of about MYR 390 million. Net, both on the loan impairment and commitment and contingencies, it has remained broadly stable. I think it was quite important that with the reallocation of our overlays, we wanted to disclose our provision in a more informative way.
Also, as we work through reallocating some of the overlays, if you look at the chart at the bottom, we are now disclosing it based on retail, non-retail, and recoveries. Broadly, during the second quarter, we have continued to minimize the overlay write back. Have managed to allocate a large portion of the COVID-19 overlay into new areas. If you look at it from an overall perspective, our quarterly provision has remained broadly stable. Going through the chart, if you look at firstly, in terms of recoveries, that has gone up on a QoQ basis, and that's mainly due to an upgrade in an account in Singapore related to the energy sector. On the non-retail segment, non-retail both captures commercial and also wholesale banking.
There's a slight increase there, and this is driven by the conservative provisioning that we have taken in Malaysia on some commercial names to offset some of the overlay write backs that we've had during the quarter. On the consumer front, a slight increase to MYR 331. Broadly, it has remained stable across our geographies, including Malaysia. We did see some delinquencies rising, and that is well within our expectation, and that has been more than covered with the overlays that we have. On the year-on-year basis, just to explain the variances. If you look at the year-on-year recoveries, last year, we had more significant recoveries coming through last year in the Singapore oil and gas space and also in the Malaysian aviation space. On the non-retail side, it has been very stable year-on-year. Within that, of course, we've taken some provisions.
Last year, if you recall, we took some provisions on the oil and gas Malaysia names. This year, we topped up further, or not a big number, but topped up further on the leisure, Malaysia, and some several names in Indonesia, not specific to any related sectors or thematic areas. On the consumer side, a significant reduction from MYR 864 million -MYR 626 million. The underlying has remained broadly stable. In Thailand, we had some more conservative provisioning coming through during the first quarter. On a year-on-year basis, consumer Thailand has increased. What has also improved is on the Malaysia consumer other provisions. On to the next slide, on asset quality. Overall, our credit cost for year-to-date is 38 basis points. On the impaired loans ratio, there's a slight tick up to 3.3% or 10 basis points movement QoQ, and that's mainly driven by consumer Malaysia.
As a result of that, you can see our allowance coverage has come down slightly, but still well above 90% to land at 91.6%. Moving on to our gross loans on slide 11. Like I mentioned earlier, the growth momentum, if you compare to the first quarter, actually picked up QoQ. Consumer banking continues to grow very well at 2.3% QoQ, that momentum has continued. If you look at where it has picked up, it's mainly on the non-retail side, and that's due to some lumpy drawdowns during the quarter, where both commercial banking and wholesale banking are driving that 3.3% growth. Similarly, because of those drawdowns coming through, especially on the wholesale banking side, on a year-on-year basis, the 8.3% growth is driven by wholesale banking. Within the countries, if you look at Malaysia, 4.7% broadly, just slightly higher than industry.
That's mainly driven by the non-retail side, both corporate and SME. In consumer Malaysia, the growth is at 4.1%. Thailand is mainly driven by retail, and also corporate. In Indonesia, that's mostly driven similarly to Thailand, retail, and also corporate. Whereas in Singapore, that 5.3% is mostly driven by the non-retail side. Moving on to deposits on slide 13. Like what Dato' mentioned, we've had good traction on CASA, in particular on the non-retail space. Here you can see the efforts that we've put in towards the middle of the first quarter, bearing some fruit coming through during the second quarter. You can see the growth of CASA at 5.7% versus the deposit growth at 4%, and led to that improvement in the CASA ratio by 60 basis points. Going forward, I think the risk still remains, especially on the consumer and SME space in Malaysia.
However, we are continuing with our efforts on the non-retail side in Malaysia. Slide 15 on our capital and liquidity. Our capital remains strong at 14.2%, relatively stable compared to last quarter. As a result, like what Dato' mentioned, we have increased our payout ratio to 55% from 50%, and this is coming from, of course, optimizing our capital and the continued strong internal capital generation that we have achieved. In terms of liquidity, we're well within our regulatory requirement and comfortable in our liquidity position. Moving on to consumer banking performance by division. Consumer banking firstly on slide 14, that growth on a QoQ basis is driven by NII, that's mainly coming through from Thailand. On a year-on-year basis, contraction on growth, and that's mainly driven by the challenging NOI markets in terms of the structured wealth management areas.
NOI weakened 4.3% year-on-year. However, that is partially offset by provisions being lower on a year-on-year basis. The good growth of 6.7% is mainly driven by very strong growth on consumer in Thailand and Niaga. Malaysia is growing more or less at market. In Malaysia, consumer growth was at 4.11%. Commercial banking on slide 15. The QoQ performance was weaker QoQ, that's mainly driven by weaker NOI, specifically on the FX side. Also, what impacted the profitability is the conservative provisioning that we did within Malaysia. That resulted in a QoQ increase in provisions. On a year-on-year basis, however, you can see a very strong growth driven by strong NOI on the FX line, driving a very strong PPOP growth of 8.7%.
On the gross loans side, the 8% overall growth is really driven by Singapore and Malaysia growing above that number. Wholesale banking on slide 16. On a QoQ basis, stronger performance from wholesale banking, and that's really related to the capital markets related income, and also the NPL sale, which was a corporate related NPL sale. Also, what's driving that is also a lower provisioning. The upgrade that I mentioned on the Singapore energy name is related to the corporate segment, and hence, there is a QoQ lower provisioning. On a year-over-year basis, however, PBT is lower, mainly due to the absence of the significant write-back that we had in Malaysia last year related to the aviation sector. However, we can see in terms of the top line is growing well at 7.2%, driven mostly by the capital markets related income.
On CDA and group funding on slide 17. In terms of the QoQ performance, very strong top-line growth, and this is driven by both group funding and also CDA. CDA in particular, Philippines. On a year-over-year basis, similarly, the strong 50% operating income is driven by both group funding and also Philippines. Some of the indicators, we look at Touch 'n Go digital. The number of registered users has continued its strong growth of 15%. Last quarter, our number of customers was at 19.3 million. Now it has exceeded 20 million figure. If you look at the annual transacting users as well, that has grown well at close to 17% year-over-year and now touching 10.4 million. Philippines, if you look at the number of customers, that has now crossed 7 million customers. Last quarter, that was at 6.9 million customers.
Lastly, on Islamic banking on slide 18, if you look at it on a QoQ basis, a stronger performance on Islamic banking, where there was a strong growth on NFI at 12.9% QoQ. On a year-over-year basis, however, PBT did contract, and that was due to weaker net financing income and also driven by higher provision. On the asset accumulation side, the Islamic financing continued to significantly outpace the conventional side, growing at 16% year-over-year. This is both driven by the consumer and also the corporate segment. That's the end of my presentation on the financial. I pass the presentation back to Dato'. Thank you.
Thank you, Khairul. I think in terms of update of our strategic plan, generally, I think it's roughly the momentum remains positive as per, I think, the last time we basically report. In terms of the asset composition and growth, I think our asset reshaping, I think it's probably at the tail end. Just happy to look at in terms of loan composition, really on the consumer side. We are now much more of what we call consumer or retail bank, with 52% of our loan composition now in consumer. The asset that effectively also the portfolio that we wanted to actually to continue to grow. One thing probably to note is our Indonesia commercial, which if you recall, we descale or tried to descale quite a bit. I think we are now ready for some form of growth.
I think you can see some growth now. I think we have been able to actually to regrow this particular portfolio. As I said, I think in terms of area that we want to invest, which is Indonesia consumer, if you look at it, we grew 8%. Malaysia commercial, there is one other area we wanted to grow, have grown 8% on the first half of the year. Next slide, effectively, in terms of our ROE journey, I know a lot of you have been asking about it, where we are. In theory, I think we are, I guess, on track in terms of our target ROE for 2023 between 10.2%-11%. We progress, I think, to hit 10.6% in the first half of the year. This is significant improvement from 8.5% in 2019.
Our reshaping portfolio, as I mentioned, delivered positively. Our structured cost takeout, I think, substantially down. The ECL uplift from active proactive asset quality management, I think you can see the impact at 38 basis points. I think we are substantially below our 50-60 basis points target on the Forward23+. Partly, I think we need to do more because I think we are building a lot more capital at 14.2% compared to 12.9% in 2019. In terms of what's the future outlook, I think the focus is continue to grow profitability from the asset growth, NOI expansion, and preferred segment growth. I think we're just now more conscious.
I think we need to do more because of the NIM compression that has happened this year, although I think our feeling is that it will subside starting from probably on the end of third quarter to the fourth quarter. The other part I would just like to highlight, I think the higher contribution from CIMB Niaga, I would like to bring you guys to the slide that we have on Niaga, which is slide 37. If you look at Niaga growth, I think it's been able to actually to transform. We grew our PBT close to 26%, net profit to about 28%. I'm very happy to report that Niaga ROE effectively in the first half has hit 15.4%. We think that the Niaga story, in terms of contributing to the overall performance, will be, I call it, a dominant play.
We are optimistic in terms of where we are at Niaga. The market is growing fast, and we've been able to tap into it. More importantly, we've been able to deliver this without taking what we call excessive risk, that perhaps we did in the past. If you look at it, a lot of the, in terms of the growth, have been what I call pretty solid, but a lot of it has been by containing costs as well as containing provision. Generally, I think the Niaga story will be a major contributor to our strategy to actually to deliver the ROE target that we have. We see some opportunity on credit cost optimization. I'll cover that. I think probably by end of the year and early next year, we'll be able to demonstrate to you the contribution coming from our digital asset.
It's our Philippine business, our Touch 'n Go digital business that I think are effectively achieving scale, and I think are starting to demonstrate what we call path to profitability. Obviously, I think the last lever that we have is capital optimization. I think we are starting with our announcement today, increasing the dividend payout ratio to 55%. In terms of the digital reliability, no new major thing to highlight. I think we are now quite happy, and I think we are working hard to make sure this is sustained. In terms of our CIMB Clicks downtime, I think we are spending a lot of time to get CIMB OCTO adoption. I think that's been our focus on this, and I think we are committed to actually continue investing in terms of technology CapEx that we have.
I think we are a bit behind in terms of our CapEx plan for the year. We plan on the second half of it to actually accelerate the CapEx investment, roughly probably towards the level that we've been incurring over the last three years. A touch on sustainability. I think in terms of the second quarter, I think we are pleased that we've been making further progress. I think we collaborated with Bursa Malaysia to help Petronas supply chain to adopt low carbon and sustainable practices. I think we have launched our sustainable living home solution. We've been able to offer preferential rate for solar home, solar financing, as well as incorporating them as part of the mortgage purchase. I think that's a key product that I think we are very keen on in terms of promoting.
Obviously, I think we are big also in terms of the EV drive adoption, and in terms of sustainability-linked treasury program. In CIMB Niaga, I think we're very happy that we won the Domestic Project Finance Bank of the Year and Domestic Sustainable Finance Initiative of the Year, at the Asian Banking & Finance Wholesale Banking Awards. We also rolled out, in Thailand, basically the human rights policy in May 2023 that is aligned with United Nations guiding principle. I'd just like to highlight and invite all of you, I think our annual flagship event is happening on the 11th to 21st of September. We have, I call it, a very exciting program. Particularly, I think we have what we call the GLIC CEO panel, the three largest GLIC in Malaysia, PNB, Khazanah, and EPF, are all effectively having a panel session to share about their journey, in terms of sustainability.
I thought just to highlight to all of you, because I think it's very rare that we've been able to actually get the three of them together to do a panel session on this. Final remarks, just to highlight, I think we are confident enough to make some revision in terms of our guidance. In terms of ROE, I think we are maintaining it within the 10.2%-11% part. As I mentioned, I think we have announced increasing payout ratio to 55% for our interim. We plan subject, of course, to regulatory approval review. I try and audit to maintain that level of dividend payout ratio for the full year. Loan growth, I think we are comfortable enough, bearing any exceptional circumstances, to actually increase our loan growth target to about 6%-7%.
More importantly, I think on the credit cost, I think we are revising our guidance to 40 - 50 basis points from 45 - 55 basis points. We believe that, I think the credit asset quality, I think, is contained in terms of any asset deterioration effectively is done. Obviously, we are judiciously, I call it, looking at effectively all our overlays while making sure that we have enough, I call it, provision, to moderate what I call any surprises that could happen in the future. All in all, I think the improved momentum in the second quarter performance really has been driven by the robust NII, strong loan growth, and CASA expansion. I think it's been delivered in an environment whereby the deposit competition was very competitive. I think it has affected all banks, particularly in Malaysia.
I think we are pleased that despite that, I think we've been able to deliver this performance. I think we've been able to do that without actually, I call it, taking a huge amount of release in overlays. I think in terms of strategy, I think we are finally, I think a lot of you guys ask, what's the benefit of having this diversified asset portfolio? I think we are now demonstrating that, strong performance in markets like Indonesia and Singapore, is balancing other markets' muted growth. I think being able to deliver what we call growth while protecting the downside risk is a theme that I think we can really leverage on. We continue to maintain a quite cautious stance, given the global headwinds and, of course, the elevated interest rate and heightened deposit competition.
As Khairul mentioned, NIM pressure has moderated in the second quarter. We are hopeful that it is expected to subside. But I think our focus is really to strengthen our CASA and deposit franchise. Because I think long-term, that is the only way for us to actually make sure that we are very, very competitive in terms of our cost of deposit. We are focused on executing the Forward23+ strategic plan. As I said, I think we will continue to actually invest in the targeted segment, as well as make sure that we remain cost discipline. I notice now we are no longer the highest cost-to-income ratio player amongst the large bank in Malaysia. I think that's a significant achievement to what we were before.
I think we continue to want to be very disciplined on the cost side, as well as being, I think, very careful in terms of asset quality, notwithstanding the asset group that we wanted to pursue. With that, I think I take it, and I'm happy to take any question that you have. Thank you.
Thank you, Dato' and Khairul. We will now begin the Q&A session. If you would like to ask a question, please use the raise hand function, and we will unmute your line. Okay, great. We have a few questions already, Dato'. The first one comes from Ben, from Macquarie. Ben, the line's open for you.
Hi, Dato'. Thanks for the presentation. Well done on the set of results. My first question is on the overlays. Could you just clarify what is the outstanding overlays? I know you've done some reallocation, so I'm really interested in the soft overlays that could potentially be written back at a later stage on the COVID.
Yeah. I'll pass that to Khairul to actually answer that. In theory, I think, you noticed, we stopped providing, effectively, the breakdown between overlay reversal, et cetera, and all that because we're really at the tail end of what we call the reallocation of our overlays.
I see.
We see, effectively, the overlays as being part, effectively, of our so-called overall position. I'll pass to Khairul to basically answer specifically on that.
Thank you, Dato'. Just to recap, right, Ben, during the full year 2022 announcement, our December 2022 position of overlays was around MYR 2 billion. Of that, MYR 1.4 billion was related to Malaysia. Right? Another big part is about MYR 350 million related to Indonesia. For that, and this is very specific to what you have mentioned, is COVID-19 related overlay. Like what Dato' mentioned, the big part of that MYR 1.4 billion has been reallocated to other forms of risk, right, that we see going forward. A lot of that is related to the global macro headwinds and also the elevated interest rate or inflationary pressure that we are experiencing. We are still some of that COVID-19 related overlay that will pass through time in terms of the 12-month observation period coming through in the second half of the year.
That proportion is significantly lower, or a small proportion of that whole MYR 1.4 billion. Overall, I think what I wanted to really stress in terms of the point is the fact that we have managed to reallocate that bulk of MYR 1.4 billion of COVID-19 overlay that we had as at December 2022. The efforts will still continue, in the second half to manage and minimize that small balance that we have in terms of the COVID-19 overlay in the second half of this year.
We might have to come back to Ben. He's lost his connection. Maybe we'll move on to the next question first and come back to Ben later. The next question comes from Yong Hong, from Citi. Yong Hong.
Hi, Dato'. Hi, Khairul. Hi, Steven. Can you hear me?
Yep.
Yep. Thanks for the opportunity. Maybe I'll just ask two of them. Firstly, on capital and dividends. Last year you did away with the DRS. Now you progress with higher payout ratio. Maybe by year-end, can we perhaps level up to special dividends? My question is that from your modeling, how does capital optimization sits in your ROE target and maybe some color on your RWA growth direction would be quite helpful. That's my first question.
Yeah, I can't comment on any special dividend, et cetera, and all that. Our approach is, like you highlighted, it's taken a phase approach. To be fair, we've gone through this journey together with you guys, right? If you recall, we were one of the lowest capitalized bank in Malaysia. When I came in, it was 12.5%. You guys were saying that, "Look, do we need more capital?" We didn't do that. We basically build the capital out of our earnings and be very efficient in terms of our RWA optimization and be able to build that capital. Obviously, when that strengthened, you're right, the first part that we basically did is the, I call it the removal of the DRS.
Even though we did say that, "Look, there's always a balance on DRS, basically, going forward, especially if you want to push higher the dividend payout ratio." We are now delivering on that in terms of increasing the dividend payout ratio. Going forward, we need to look at not only just our own capital, but as I said, in terms of the industry capital, that is prevalent. We note that effectively all our competitors, historically Malaysia capital between 13%-14%, subject to some of the companies that are outlier, now it sort of moved to 14%-15%. Generally, we got to be conscious, and obviously the regulatory view is extremely important. Has a bearing in terms of any decision on further capital optimization.
Sure. Thanks for the color. Maybe just following on that, I think you talked about RWA optimization. Where do you see maybe RWA growth for this in your perspective?
Yeah. Yong Hong, in terms of the RWA growth, of course, in the first half, we did see some very strong and robust growth on RWA, and that is a reflection on two parts, right? One, it is on the non-retail side, where we had some lumpy drawdowns coming through in the first half of the year. Also, given very robust trading and FX, there is some RWA that is related to that. In the second half of the year, we still expect, of course, continuing growth on RWA, but potentially, if you look at it from a value perspective, it is not going to be potentially as robust as the first half of the year, but still expect very decent RWA growth in the second half of the year.
Overall, if you look at it from a capital generation perspective, on a year-on-year basis, definitely, we do expect the returns over RWA to improve on a year-on-year basis.
All right. Thank you. That is clear. My second question is, I think under your Forward23+ strategy, where are you in your cost optimization, your asset reallocation mix, and any other levers that you can pull? Also, I think you mentioned that you have some CapEx to catch up in the second half. Should we expect OpEx to pick up in the second half as well? That is my second.
Yeah, I am on the cost optimization. I'll pass to Khairul to answer about the second half. I think, we've done the bulk of what we call our cost take-up or structured take-up, right? We took close to MYR 1 billion in terms of the cost take-out. I think the total number was probably close to MYR 1.5 billion total that we have taken out. In terms of what we call real structural cost take-out, we have done. Of course, now I think the focus is being, try to optimize it. It is getting challenging because the inflationary pressures basically are there across all countries, all markets. Our focus is really now, I think really to optimize rather than real, what we call, structural cost take-out. I'll pass to Khairul in terms of the outlook for second half.
In terms of the OpEx P&L itself, on a sequential QoQ basis, of course, we do expect cost to tick up sequentially QoQ. On a year-on-year basis, we are still expecting around the mid-single digits of level of growth. The main driver will still be in terms of personnel costs and technology costs, for the P&L will likely increase compared to what you're seeing here in the first half of the year, which was at 6.7%. That will expand as we go into the second half of the year. Related to that, one point that Dato' mentioned earlier in terms of our CapEx, year-to-date, we have initiated MYR 100 million or so in the first half.
There will be a significant catch-up in terms of the CapEx in the second half where Dato' mentioned that we will likely end the year around the MYR 800 million number. I think it's important to highlight, these are CapEx that's been put on stream, and there is a time lag in terms of how it hits the P&L, right? There will be a duration where the project is being undertaken and before, and then it goes live, and then it hits the P&L.
Got it. Thank you. Just to clarify that year-on-year, it's on a full year basis or is it on a second half basis?
On the year- on- year, it will be on a full year basis. We do expect for the full year 2023 to be around slightly higher than the mid-single digits of level.
Got it. My final question is on your ROE next year. I guess a lot of us are thinking that overlays write-back is the key driver for next year. Do you think 12% ROE is sustainable beyond FY 2024? Maybe, from your point of view, maybe from your experience as an Analyst and now as a CFO and CEO, illustrating at point in time versus your ROE trajectory of your fair. I just want to get some views from you. Thank you.
I think on the outlook on 2024, I think we'll cover that effectively end of the year. One major thing that we got to basically see is how does this deposit competition play out. To tell you the truth, if we didn't have the deposit competition, our result would be a lot stronger, and our confidence level in terms of hitting that 2024 target is a lot stronger than what we are feeling today. I'm sure a lot of you are asking why effectively Malaysia suddenly have this deposit competition. To tell you the truth, we are trying to figure out, is it a structural issue? Is it excess liquidity issue that's driving it? Is it what I call all of us acting rationally but creating what I call an irrational outcome?
I think we need to actually think through that at least we have a better understanding how it's going to play out, in 2024. Having said that, as I said, I think we are very, in terms of your comment on the multiple valuation, I leave it to you guys, et cetera, and all that. I'm not sure that you guys are aware, our half year profit, we are now the second, I call it second largest in terms of absolute level of profit in Malaysia, compared to Malaysian banks. It's an absolute level of profit. I don't think that's been delivered. I'm not sure, Steven probably will correct me, when was the last time that we delivered higher level of profit in second largest.
Anyway, I think that just shows the, I call it the valuation gap, or multiple valuation gap that I think we have. We are cognizant that we need to earn the right to actually to have the right, appropriate valuation. All we can do is, I think, demonstrate that what we are building, the transformation that we are delivering, is working. Hopefully, market will recognize that.
Got it. Thank you.
Thanks.
Thank you.
Thanks. Thanks, Yong Hong. Our next question comes from Aakash from UBS.
Hi, thanks to the management for the presentation and taking my question. Congratulations on a good, strong performance. The first question is just on the non-interest income. You were talking about it earlier. It was quite strong QoQ, right? You said that, the NPL sales was a big part of it. Kind of like, are you able to tell me exactly how much was NPL sales out of that 14% QoQ growth? How much did it contribute? I think you've talked about this as a sustainable stream of income in the past. What is like a normalized level for this business now in your mind?
Yeah. As you know, it was part of our strategy to improve our NOI because, particularly on the Niaga side and our Thai side and even Singapore side, because of what we went through, the legacy credit issues that we will face, we do have a bulk, significant, I call it, asset, for us to actually to either divest or to recover. Yes, it's been lumpy, and I'll pass to Khairul to actually to show out of that. On an annualized basis, we think we can create what we call a sustainable revenue stream of this strategy. It may not be probably in the same quantum. As I said, 2022, we had some. 2023, I think, is a larger amount.
As I said, I think as a consistent revenue stream, at least for the next two years, I think we are working on the strategy to make sure that it provides what we call at least a base recurring revenue stream for us.
Yeah. On the numbers itself, firstly, if you look at it from a year-on-year basis, first half 2023, NPL sale, both Thailand and Niaga, the bulk of it is in Niaga. For this year, it's still MYR 250 million. Last year, we had some as well, which is about MYR 70 million last year, first half. On the QoQ basis, in the second quarter, and this is all mostly Niaga, okay, NPL sale of MYR 170 million during the second quarter. Last quarter, we had about MYR 80 million, both a small portion of that is Niaga. The bulk of it is in Thailand, last quarter.
Okay, got it. In terms of the normalized number, is it sort of somewhere in between last year and this year's number, would you say? Like a normalized stream of income from this business?
Difficult to give the guide.
Got it.
It's something that we're working on. As I said, of course, NPL sale I think is a bit extreme, I think on this year, I think we forced forward, actually took the NPL sale in the first half of the year.
Yes.
Next year, I think, we still haven't finalized yet the plan. As I said, all I can say, Aakash, we are trying to actually to create what we call a recurring revenue stream out of effectively of this NPL sale.
I think the point on this year, like what Dato' said, is front-end loaded to the first half. There's unlikely to be any further significant NPL sales coming through in the second half of the year.
Okay, understood. Thank you. That's very helpful. The second one I have is on the, one of the drivers of achieving the ROE target, is the credit cost optimization that you've talked about. Firstly, I mean, what sort of number are you thinking about, right, in terms of credit cost on a sustainable basis? Second, how does this sit when you look at the coverage ratios? The coverage ratio for CIMB is still a bit lower compared to the industry, right, below 100%. Do you think that coverage ratio will go higher? If yes, how does the credit cost optimization work?
Yeah, on our side, I think first step, I think we basically sort of like revise our guidance. I think that's our first step. If I were to recall, I think we shared on the Forward23+ 2024 target was between 50 to 60.
Yeah.
I think substantially, that has come down. Whether we can further optimize it, more work needs to be done on this. If you ask the question whether we have one eye on loan loss coverage, yes, we do. We do want basically to make sure that our loan loss coverage is, I call it, comparable to benchmark. That is the, call it, one of the factors where you talk about releasing overlay or not to reallocate overlay, that's one of the factors that we actually think about. However, our other initiatives on LLC is really to improve on our GL ratio. It is known, and you guys highlight, our GL ratio is higher than market. We are at, what, 3.3%?
3.3%.
We know that's higher than market. Partly, it's basically structural because obviously, we have Indonesia, we have Thailand, et cetera, and all that out of that. We are really focused on, I call it, addressing it and reducing that GL ratio. Obviously, we can reduce the GL ratio, your LLC will go up despite not having to make any additional provision. Yes, if you ask us, we do have one eye on the loan loss coverage when we make, I call it, decision in terms of the credit charge.
Okay, understood. Great. Good. Thank you. I have two more questions, quick one. The next question is also on provisions. You showed on one of the slides that the provisions for the consumer sector declined quarter-on-quarter. What is going on there? You talked about this reallocation of overlays to provisions, right? Is that the same thing as writing back provisions, or is there any difference between these two?
Okay. On the first part, QoQ, on the consumer side, has remained relatively stable. On a year-on-year basis, there is a significant reduction. That's mostly on provisions that are not related to loans. It's under others. Last year, we took some other related provisions related to the double crediting issue. Whereas on the loan side, on consumer on a year-on-year basis has remained broadly stable. In terms of the overlay, if I get your question correctly, Aakash, because it's mainly on the reallocation on the balance sheet side. Rather than having it as a COVID-19 overlay, we took some assumptions on two parts. One is either reallocating it to a new form of overlay, not related to COVID-19. Like what I mentioned, it's more related to the macro backdrop and uncertainty.
Another way that we have reallocated it is looking at the non-retail side, whether we could take any further conservative assumption on whether on the NPL book or even on the performing book, from the perspective of the borrower or collateral. It's a shift of provision within the balance sheet itself.
Sorry, in short, I really don't see any benefit of reversing all our overlays and showing a year or effectively a quarter of effectively zero provision. In my mind, that's not sustainable, right? What we are trying to actually to do, think about it logically, if you do that on your LLC, effectively will drop significantly, and I don't think we are building a much more resilient bank. That is why I think we are reallocating our overlay. I'm not saying that we didn't release any. I think there were some basically there, but I think we are trying to actually to do what we call a consistent improvement in our credit costs. That I think is the philosophy that we are trying to actually to take, which is why I think now we are just combining it effectively in terms of what we call total provision.
I think the data that we show is between retail and non-retail so that you can see the evolution going forward on how effectively our provision, basically the net provision, effectively that's taken.
Okay, understood. The last question, there was no impact of collective agreements on your OpEx, was there? Some of your peers were affected by that.
The bulk of the personnel cost increase, 7.2%, is really reflecting our revenue. It's mostly bonus. The catch-up in collective agreement because we have taken our provision as the negotiations was ongoing. The catch-up in provisions on the CA was not significant on a QoQ basis. Okay, understood. That's all my questions. Thank you very much.
Thanks, Aakash. Ben is back from being dropped just now. Ben, Macquarie.
Hi. Trying to unmute. Can you hear me?
Yes, we can, Ben.
Not very well.
Not very well.
Okay. Yeah, sorry. Hope you can hear me. I missed the answer earlier on the overlay, but I just want a very simple number. I just want to know how much should we think about is potentially, it can be written back going forward. The number I have here previously that you were using as a headline number was like MYR 2.7. I understand you've relocated most of your direct overlays in Malaysian ringgit. What's the number that we should just refer to, just sort of a lump sum and useful to benchmark across your peers?
Ben, I think what I can say is that, just to clarify, that MYR 2.7 position is a December position, and that MYR 2.7 includes MEF. That's a December position. Going to the second half of the year, I would say that we're not in a position to disclose a specific number, but we are trying to make it as minimal as possible and reallocating it as what we have done during the first half of the year.
If your answer is that, whether we're going to have a, I see some of the banks have basically reported a significant, I call it a quarter, whereby overlay, their credit cost is zero, and because of that, profit went up. I don't think that's our strategy. What we want to do effectively, we are really focused on the credit cost. If we can do a sustainable improvement in our credit cost, utilizing overlay is part of it, but it's sustainable. It's not something that is a one-off happens, and then in the next year or the next quarter, effectively suddenly spiked up. That's not intention. Pardon, my apologies, we are not able to show because that's not intent. That's why we reallocated the overlay. The intention is not to use overlay to get a one-off significant benefit in terms of profit.
Thanks. My question, I guess it's a simple one. Any implications for the money laundering case in Singapore, and also thinking are there any potential mitigating circumstances we can think about? Did you self-report today, or were you caught by surprise when this case came out?
No, I think you know that we're not able to comment on any individual or an ongoing investigation or court proceeding. However, I think I'd just like to assure you, we are fully committed to strong corporate governance, and we adhere strictly effectively to banking standard laws as well to make sure that we are always in line with the group's anti-money laundering and counter-financing of terrorism activity. I think you all know the role of the bank is to do what? To report. This applies basically to all banks, right? That is the role of the bank basically to report. I leave it to that because as I said, we've been cautioned by MAS and by [CAD] not to comment specifically on this case.
Okay, understood. My next question is around your guidance. Did I miss it, but did you provide a NIM guidance going forward?
Not yet. In terms of our NIM guidance, for the group overall, we are looking at -15 to -20 basis points group NIM pressure on a year-on-year basis. In the last quarter, it was at -10 to -15, there is a downgrade in terms of our NIM guidance, and this is mainly driven by Malaysia. Within Malaysia, that is the main driver of that margin guidance. In Indonesia, we're still maintaining the 4.6 - 4.8 basis points, ±10 basis points compared to where we ended last year. Last year was at 4.69 basis points. In Thailand, we are expecting about 10 basis points margin contraction, about 100 - 110 basis points in terms of margin. In Singapore, we are expecting it to be relatively flattish.
Although on a year-on-year basis it has shown a significant improvement, we do expect in the second half of the year, that pressure coming through from treasury and markets, recording more under NOI and also deposit pricing catching up, that should slightly ease in the second half of the year. Net net overall, in terms of our margin guidance, we are expecting 15- 20 basis points. This is a reflection of both, in terms of the repricing of the deposit to higher rates, reflecting how the policy rates have moved over the second half, in particular, the second half of last year. Also still a reflection of some of the pockets of competition. Although receding, it's still there.
I just wanted to highlight the nature of, I think, Indonesia, Thailand, are slightly different in terms of NIM compression versus Malaysia. Malaysia is a straightforward, cost of deposit have risen higher than OPR rate. Asset yield side basically is translate or really follow the OPR rate. For Indonesia and Thailand, the NIM compression is happening that the increase in cost of deposit tend to be lower than the increase in the interest rate. However, their challenge is passing on the increase in the interest rate to the customer. Because unlike, particularly in Indonesia, unlike Malaysia, there is no automatic way to actually pass your increase in interest rate to the customer. It is literally a bilateral negotiation effectively, particularly on the corporate side on that. It's a different nature of what's driving, effectively, the NIM compression in the three countries.
Okay. Sorry, did you mention the NIM compression for Malaysia, your guidance for Malaysia?
Our—
The NIM guidance for Malaysia, yeah.
Yeah. For Malaysia, it is broadly similar to the group level.
Okay. Just to follow up on that, you've done relatively well on the managing your NIM pressure. Could you give a bit of color on maybe what you're doing differently, and whether you still have any more levers to work with into the second half, or are you mostly done, sort of extracting that relative advantage?
I think it's a difficult question to actually answer. Of course, I think we saw this, and I think we highlighted it. I think some of you were quite surprised. We were quite, I'd call it, conservative in our NIM part, right? Because we saw late, I think, fourth quarter last year, sorry, late third quarter last year, this basically is coming through. I think we embarked upon our CASA deposit franchise, probably earlier, on that. This is just really to make sure our CASA deposit franchise actually happened. I think that benefited probably Malaysia in the first quarter. I think we pulled in, I think, quite a strong, pretty decent growth in terms of deposit, to actually help alleviate this. Whether that continue, and obviously the market part, to tell you the truth, I think market needs to be more rational. I think that's my view.
There is, maybe perhaps basically, an issue of structural, not structural issue, but we have the issue about liquidity, et cetera, and all that. On this, I think that we are still, maybe that is just a transient part. Yeah, I think the key out of it, I think on the long term or midterm, long term basis is really focused on your CASA and effectively your deposit initiative. I think, really starting end of last year, I think we really made that as our key focus, for 2023. Hopefully, as I said, I think it's still there because I think people are still competing for the deposit. I think we are able to improve the people usage of the operating account, being very aggressive in terms of the non-retail market, in terms of getting main operating current account as well as some deposit.
I think that's our main strategy.
I think just to add, in terms of tactically in the very, very short term, if you look at the deposit pricing, we've managed to cut our campaign rates in July and August by about 5 basis points in July and also August. Volumes still continue to be very decent, although despite we did see some pockets of competition on the campaign rates by other banks. That is relatively quite positive in the third quarter. As we run into the end of the year, and it's quite typical, especially on the wholesale funding side, where at the year-end, the rates on the wholesale funding side starts to creep up. Again, similarly for this year, we do expect that to come through.
Net, there are some short-term trajectory where it looks quite positive, but because of the pockets of competition and our typical year-end rates going up, there could be some offset to that technical upside.
Yeah, this, I think, took us a decision to take a leadership position in terms of moderating our so-called FD rates. Really, I think, we are hopeful that market basically will see that, and then effectively moderate itself, right? Because I don't think this whole idea about all of us effectively increasing our deposit rate higher than the OPR increase, I think just doesn't quite make sense.
I'm looking at, let's say, Maybank, they're dumping their deposits, especially wholesale, I think. You saw the deposit contracting, whereas you guys are still having deposit growth, and maybe you're cutting your long-dated FDs. Clearly, there's some differentiation in that strategy from that perspective. From your answer, it sounds like it's more structural, what you're trying to attract customers back from the third quarter, even you're saying last year. Anyway, thanks. Those are my questions. Thank you.
Thank you.
Thank you.
Thanks, Ben. Our next question comes from Harsh from JPMorgan. Harsh, are you there?
Yeah. Hi. Thanks. A quick couple of questions. First, what is the minimum ROE for FY 2023 that you need to hit? The second question—
I'm sorry, Harsh, you're breaking up. You're not clear.
Sorry. Okay, I'll try again. What is the minimum ROE in the 10.2%-11% range that you need to hit this year?
Harsh, if you are saying what's our minimum ROE part, we haven't changed our guidance and target on the ROE, as I said, I think our target has been set between 10.2%-11%. That's our range on the ROE for 2023. We haven't changed that. At the moment, we are right back in the middle. I think that's where we are today. I think we need to do a lot more work to make sure that for us to actually do better. At the moment, we are really in the middle of that, 10.2%-11%.
Another one, on the margin. Malaysia, we have gone through a massive competition. Singapore, Thailand, Indonesia look okay. If that changes, how can you protect your ROE for 2024?
Sorry, Harsh. Couldn't hear you. Is your question, what will be the impact if our NIM compression in Malaysia gets moderated or improved? Is that your question?
Harsh, perhaps you could type your question into the chat. It'd be easier that way because we really can't hear you. Sorry about that.
Yep. Done, sorry.
Okay. Sorry. Maybe we can move on to the next question first. We have Peter Kong from CLSA.
Hi, Dato'. Hi, Khairul, and hi, Steven. Yeah, I just got two questions. Sorry, the first one, I should know this, but I don't. On page 22 of the slides, when I look at the achievements so far in terms of ROE journey, immediately, it strikes me that, portfolio reshaping looks to be very small in terms of how you have drawn the line. There's another category called Others, which is before capital accumulation. Maybe just help me understand what Others is that is helping the ROE.
The Others bucket is within the other parts of the businesses that has improved, right? This is more from a segment point of view rather than the Forward23+ sort of strategic pillar.
Okay. Right. It's not any specific driver. Okay. Got that. My second question actually is more hypothetical. I just wanted to understand, right now, it does seem like you are willing to optimize your capital a bit more, and improve your payout ratio. In my mind, I was just wondering whether or not, because I think Dato' has mentioned before in the past also that you want to be a bit more asset light, be very careful about how you all grow your assets and all that. Is there also a thinking that you are doing that while simultaneously keeping your CET1 at a more elevated level, like at 14%?
No, I think around the CET1 level, if your question is basically there, it is much more a function of the, I call it the market and, I think the industry capital ratio seems to be a lot higher.
Yes.
Partly, I guess because of, I call it regulatory oversight.
Yeah.
As I said, I think when I joined, effectively, we were at 12.5%, if I recall—
Yeah
CET1 ratio. Most of our competitors were roughly around 13%-14%. Everybody is basically seem to be 14%-15%, I assume that's the question is why, right? Obviously, I think we went through COVID. I think everybody is basically conservative. Regulatory, I think scrutiny effectively on this, will probably heighten during COVID. If your question is whether there is opportunity that will revert back to the 13%-14%. To tell you the truth, I don't have an answer at the moment. As I said, we don't want to be the least capitalized bank, back to where we were before. I think we will be very conscious of that. At the same time, I think we will, I guess, continue to engage with our regulator in terms of the scrutiny, that they look in terms of capital.
Sure. My final question is, I think this quarter, in my observation, quite many banks have done relatively well, on the FX income side. Growing NOII is one of your future expansion drivers. I was just wondering, what are some of the areas that you are currently building that will help us understand the magnitude of potential improvement into the next year?
I think this FX is generally driven by what Khairul mentioned, the, I call it the carry trade, that people do. Effectively borrowing in U.S. dollar and then effectively swapping it. Because you borrow U.S. dollar, you have higher cost of deposit on the treasury side, which reduce your NIM, but you make money effectively on the swap. I think we benefited out of that particular part. Now we see that as relatively opportunity to a certain extent because in treasury itself, effectively, there are then opportunity to make money on the NII side, perhaps in the future. We are much more focused on what we call sustainable NII growth, whether it comes from fees, FX commission, trade, et cetera, and all that, on investment income. Those kind of effectively what I think we are focused on to actually to grow.
I call it market opportunistic deal, I think that is something that, obviously, we will try our best, but we are more focused on what we call creating a much more sustainable growth in terms of sales, distribution, income or flow business rather than what we call the one-off or episodic effective income.
Thanks. That's all for me. I'll turn back to the queue.
Dato', just to highlight the Harsh's question, is how can you protect ROE in 2024 if we get competition in Indonesia, Singapore, and Thailand?
Yeah. I think on the Singapore side, I think we are quite comfortable. We've been able to tap into, of course, I think the liquidity in Singapore has been very strong, but we've been able to tap into what we call the SME market on the deposit side. I think that's been a very successful strategy that we've been able to actually to grow. Really, I think we see that continue to be there because I think we are still a marginal player. In reality, I think there's opportunity for us to be very sharp in terms of our offering, to be able to garner effectively the deposit on the, I call it the SME side, effectively in Singapore. In Indonesia, I think the issue is that if competition heighten, as I said, on the deposit side, it's still manageable. I think we do that.
The bigger challenge of Indonesia is much more whether we can pass on effectively the higher cost of deposit to the asset side. Now, if we're not able to do that, then I think we need to think through about how, meaning that if margin is going to contract, I think we need more volume, to actually to compensate that, right? There's only two ways for you to grow your revenue. Either you improve your margin or if not, you increase your volume. We think that there's opportunity for us to grow faster in Indonesia without taking what we call additional credit risk. That's because even with our good growth on the loan side, Indonesia, we've been growing per market, and we're still relatively a small player compared to the Big Four out of that.
The way we think about, I call it NIM in Indonesia, we basically compress because we are not able to actually pass on that higher cost of deposit because interest rates have gone up. The key to Indonesia, I think, is increasing loan volume, but doing it judiciously, doing it effectively such that there is no adverse impact to the credit cost in Indonesia. I think that's the way that we're thinking about tackling the greater competition. We think market Indonesia is still large, growing. Demand for credit is still very strong. We just need to make sure that our underwriting model is strong to really tap into it, into the market, and lend more in a judicious manner.
Thanks, Dato'. I think we have a last question from Danny Goh, from Credit Suisse. Danny?
Thanks for the call, and sorry we've kept you so long. One very quick question from me, actually. Would like to hear your thoughts on what's actually your base case scenario in terms of the macro backdrop, and policy rates that you've baked into your ROE projections, and what are the potential upside and downside risks to those assumptions?
On the Malaysia side, I think we're assuming interest rates will remain the same in terms of that. We are not making any cut. Neither we are expecting any increase. That's on the Malaysia side. In terms of total macroeconomic growth, I don't think our take, our house take, is any different than what is forecast. For instance, Malaysia is still around growth this year, 4.3%. That, I think, is basically is our base. If you ask me whether we are forecasting a recession in our regional economies, no. I think our view on the macroeconomy numbers are relatively the same as what we call market assessments.
Got it. Should there be a situation where we do shift into a scenario where people are expecting rate cuts to come through, would that be something that would change your ROE expectations, either positively or negatively?
I think, if we do get any adjustment on the rate side, the biggest impact will be coming through from Malaysia, given the size and contribution of Malaysia to NII. However, because of how, I think, the outlook, in terms of if we do get a cut in 2024, that cut would likely be very moderate and measured, and therefore, the impact to ROE or NII would not be as significant as it would be, like how it has been in the past.
My hope is that if there is a cut, our cost of deposit comes down even more. Maybe some of my competitors basically will act accordingly, hopefully. I mean, that's the case. That's just personal view.
That's what I was actually thinking, maybe perhaps that that might be something that would actually lead to much less competition on the deposit front if that expectation were to change. Yeah.
Yeah.
Okay. Thanks for that.
Okay, Dato'. We do not have any further questions at this point. Can I just pass the line back to you for your—
No, thank you very much, everybody—
Remarks.
For joining us on the Eve of Merdeka. Just like to thank all of you. If you have further question, obviously, you can reach out to Steven and Khairul. Thanks again for joining, and wishing you a happy Merdeka Day. Thank you.
Thank you.
Thank you very much.