Bank of the Philippine Islands (BPI) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to BPI's Third Quarter Earnings Call. This is Chinky Lukban. I'm the Head of Corporate Strategy and Investor Relations here at BPI. Some housekeeping reminders before we proceed. All participants are requested to use the log in convention of company name, first name and last name. Keep your lines on mute so as to minimize background noise and use the Raise Hand or Chat functions for queuing during the Q&A session. We have -- I'm pleased to introduce our speakers for this afternoon. I am pleased to introduce our President and CEO, Mr. Bong Consing; and Executive Vice President and Chief Finance Officer, Tere Marcial. We will start with a few words from Mr. Consing on the third quarter results, and Ms. Marcial will briefly go through the presentation deck that was sent out earlier. Thereafter, we will have a Q&A session and wrap up with some final thoughts by Mr. Consing. Bong, I turn over to you.

Thank you, Chinky. Good afternoon, everybody. Thanks for joining the call. When you look at the first 9 months of the year, the story is actually a fairly simple one. We've seen pre-provision operating profit up in the order of 22%. And that's driven by an almost 12% growth in net interest income and a little over 5% growth in our non-interest income. We've managed to keep our OpEx down relative to the same period last year by a little less than 2%. And so you see pre-provision operating profit up 22%. However, given the times, we have increased our provisions considerably over the same period. In the first 9 months of the year, we took PHP 21 billion in provisions compared to about PHP 4.6 billion the same period last year. And so when you look at the net income, you're seeing a net income number that is 22% lower than the same period a year ago. So it's really a story of net revenue from funds growing, net interest income growing on the back of good securities trading gains, but slightly reduced fees and commissions and a whole lot of provisions. And when you look at where we showed NPLs, at the end of the third quarter, our provisions cover almost peso for peso on our NPLs. So that's really the story of the first 9 months. Thank you very much.

Good afternoon, again, ladies and gentlemen. Thank you for joining our third quarter earnings call. Let me begin with some updates on the macroeconomic environment and then proceed to a discussion of our financial results. Next slide, please. The Philippine economy remained under stress with third -- with GDP for the second quarter dropping by 16.5%, pushing the country into a recession. Quarantine measures have curtailed aggregate demand, forcing declines in household consumption and investment spending. For the full year 2020, we estimate GDP to contract by about 8%, similar to the magnitude of decline during the country's economic crisis back in the 1980s. Recently, as the country transitioned to more relaxed forms of quarantine and the gradual resumption of business activities, the rate of unemployment improved to 10% in July, coming off of the record high jobless rate of 17.7% in April. Looking ahead, the reopening of the economy may provide a boost to domestic demand and lead to an increase in spending in the coming months. External trade accounts fell sharply in Q2, slowly picking up in the last 3 months. Meanwhile, international supply chain bottlenecks and the resulting slowdown in infrastructure spending resulted in sharp reductions in capital goods imports. Our gross international reserves reached a record high in September of $100 billion, equivalent to 10 months' worth of imports and 9.2x short-term external debt. Dollar inflows continue to exceed our outflows, given the significant decline in import by almost 30% year-to-date, allowing the BSP to build up its reserves primarily from its foreign exchange operations. Meanwhile OFW remittances fell again by 4.1% in August after registering growth for 2 consecutive months prior. Next slide, please. Inflation print went as low as 2.1% in May picking up to 2.3% in September. Inflation outlook for the full year 2020 remains soft at 2.3%. With benign inflation environment, clearly, you will recall, that the BSP aggressively implemented measures to increase domestic liquidity. Among these monetary policy measures were a series of policy rate cuts this year from 4% to 2.25%, a cut in reserve requirement ratio from 14% to 12%, and purchases of government securities in the open market. Domestic interest rates declined across the entire yield curve, down by 161 basis points on average. Meanwhile, the national government has implemented various fiscal measures to support the economy. So far, the government's fiscal response, including indirect measures, is less than 10% of the country's GDP. To the country's budget deficit, it's expected to widen from 3% to 9.6% of GDP. As a result, the country's government debt to GDP ratio will most likely increase from 40% to 50%, still fairly comfortable as the country continues to enjoy strong credit metrics and favorable external position. Moving on, the latest banking industry statistics reflect a slowdown with the customer loan growth moderating to 2.6% in August from 9.4% at the end of 2019. The slowdown in loan growth is reflective of the total spending and investment decisions of households and firms. Year-to-date, customer loan book is down by 3.6%. Meanwhile, industry deposit growth is lower at 10.6% in August, with M3 growth slipping to 14.2% from 15% the previous month. With this backdrop, let me now move on to the financial and operating highlights for the third quarter of 2020. Despite a difficult operating environment brought about by the COVID-19 crisis, the bank has demonstrated resilience during the third quarter, allowing us to sustain a reasonably good financial performance this past 9 months. To summarize. First, revenue is holding up well despite all the challenges, made possible by low interest rate environment, resulting from aggressive monetary stimulus measures. Bond markets have been buoyant, and our securities trading income has been robust. Second, asset quality provision and preemptive provisioning have been front and center in management decision-making processes. Third, our focus on operating efficiency and cost discipline allowed us to deliver high-quality earnings, as reflected in our strong pre-provision operating profit and a cost-to-income ratio that is the lowest in recent years. Fourth, we continued to maintain a comfortable loss absorption buffer and capital position and our liquidity measures are at record highs. Moving on to our profitability highlights. Next slide, please. Year-to-date, net income was PHP 17.17 billion, a 22% drop from PHP 22.03 billion registered during the same period last year. Third quarter net income was PHP 5.5 billion, a 33.7% decrease from last year's PHP 8.29 billion. Total revenues for the 9-month period increased by 9.7% to PHP 77.88 billion. Net interest income grew by 11.8% to PHP 54.4 billion on the back of 5.7% expansion in our average asset base, supported by a 19 basis point widening in net interest margin to 3.51%. Noninterest income reached PHP 23.48 billion, higher by 5.1% versus 2019 levels, primarily from securities trading gains. Total operating expenses as of September 2020 ended at PHP 36.48 billion, down by 1.6% from the previous year, due to lower premises, technology and transaction costs, as well as lower discretionary spending such as marketing and advertising. Pre-provision operating profit was up 22% year-on-year. Higher earnings allowed us to sustain elevated loan loss provisioning. For the third quarter, we set aside PHP 6.05 billion in provisions bringing year-to-date provisions to PHP 21.1 billion. Let's look at revenue and net interest margin. On a quarter-on-quarter basis, asset yields have continually declined. This brings third quarter asset yields to an average of 4.53%, down 66 basis points compared to last year. Cost of funds also continued to trend lower, in line with the fall in interest rates, moderately strong customer growth and a reduction in high cost funding sources. Thus, average cost of funds improved by 89 basis points to settle at 1.25% for the third quarter of 2020. As a result, our Q3 NIM improved by 15 basis points year-on-year. However, this is 5 basis points lower compared to the second quarter. Meanwhile, net interest margin for the first 9 months reached 3.51%. This is higher by 18 basis points compared to the same period last year, mainly on lower cost of funds. Our noninterest income, next slide please, for the first 9 months is up 5% year-on-year, driven by higher securities trading gains, offsetting the drop in fee income due to lower transaction volumes and fee waivers. For the third quarter, trading income is at PHP 1.8 billion, while fee income stood at PHP 5.4 billion. This is an improvement from the PHP 4.5 billion registered in the second quarter, as we have slowly reintroduced fees on certain products and transactions. We continue to maintain a diversified mix of fee income sources, led by credit cards, asset management, deposits, insurance and transaction banking. Moving on to operating expenses. Q3 OpEx stood at PHP 12.3 billion, down by 4% compared to last year. Cost-to-income ratio is down to 48.8%, better than 51% last year. Year-to-date OpEx reached PHP 36.5 billion, a 1.6% decline compared to the same period last year, bringing our 9-months cost-to-income ratio at 46.8%, a marked improvement from 52.2% last year. The operational limitations brought about by the lockdowns strengthened our view to continue to rationalize, consolidate and optimize our branch network. We have deferred new branch projects for 2020 as we assess our framework for candidate sites, reevaluate our branch operating model and revisit the roles of branch personnel as well as the products and services we offer. This contributed to the decline in our premises costs during the year, despite the counter effects of additional spending on health and safety measures to protect our workforce. Moving on to our balance sheet highlights. Our total assets grew by PHP 78 billion or 3.6% year-on-year, but almost flat versus year-end. Net loans is just flat year-on-year at PHP 1.38 trillion. Deposits grew by 4% to PHP 1.68 trillion. Loan-to-deposit ratio settled at 82%, while CASA ratio improved to 76.2%. Looking at our loan portfolio. With the slowdown in economic activities, our loan book is lower year-to-date across all segments, except for mortgage and microfinance. We also track our loan releases closely. After sharp declines in April, new loan releases for corporates, SME and mortgage are now approaching pre-COVID levels. This recent trend in new releases, however, is not yet enough to offset loan paydowns, particularly for auto and SME. Credit card loans also dropped as billings remained soft. Next slide, we show our loan yields. After successive policy rate cuts and with sustained high domestic liquidity in Q3, loan yield progression continued in certain segments due to lower benchmark rates and competitive pressure, particularly on the large corporates. Meanwhile, loan yields for auto, credit cards and personal loans have so far held higher by 20 basis -- 20 to 60 basis points compared to 2019. On funding and liquidity, a diversified funding mix of deposits and bonds ensure ample liquidity and optimized cost of funds for the bank. Total bank deposits grew by 4%, with significant growth coming from retail banking, which is up by 8.4%, driven by personal segment and OF segment. Worth noting is a 14.7% increase year-on-year in our CASA deposits. Meanwhile, time deposits contracted by almost 20% year-on-year, mainly from corporate segment. These events contributed to significantly -- contributed significantly to our NIM expansion. On asset quality, as of September 2020 our NPL ratio stood at 2.98%, higher by 115 basis points versus June 2020. We noted an increase in NPLs across all loan portfolios when Bayanihan 1 relief period ended. Higher impairment was seen in mortgage loans, credit cards, SME and auto loans. Meanwhile, provisions were beefed up by an additional PHP 6 billion in the third quarter, a preemptive move to address a potential more adverse scenario. As a result, credit costs remain elevated at 194 basis points compared to pre-COVID credit cost levels of 40 to 50 basis points. NPL coverage ratio declined from 140% in June to 100% in September. With Bayanihan 2 grace period for loans now in effect, we expect a delay in new NPL formation and -- which is getting pushed toward the first half of 2021. Earnings. Next slide, please. First, let me show you our experience with respect to Bayanihan Act 1. It's early days for Bayanihan 2, but we are closely monitoring the availment. So here, we'll show a big difference in terms of how our corporate borrowers versus our retail and SME borrowers availed of the grace period during Bayanihan 1. 4% of our borrowers availed of grace for corporate, and about 70% for SME, 75% for retail loans and about half for credit card borrowers. The difference is those who actually opted out or decided to pay. Meanwhile, we're monitoring Bayanihan 2. So far, it's early days. But for SME loans, we have so far seen 10% of our borrower signifying interest to avail of the grace period. For retail loans, so far, 3% have signified interest to avail of the Bayanihan grace period. Moving on, for earnings. Our pre-provision operating profit for the first 9 months grew at a strong clip of 22% year-on-year. After taking provisions, ROE for Q3 declined to 8.32% from 8.56% in Q2. ROA likewise slid to 1.05% in Q3 from 1.08% in Q2. Supported by our earnings and comfortable capital position, the Board approved the declaration of regular cash dividends of PHP 0.90 per share for the second semester 2020. Our capital position remains strong, with indicative CET1 and CAR at 15.46% and 16.35%, respectively. These levels are well above our internal minimum as well as regulatory requirements, implying sufficient loss absorption buffers for potential adverse ideal scenarios. Total equity amounted to PHP 283 billion, higher than Q2 and year-end 2019 levels. We have maintained our modest financial leverage at about 7.8x, lower than 8.1x the previous quarter. Next slide, please. Our early investment in technology has enabled the bank to pursue its digital transformation, while maintaining a moderate expansion in our branch footprint. Digital adoption was further accelerated during this pandemic, as prolonged lockdowns have pushed the consumers to rely on remote interactions and digital channels for their financial needs. With 100% of our branches already opened at one point on a rotational basis, we have observed that the share of digital transactions remain higher than pre-ECQ levels. The number of enrolled and active users also exhibits a steadily increasing trend. This indeed is a transformation catalyst that prompted us to revisit our retail distribution strategy. We shall move onwards into 2021 with a customer and stakeholder-centric approach in transforming the bank for the new normal. Our strategic imperatives revolve around the following key areas: 1, deepen our corporate relationships and retail client engagement; 2, strengthen our funding franchise; 3, execute our 5-point digital strategy; fourth, taking a pause in aggressively growing our high-margin businesses as we focus on asset quality preservation. In closing, we summarize on this slide, next one, please, our financial and operating results, which, in our view, demonstrates resilience during crisis. In this challenging environment, we'll continue to sharpen our focus on 3 key areas: asset quality, operating efficiency and capital management. Let me stop there and open the floor to questions.

Thank you, Tere. We will now begin the Q&A session. [Operator Instructions] Our first question comes from Melissa Kuang of Goldman.

So just a few questions. Firstly, on Page 19 of your presentation regarding the Bayanihan Act and a number of loans, I see you're mainly given it in borrower accounts. Are you able to share with us these ratios in terms of the loan book itself, the notional numbers? Like how much percentage of your loan book is -- has opt in and opt out? And also, on the Bayanihan Act 2. Then secondly, maybe can you just talk to us a little bit about -- you talked a bit about your branches and the reconsideration of how you go about it. Can you just give us a little bit more color as to what are you thinking in terms of branch numbers next year or going forward? Are you looking to decrease from here in or stable the number of branches? That will be helpful.

Melissa, on your question on the Bayanihan Act impact, on the corporate side, at the peak in Bayanihan 1, you were talking only about PHP 20 billion in terms of opt-ins. That was at the peak. On the other extreme, on the credit card side, at the peak, you were talking of something in the order of PHP 27 billion. I don't have the SME and retail lending numbers with me now. But I think we can figure that out. But again, on the one hand, corporate, PHP 20 billion at the peak, credit cards, PHP 27 billion at the peak.

Can you give some numbers as to what they are now? Will be quite helpful as well.

Yes.

The Bayanihan 1 has lapsed. And so the numbers you see as of September 30 reflects the fact that it has lapsed. So until it actually laps -- basically September 30 was 90 days over from the time Bayanihan 1 actually lapsed. And so the NPL rate that you see today is actually the true NPL rate. Now with Bayanihan 2 underway, you're going to see a divergence again between the NPL rates with Bayanihan and the NPL rates without Bayanihan. But what this page shows is that the opt-in for Bayanihan 2 so far is a lot lower. What was your second question, Melissa?

Sorry. Just back on this question, so can I just better understand. So in terms of the Bayanihan Act 2 and those that have already turned NPL post this, does it mean that these guys who are in NPL can request for Bayanihan Act 2 or know that they are already NPL...

No, no. You have to be current, Melissa, to avail of Bayanihan 2.

Right, right. Okay. And then the second question is on your branches. Can you give us some more color on your strategy going forward in terms of branch numbers?

Well, you -- what you've seen in one of our slides where we talked about our digital transformation is only about 10% of all our transactions now happen in the branch. And that is even with all the branches coming back online, okay? And so you've got 90% of the transactions taking place digitally or via an ATM machine or via a cash acceptance machine or something like that. And so what it is making us do is look at our branch network and figuring out, can we do with less? And so we are actually reviewing a strategy now where we might colocate a certain percentage of our branches, which would have the effect of reducing the number of physical branches. Those numbers are work in -- or basically work in progress.

Okay. Our next question comes from Robert Kong of Citi.

2 questions from me. First of all, on your net interest income and your net interest margins, I think they held up extremely well. Clearly, you've done a great job on managing the funding costs in this difficult period. But what I'm worried about is what kind of trajectory do you see in the coming quarters? Obviously, we've had a tremendous collapse in policy rates. We've got ample liquidity with very little new loan growth. And also, I think, it's from November, the credit card cap comes in. So if you could sort of give us a sense of what you're thinking on the NIMs, both just because of how you're managing in the low rates and then the additional adjustment that you expect to take because of the credit card cap? The second question is simply on asset quality. Was the jump in the net -- in the NPL ratio sort of in line with your expectations? Or was that jump much sharper than you had expected? We obviously -- as an analyst community, we're trying to work out where we think your peak NPL ratios will be. And we're just wondering whether this trajectory is still on track with what you've been guiding or whether this is the tide. Those are the 2 questions.

Let me answer your question on net interest margin. You're exactly right. The challenge for us really is the continued decline in interest rates, particularly impacting asset yields across the different loan segments and with the benefit of a declining cost of funds almost fizzling out given the fact that much of the benefit has already been felt so far in the first 9 months of the year. As we exit December, we are looking at a net interest margin of around 2 -- 3.25%. So if we're able to maintain that level for the most of 2021, that means our net interest margin will be steady at that level, which is going to reflect a decline compared to 2020, which means that we have to look to the expansion in our asset base depending on where growth will be expected in the different loan segments. Unfortunately, as of now, it's really very difficult to quantify which loan segments will actually show some growth given the very weak performance of the loan markets. At the same time, on the corporate side, there is some demand, but it's also quite competitive because most banks are jumping to the highest quality loan segments. So that's the challenge. We look to exit at 3.25%, and hopefully, we can keep that level for the balance of the year. There might still be opportunities for us to continue to reduce our funding costs as we continue to reprice lower our time deposits. So there might be some improvement there, so hopefully, better than the rate at which we're seeing a decline in our asset yields. Now the other important consideration is the expected incremental NPL that will cause a drag in our net margins assuming this -- from current levels to next year where we have guided for roughly about 6%. Earlier, we were looking at 4% to 6%, but it looks like we have to gravitate towards the upper end of our estimate. So with an incremental 3 percentage points coming from 2.98% to 6%, we should also allow for that additional drag in net interest margin, particularly a drag on asset yields. To your question on asset quality, as to whether the recent NPL numbers are in line with our expectation. To be honest, there was some surprise on the part of management to see that after tracking -- we were actually tracking what we call with Bayanihan and without Bayanihan. And the -- up to the point, I think around maybe August, that number was about 100 basis point difference. Meaning the ratio which you won't see, but internally, that August number was 2.13% and without Bayanihan was around 3.2%. So there was 100 basis point difference, such that if all of those who availed of the grace period did not pay we should have seen 3.2%. What happened was we're seeing in September what is somewhere between 2.13% and 3.2%. So the surprise that we were hoping it was closer to the lower end of that range, but it came in closer to the upper end. So the 2.98% being closer to 3.2%. So that's what happened.

I'd like to circle back in relation to this question, Robert, and also to Melissa's earlier question. We have on the line with us today Ginbee Go, who manage our retail lending as President of BPI Family Bank. And she's got some inputs on the effect of Bayanihan 1 and Bayanihan 2 on retail loans. Ginbee, are you there?

Yes. Thank you, Bong. Just on the earlier question on how many -- or how much of the loans are -- have availed of the Bayanihan 1, that's 75% of our loan books, both auto and housing. So that's about PHP 155 billion who have availed of the Bayanihan in terms of loan amount. And for Bayanihan 2, because we're just midway of Bayanihan 2 opt-in, we only have about PHP 4.8 billion outstanding balance that had availed. So that's the earlier question.

So the scenario we're looking at with those inputs is, as I said, we were hoping to get to the midpoint of the range, somewhere between 2.1% and 3.2%. When we looked at our NPLs with and without Bayanihan, we were hoping to get to somewhere like 2.6%, 2.7%, but we got to 2.98%. But as we look at Bayanihan 2 and the much lower opt-in rates, at least so far, we're a little bit more positive about the effect of Bayanihan 2. But let's see. It's still very early in the quarter.

Sorry. Can I just clarify on a couple of things? So first of all, on the NIMs, you gave the guidance of the exit, 3.25%. Does that include the adjustment for the credit card cap? Or can you give a number for that? And then second, on the asset quality. I just want to confirm. You're basically now guiding us, instead of 4% to 6% peak, you're probably going to say we're going to really get to the higher end based on this slightly negative surprise that you've mentioned.

Well, I would say -- we would say for anywhere between 4% to 6%. And now we might now narrow that. I think it will probably be somewhere between 5% and 6% based on what we see now.

Robert, the exit NIM accounts for the yield as of December. Now any further reduction in asset yield going forward will have to be incorporated. But it assumes that by November, we would expect lower yields on our credit card products as a result of the cap on yields. And also, it assumes the NPL level that we are -- that we have put in by December 2020. So any further increase in NPL, as we go from current levels to the peak in 2021, will have to be incorporated in the NIM estimates.

Okay. So if I may just try one more shot at this. So it goes from 36% to 24%. I think your effective credit card yield was maybe around 18%, I think. If that's right, then how much is the effect of the cap on effective rate?

Well, Robert, if we did nothing, if we just took the -- here's how to look at it. The -- because the industry of the credit card interest rate caps is in the order of PHP 15 billion, okay. And you take our market share, and our share would be in the order of somewhere, call it, PHP 2.5 billion to PHP 3 billion on that. If we did nothing, that would be the hit on our NRFF for a full year, okay? That will be the hit for a full year. But we are making adjustments to our business. We do not think that hit will be anywhere close to PHP 2.5 billion to PHP 3 billion.

Thank you, Robert. Our next question will come from [ Luigi Lim of Sun Life ].

It seems that the effective tax rate continues to be low in -- as of 9M, but in 3Q, somewhat higher compared to that of 2Q. Could you provide more color on this?

[ Luigi ], it was a function of the fact that our securities trading in the third quarter relative to the first 2 quarters was lower, right? Because the securities trading results attract a lower tax rate. That's what it was.

That plus the relatively lower provisions that we took in Q3.

Yes.

Okay. And then for OpEx, the cost savings that you've made so far do, do you expect this to extend into -- or improve further into 4Q and possibly next year? And if not, what's a good steady state for that?

Yes. There might be -- we might expect Q4 OpEx to be a little bit higher than Q3. But the total for the year, we are looking at maybe just PHP 150 billion in total OpEx, which is flat to last year. And in terms of cost-to-income ratio, that should be closer to 50%, coming from about 47% first 9 months. That's still better than -- close to 53% cost-to-income ratio for the full year 2019.

Okay. Our next question will come from Selvie Jusman of Morgan Stanley.

I think I have 2 question. The first part relates to the asset quality. So in terms of the NPL that has risen Q-on-Q, which segment is actually driving it? And I think with regards to that, with the commentaries around this, I just wanted to -- I just try to understand, will it be fair if I were to assume like the -- if this were to be passed and become official, that you would probably classify the overall NPL even in -- you will be more aggressive in downgrading the problematic loans into NPL, which I think you mentioned earlier, the peak would be around 5% to 6%, before actually selling debt to the SPV? And therefore, what would it mean to your provision guidance? And I think my second questions will be in terms of the cost. And you mentioned earlier on -- you are expecting for the full year to be relatively like flat. But with the changes in how we do business with regards to COVID, do you see a sustainable reduction in the cost base? For example, when it comes to marketing expenses or travel expenses.

Your first question has to do with how we're looking at loan classifications? And whether we are -- our view on downgrading.

So I think my -- yes. So I think my question will be, firstly, on the NPL. What actually drove the Q-on-Q increase in NPL in terms of the segments? Which particular segment drove it? And the second question relates to the SPVs. If this becomes official, I think there will be a 10 -- I think the stand was a bit more like aggressive recognitions of bad loan. Does it mean that -- now your NPL is about 2.8%, right? But I think you mentioned earlier that the peak NPL could potentially be at 5% to 6%. So if this become official, would it -- does this mean that this thing will get accelerated, and therefore, we will continue to see a bit larger provisioning, even like in the first half next year to take into account that?

Selvie, to your first question, we increased NPL provision also on the retail side of the house, okay? The corporate side of the house fairly benign. It was really the retail side. And not surprisingly, mortgages, auto, credit cards and microfinance, okay? The big number of that really is mortgages. But the mortgage book is highly, highly collateralized, okay? You've seen auto loans go up. You've seen the credit cards go up. You've seen microfinance go up. So that's the quick summary. Now as to your next question. Would we be increasing our provisioning rate as we go from, say, call it, 3% NPL closer to maybe 5% -- 4%, 5%, 6% NPL? It depends a large sense on where we are in the cycle, right? Because our loss -- our historical loss given default rates are a lot, lot lower, obviously, than the quantum of the NPLs. Depending on the product, loss given default rates can range from 10%, 20%, all the way up to 50%. So what we're looking at in this environment is, do our loss given default rates change? I think if you look at our whole portfolio, our loan -- our loss given default rates historically have been in the order of probably 34%, okay? But we're asking ourselves now, and I know on the retail side, Ginbee is looking at perhaps assuming loss given default rates closer to 50%, even 60%. So we'll manage our NPL to that. So it's a function of what happens to loan loss given default rates and our perception of where we are in this cycle.

Okay. And I think do you have like any comments on fees? I think previously, you mentioned that it could help the bank in recognizing the NPL faster. Now that we are here, and I think there are further discussions on this, what do you view the impact would be and also maybe the impact on the capital?

You mean impact on provisions?

As in like the capital release, the capital release?

Yes. Well, in -- first, on provisions, as explained by Bong, it will really depend on what we expect will be the potential loss and recovery rates. And we will adjust our provisioning based on what we're seeing. And of course, it will be dependent on the revenue outlook for next year. What allowed us to aggressively provision this year is the fact that we registered very strong revenue and very strong pre-provision operating profit. So -- but we -- I think one thing is clear. Provisions will remain elevated. Right now, we're tracking about 190 basis points in provision. Towards the end of the year, it's probably going to be around 175 basis points. It won't be far from that next year, be slightly lower, but it will still be elevated. Impact on capital, as you might be aware, any incremental NPL requires 150% risk weight. So we'd like to be able to manage our NPL formation and -- with a really sharp focus on making sure we exhaust possibilities to work out or reschedule or restructure, especially for borrowers or loans that are still current, therefore, were not required 150% provision. So that it stays at typically 100%, if it's the regular corporate product. It could be lower for MSMEs. It could be lower for mortgage. But our objective is, as much as possible, to be able to work out so that these loans don't flow into NPL and minimize the hit on our capital. But that said, I will have to say that given the large amount of buffers, the loss absorption buffer that we have in our 15-plus and 16-plus-percent CET1 in CAR, I believe, the last time we calculated, it gives us over PHP 150 billion in NPL headroom for us to fully exhaust capital. And we don't think we'll even get close to that.

All right. Okay. And I think my last question is on the cost. So do you think, in terms of the cost outlook next year, given that the way we do business is kind of like different due to COVID, is there any potential sustainable cost saving from your cost base? Like maybe either marketing or travel expenses?

Well, the answer to that is yes. We expect -- if you just look at people, for example, we are running an attrition rate this year of almost 11%. And that is a combination of managed attrition and voluntary attrition. Okay? And when you think that we start with a base of 21,000, you've seen that we have quietly gone about trying to rationalize something like headcount. I -- earlier in response to an earlier question, I said we're looking at co-locating branches, all right? And that will create capacity and create cost savings. We are gearing for a scenario where PHP 50 billion should be our high watermark expense-wise. We think that number should be coming down. And as we continue to digitalize, we expect to see more cost savings.

Okay. Next, we have a set of questions from Aakash of UBS. The first question, he says, BSP involvement in the bond market with active issuance of government securities, how has that created opportunities for banks, if any? The second question is, how should 1 expect -- should one expect higher trading gains in the fourth quarter? And finally, what is the latest thinking about -- thinking around provision levels for next year?

Chinky -- Aakash, for the first question on the impact of the active issuance of -- so you're referring to the Central Bank issuing debt securities. The impact is positive as it provides more options for banks in terms of outlets where we can release liquidity. Prior to that, we have actually been actively using overnight and term deposit facility of the Central Bank. And as you are aware, the massive amounts of liquidity that was released into the system really showed very high liquidity levels for banks. It's the same for outlets. So that's -- can we ask if you're not speaking, if you can go on mute, please. So that's additional outlet for banks, as I mentioned. Aakash -- Chinky, could you repeat the other 2 questions?

Do we expect higher trading gains?

Higher trading gains for next year.

Higher trading gains for next year. So -- well, at rates where we are, it's very difficult to replicate the PHP 6 billion, PHP 7 billion that we have already generated for this year. So there will still be opportunities. We believe that on the short end of the curve, we might still be able to generate some gains. We still have positions that have unrealized mark-to-market gains on both our peso and FCDU portfolio which we may at some point. We think rates with -- well, at least on the peso side, our markets team think that there might still be another rate cut happening next year. So maybe on the short to the medium end of the curve, there might still be opportunities to generate gains over the course of 2021, particularly as the government issues more borrowings to fund the deficit, we could expect a steepening of the curve with rates on the long end going up. So one strategy is if we can take advantage of taking profit on some of our positions ahead of a steepening of that curve. So there will be opportunities. It's just hard to say whether it's going to be close to the levels that we have generated this year.

The last question, Tere, is what is the thinking around provisions for next year?

Chinky, yes. Aakash, we -- I alluded to it a little bit earlier to an earlier question. A lot depends on where we see -- how we see this economic episode panning out, right? If it looks like the economic downturn will extend, then we will continue to do what we've done this year, which is we're trying to get ahead of it. If we see that this economic downturn is coming to an end and we're being -- see real growth and loan demand coming back, et cetera, et cetera, then we will consider actually coming back at the rate which we provision. It really depends on where we see this going. Right now, our base case assumptions are for growth next year in the order of maybe 5% or 6%. That would be -- that's our base case assumption, but let's see.

Okay. Thank you, Bong. The next question will come from DA Tan of JPMorgan.

Just a few quick follow-up questions. One is on the NPL outlook. You mentioned 5% to 6%. I just want to understand where this is coming from. So would it be -- this is still mostly on the retail side?

We would expect it would still be mostly on the retail side, DA.

Okay. And then another follow-up is on the restructured loans. Could you give an update on the amount of restructured loan as of third quarter?

It's still early days, DA. The numbers that we're seeing at least as of the -- I think June 2020, our restructured loans is still under PHP 1 billion, comprising about 12 accounts. What we could see in the next few months will be the actual booking of a lot of restructuring transactions that we are negotiating at the moment. And as I said, with the openness on our part to really work out a deal with the borrowers to allow for rescheduling and restructuring. So that could go up in the coming months. In fact, there were some approved restructuring transactions that are not yet incorporated in the 800 -- the number is PHP 800 million, so less than PHP 1 billion. So we're watching that. So we will continue to give quarterly updates on that.

All right. And I had just one last one on the provisions and coverage side, because based on your comments it seems that you're quite comfortable with coverage going down much lower than 100%. Is that fair? So is there a number that you guys would be looking at, at least somewhere you want to maintain this NPL coverage?

Well, early in this crisis, and as this crisis sort of plays itself out, it makes sense to have provisioning of 100% or better. But as the crisis resolves itself, right, then we think that kind of provisioning gets very, very expensive. So again, like I said, DA, it really depends on how this crisis sorts itself out. We are prepared, and we think we have the earning capacity to hover around 100% if we had to. But at the same time, as things begin to resolve themselves, it may not make sense. When you go back to the crisis of -- obviously, the Asian financial crisis as an example, and you look at the -- what happened to provisioning as the crisis played itself out over 3 years, you've seen provisioning levels go way up and then come way down as the crisis resolved itself.

And one last one for me. You -- I mean you've been mentioning branch rationalization for a while now. I just want to get a sense of, is there a timing that you're starting to do this already? When should we start to see this?

It's work in progress. I think it will become pretty apparent early next year.

Thank you, DA. Our next question comes from Rafa Garchitorena of Regis.

Sorry, no. My questions really were same things, on the provisioning side. So you're -- given the LGDs in the past, you're comfortable bringing NPL coverage down below 100%. That's fair. But is there a number you would not go below, I suppose?

I never want to say never, Rafa. Our historic LGDs are 30% or better. Those will change in an environment like this, right? There's never been a crisis like this before. We have to assume LGDs are going up, right? On the retail side, Ginbee told us -- Ginbee told me yesterday she's assuming 60% LGD, and we're working to that number.

Great. I mean, just circling back. There was one question earlier about NIM and the impact of the credit card rate cap. So 2 things there. I guess that you will be doing things to reclaim some of that loss. But I presume most of it will be in the fee side, not on the NII side?

A lot of it, Rafa, will be in -- on the expense side. The cost of rewards, points, stuff like that, because if you look at the Central Bank circular, it limits our ability to raise our fees.

Right. So -- okay. So then NIMs will come down. It will be matched by lower costs somewhere else?

Yes. I wouldn't say match, Rafa. That would...

Or clawback some?

Yes, that would paint too pretty a picture. The value from this business will shrink. We are averaging the shrinkage. It will be a manageable number.

Got it. I guess an extension to that. I mean, I was actually surprised that the BAP or the banks in general -- and obviously, we don't know what the workings where when -- during the negotiation. But is there a sense that that's it the past year? Or will they -- is there a feel they'll spread the caps? I mean this is the first time ever as far as I understand that Central Bank has officially set rate caps on anything. Is this a slip pretty slow, do you think?

I don't think so. But there was -- there's an article in today Philippine Star where a Central Bank official in -- was quoted as contemplating that. She rates it as a possibility, but I don't think so. Then again I was wrong on these caps, and I can be wrong again.

Thanks, Rafa. Our next question come from Karthik of Buena Vista.

So 3 quick questions. For the third quarter, can we have the figure for what was the 30-day past due and the 60-day past due?

Okay. I don't know. What is it?

It's -- Karthik, we have different levels for the different portfolios. I don't quite have a summary. But roughly for -- like credit cards, for instance, it's roughly around 8%. For retail, Ginbee, do you have the PDO?

Is that for 30 days past due, Karthik?

30 and 60.

30 days in terms of amount for auto loans is at 13%. That's -- whereas for housing, also at about 9%.

But I just want to point out, Karthik, that for each of the loan sentiments and for each of those PDOs, 60 or 90, you have to assume certain flow rate. And our experience is that, at least for retail, the expected flow rate is probably less than 40%. It could also be lower, especially on the -- what we call the middle commercial loans, commercial credit. So it varies. Right now, we're actually watching the PDO 30 and PDO 60 in terms of forecasting where we will end this year in terms of NPL. So so far, it's within what we were initially estimating in terms of where we'll end by 2020.

Okay. So the range is between 8% to 13% then across retail categories?

Across retail, yes, yes.

Okay. My second question is, if you're actually comfortable with your peak NPL of about 6-odd-percent by sometime next year, and if the LGD that you're assuming is already close to 60%, even if I assume it's going to be 70%, you would need a provision to loan of about 4% to 4.2%. You are already at 3% currently. That would put the FY '21 credit costs somewhere in the 100 to 120 basis points range, assuming you stick to your 6% peak NPL. I would think that -- because I find the guidance on your peak NPL and the credit cost for FY '21 to be a bit inconsistent, with the credit cost guidance being more conservative than required.

Well, that's on purpose, Karthik. We wanted to get ahead of this. You're exactly right. Our mindset -- the way you described it is not very far from what we're thinking. We just want to get ahead of it. Now if -- like I said earlier, if it looks like this economic episode is resolving itself, then we'll make adjustments.

Okay. Excellent. My last question is on the BSP circular recently, I think it was about 1100 or so, it permits lending to MSMEs, which have been hit by the pandemic to qualify as a part of your reserve requirements. And I believe there are also proposals to bring down the risk weight for MSME lending to 50%, especially when it is lend to enterprises which are impacted by the pandemic. Do these initiatives at the margin improve your appetite to lend given where your risk pricing right now and your risk appetite is right?

Well, let me answer this the other way. Right now, those 2 BSP provisions have not changed the way we do our business.

Thank you, Karthik. Our next question comes from Danielo Picache of Crédit Suisse.

2 questions from me. On loan growth, I'm sure you made mention of this earlier, but can you provide some guidance for the rest of the year and 2021? Generally, I just want to get a sense of the pipeline. And for the slowdown so far this year, is this due to the bank's risk aversion or there is simply slower drawdowns? Second question would be on the deposit side. And I'm looking at a significant improvement in CASA ratio. But is there still room to optimize your CASA, both in terms of deposits?

Yes. Danielo, on the loan side, we're looking at very -- at 0 or very little growth vis-à-vis 2019 year-end numbers, okay? If I were to guess right now, I'd say it could be anything from maybe minus 3 to plus 3, in that range. And what's happened on the loan side is you're seeing demand come off a lot. And when you look at the whole industry, at least amongst the bigger banks, the bulk of it is corporate loans, right? And the corporates have basically catched up already. And so much of the competition on the loan side is in the corporate sector. Now Ginbee in Family Bank has succeeded in growing our mortgage book. Our Jojo Ocampo in Bank has succeeded in growing our microfinance book. But all the other segments are actually down year-on-year. All right. So that's the -- that's on loans. Now on CASA, yes, there's certainly room to improve further on CASA. The CASA numbers this year are okay. We're pretty happy with it. But we will really use CASA growth, I think, to replace TDs, okay? Because unless loans resume the growth trajectory of a year ago, it's simply a function of us trying to reduce our funding costs.

Bong, if I may also add to the CASA question. The real big difference at this stage is the shift of our consumer preference towards more liquid holdings or funding. And that's why we see that, as long as the preference is to keep it short and highly accessible, CASA will have a good potential to further grow up. Particularly in the segments of the retail side, we've seen growth for CASA in the OF segment and in the personal banking segment.

Okay. Our -- we have time for 2 more questions. The first one coming from Jun Tarrobago of ATRAM.

Just one question actually or 2 if there's time. The most important of which, I think is [Technical Difficulty] I mean you're expecting 5% to 6%, assuming that happens post [indiscernible] or when it expires. What -- do you anticipate the industry to be at 5% to 6% as well? Or what's your sense of where competition might lead? If you can segment that into the line as compared the second level of banks in terms of their share, in terms of size? That would be my first question. And why?

Yes. I mean Jun, but -- so the people who are not keeping in mute their phones, I'd appreciate. Jun, at 5 or 6 percentage, if that's our peak next year, I think we would be amongst the best in the industry by far, by far. The only -- the ones that would probably come close would probably be the banks that are similarly sized, maybe. But as you get to the smaller and smaller banks, I think those numbers are going to be a lot higher.

May I, Bong, just to also give a follow-on perspective. In terms of our loan books, at least retail side, it's really -- we have very good asset quality, particularly because 70% of our loan books are actually depositors. That's for housing. 80% is for auto loans. 80% of our loan customers for auto loans are actually our own depositors. And in terms of asset quality, the depositor portfolio is much better than the non-depositor portfolio.

So last question is on PAT. How -- where -- if you had talked about this earlier, please forgive me. But where are you from a technology standpoint? And we are anticipating a larger cash, OpEx or CapEx going forward as the volume of the transactions increase. Is that going to happen?

Well, Jun, I think like I told people before, I think we'll tick the box on digitalization in here. Essentially, that's remittance service payments, investments. Digitalization 2.0 involves a lot of other products. Some basic things like can you open an account digitally, for example. So we've gone through the first phase. I actually think over the next 2, 3 years, we'll probably go through another -- at least another phase. Again, this is like provisioning. We intend to stay ahead of this.

Our last question comes from Rachelleen Rodriguez of Maybank.

Actually, just one question for me. Do you have a comfortable level of NPL cover? Is it -- are you okay that it going down to below 100%?

Yes. Rachelleen, look, as I said, if you're early in this crisis or you're in the middle of the crisis, you want to stay at 100% or better. As this crisis resolves itself and as we get more confidence in what happens to loss given defaults, then there might be opportunity to bring that down. Obviously, the fact that we're at 100% should link that this is -- we're still at the first stage of this crisis.

Okay. Ladies and gentlemen, thank you for your questions. These were insightful and useful feedback as the management team considers these in our strategic discussions within the bank. To wrap up this earnings call, Bong, let's have some final thoughts from you.

Well, I actually think the critical question was really raised by Jun at that round. He basically asked us where would we rank vis-a-vis the other banks in terms of the quality of our loan portfolio? Look, guys, am I happy with our NPLs? No. But do I think we will compare favorably to almost every other bank out there? Yes. Right? And that's all we can do right now. I think we will compare favorably to the industry and to most banks out there. So with that, thank you very much.

Thank you.

Thank you, everyone. Bong, thank you. This concludes today's conference call. Should you have additional questions, please direct them to our Investor Relations mailbox at [email protected], and we'll be happy to respond to your queries. Thank you for your participation. You may now disconnect.

Thank you.