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

I think we can start. We have a good number on the line. Good afternoon, ladies and gentlemen. Welcome to BPI's Fourth Quarter 2020 Earnings Call. This is Chinky Lukban, Head of BPI Corporate Strategy, Investor Relations and Sustainability. I am pleased to introduce our speakers for this afternoon. With us today, we have our BPI President and Chief Executive Officer; Cezar "Bong" Consing; and Executive Vice President and Chief Finance Officer, Tere Marcial. We will start with a few words from Mr. Consing on the full year results of 2020, and Ms. Marcial will walk us through the presentation that we just sent out earlier. We will then have a Q&A session and wrap up with some final thoughts from Mr. Consing. [Operator Instructions] Bong, please go ahead.

Thank you, Chinky. Good afternoon, everybody, and thank you for joining our call. Yesterday, you would have noticed that the Philippine GDP lost 9.5% over the course of the year. And while the fourth quarter looked a little bit better than the third quarter, it's still -- I think the Philippines lags. Later in the day, after the announcement was made, I read a piece prepared by the economic managers of the country, Governor Diokno and Secretary Dominguez, and the piece, it was really addressed to the Filipinos nationwide, was also an appeal to other government policymakers to try to lighten up the extent and the depth from the lockdowns because the finance people were saying, rightly so, there's no point introducing a lot of stimulus if the lockdowns are going to curtail all kinds of demands. And it's that dynamic which I think helped define how our bank did last year. In an economy that shrank almost 10%, you saw us barely growing our asset base. As a matter fact, you saw us reducing our loan book by a few points. You also saw us, very importantly, increasing our provisions by a factor of 5, all the way up to PHP 28 billion. And frankly, what we really wanted to do was to make sure that we are well ahead of any NPL formation. So we saw our NPLs go up from what was about 1.8% in 2019 to a little less than 2.7% in 2020. We really wanted to get ahead of any further NPL formation. At the beginning of the second quarter of last year when we had this conversation, I actually signaled that I thought the -- sorry, in the beginning of the third quarter last year, I actually signaled that I thought that the second half provisions would be a lot lower than the first half provisions. Unfortunately, our second half provisions were, while they were lower, were not a lot lower. That's because, frankly, as we saw the lockdowns getting extended, as we saw the moratoriums being put in place, as we saw the lethargy in the market, we just thought it made sense to build our provisioning. Now while we're building our provisioning, while we took more provisions in the second half than we thought we would be taking, we're also more sanguine about NPLs. Early last year, we thought that NPLs in 2020 would be in the order of somewhere between 4% and 5%. And what we saw last year was our NPLs peaking sometime between the third and the fourth quarter, but coming down towards the end of the year, especially as Bayanihan 1 and Bayanihan 2 were off, okay? Now we're telling ourselves that this year, we'll probably see NPLs peak in the second half of the year. But now we're looking at peak NPLs more in the area of maybe 3.5%, 4%, not the 5%, 6% or 7% we were talking about 6 or 9 months ago. So we're a lot more sanguine about NPLs now. Now while all of this is going on, on the NPL provisioning front, we're seeing our net interest income last year go up, a function of higher average balances and a little white risk. We're seeing our noninterest income growing, driven by securities trading gains, offsetting a small decrease in fees and commissions. And we're holding our expenses constant, notwithstanding the fact that we spent more than PHP 0.5 billion on COVID-related expenses, for transportation, for testing, for physical distancing, everything related to COVID management. So that's the long and short of it. I'll now pass you over to Tere, who will talk a little bit more about our results. Thank you.

Thank you. Thank you, Bong. Good afternoon, ladies and gentlemen. So allow me to start our year-end report with this picture. In 2020, Euromoney named BPI as the Best Bank in the Philippines. The announcement carried the quote, "BPI is a port in a storm -- and right now, we are in a storm." So the unprecedented global health crisis brought about by the COVID pandemic has put every single economy in the midst of squalls, gale-force winds and seemingly insurmountable waves. Thankfully, the bank demonstrated resilience during this crisis, remained accessible to our over 8 million customers and sustained a reasonably good performance despite a difficult operating environment. Before I discuss the past performance for 2020, let me give you a macroeconomic overview. The Philippines carried its strong growth momentum into early 2020. The economy was expanding at an annual rate of about 6% over the past 3 years. Unemployment rates were at their lowest. Inflation was benign, and interest rates were low. This notwithstanding, the Philippine economy was not left unscathed by the effects of the pandemic, made worse by the natural disasters that hit the country at the beginning and towards the end of last year. For the full year 2020, GDP contracted by 9.5%. This is the steepest since the country's economic crisis in the mid-1980s, as the impact of the pandemic was broad-based and deep, forcing declines in investment and consumer spending. The quarantine measures and closures of nonessential businesses have resulted in record-high jobless rate of 17.7% in June. As the mobility restrictions were gradually eased and economic activity started to return to some sectors of the economy, the rate of unemployment improved to 8.7% by December. Inflation remained comfortably within the BSP target range in 2020. In December, inflation registered at 3.5%, bringing full year average inflation to 2.6%, in stark contrast to the 50% inflation rate in the 1980s and the 8% to 9% inflation rate during the Asian financial crisis and the global financial crisis. This benign inflation environment provided space for monetary adjustments to mitigate the impact of COVID-19. During the course of the year, interest rates were at near-record lows, underpinned by highly accommodated monetary policy in preference for safe assets. Moving on. To help cushion what was probably the most timid fiscal response in the region, the Philippines Central Bank injected an unprecedented amount of liquidity into the economy through various channels, equivalent to almost PHP 2 trillion or 10% of GDP. However, loan growth remained tepid due to lack of corporate and consumer demand, resulting in continued growth in money supply. The lack of economic activity resulted in import contraction, which, coupled with OFW remittances, led to the expansion in current accounts surplus, buildup of record-high gross international reserves and appreciation of the peso against the U.S. dollar. In 2020, the peso appreciated 5% against the U.S. dollar. We saw a similar appreciation of the peso against the U.S. dollar in 2009 and 1998. These are in striking contrast to the 30% depreciation in the 1980s. This crisis happened at the time when the country enjoys investment-grade sovereign rating from major credit rating agencies. These ratings have remained unchanged amid the recent wave of credit rating downgrades in other countries. We believe that the banking industry is expected to withstand the risks posed by this crisis and may recover faster this time compared to the previous financial crisis. The low interest rate environment is helping borrowers endure the debt burden amidst stressed cash flows. The industry NPL ratio may rise to over 4% in 2020, could peak in 2021, but this is far lower than the 17% level in the aftermath of the Asian financial crisis. Years of structural reforms, including early adoption of Basel III, ushered in a stable Philippine banking industry with strong capital position, adequate liquidity buffer and moderate leverage. Finally, the industry has so far shown revenue growth, permitted by declining funding costs and securities trading income. Despite huge provisions, we are seeing growing bank earnings. So now let me move on to the bank's financial and operating performance. Here are some of the key performance highlights. For the full year 2020, the bank registered a net income of PHP 21.4 billion, down 25.7% year-on-year. The bank generated a record-high revenue on NIM expansion and strong securities trading income. We showed strong asset growth and a slight decline in net loans. In view of expectations of muted loan growth for the year, our focus has been on cost discipline and operating efficiency, resulting in a cost-to-income ratio that is the lowest in many years. We also focus on asset quality preservation and preemptive provisioning while maintaining a comfortable capital and liquidity position, while earnings and strong capital position provided us the flexibility to pay regular cash dividends during the year. We also started initiatives to rebalance our traditional and digital channels as the events of 2020 accelerated the speed of digital adoption. On the next slide, we show our full year profitability. The bank generated a net interest income of PHP 72.26 billion, up 10.2% year-on-year, and noninterest income of PHP 29.66 billion, up 11.1% over the same period. Net interest income was driven by expansion in NIM, while noninterest income was largely due to treasury-related trading income, which offset the effect of lower fees. Operating expenses was controlled and almost flat year-on-year at PHP 48.15 billion. Record preprovision operating profits, which reached PHP 53.77 billion in 2020, higher by 22.4%, enabled us to build our provisions amounting to PHP 28 billion, translating to a credit cost of 196 basis points. In 2020, we delivered earnings of PHP 4.70 per share. Let me now focus on our Q4 earnings. Quarter-on-quarter, net interest income stood at PHP 18.05 billion, slightly higher compared to 3Q, due to a 3 basis point improvement in NIMs. We saw continued recovery in fees, while trading income was weak for the quarter. Total revenue generated was PHP 25.63 billion, up 3.8% year-on-year. We booked provisions of PHP 7.53 billion, which cap income to PHP 4.24 billion, down 22.9% versus the previous quarter. Year-on-year, net interest income for the quarter posted a 4.9% growth. Both asset yield and cost of funds reflected the impact of lower interest rate environment through the decline in rates, though the decline in rates was much faster reflected in cost of funds than in asset yield. Noninterest income stood at PHP 7.58 billion, up 34% on higher fees and trading income, which was almost 3x the amount booked in Q4 2019, underpinned by declining interest rates. Revenues amounted to PHP 25.6 billion, up 12.2% year-on-year, while costs increased by only 2.2% over the same period, resulting in preprovision operating profit of PHP 12.72 billion, up 24.5% year-on-year. Resilient preprovision earnings allowed us to book provisions over 6x higher than pre-COVID levels, resulting to net income of PHP 4.24 billion. This is down 37% year-on-year. So that's for the fourth quarter. Let me move on to returns and dividends. Provisions for credit losses capped 2020 income, resulting in lower return on equity of 7.7% and return on assets at 1%. Notwithstanding the contraction in net income, we continued to pay stable dividends to our shareholders. We paid 1.80 -- PHP 1.80 per share in cash dividends in 2020, for a total payment of PHP 8.1 billion, equivalent to a dividend payout ratio of 37.9%, which is higher compared to the previous year. Now let's look at revenues and expenses. Our net interest income was driven by NIM expansion, reaching 3.49% for the full year. Higher NIMs allowed us to grow net interest income, offsetting the effect of a modest contraction in the loan book. Noninterest income, as shown in the second chart, was driven by hefty trading gains of PHP 10.1 billion, up 65% year-on-year, which made up for the 5% decline in fee income due to lower transaction volumes and fee waivers. Moving on to operating expenses. We record almost flat operating costs year-on-year, as the increases in manpower and technology expenses were offset by lower expenses related to prices, volume-related transaction costs and other discretionary expenses, including traveling, marketing and advertising. This brings our 2020 cost-to-income ratio to 47.2%, a marked improvement from 52.4% in 2019. Our 2020 financial reports reflect the effect of deconsolidation of BPI Century Tokyo Lease & Finance Corp., or CPL, after we sold 2% of our 51% stake to our partner, Tokyo Century Corporation, or TCC, effective December 23, 2020. The reclassification to equity accounting has the effect of removing line items in our P&L and balance sheet, including a reduction of PHP 1.8 billion in expenses from the bank's consolidated OpEx and a reduction of PHP 1.92 billion in fees from the bank's consolidated noninterest income. With the transfer of majority ownership and control to TCC, this allows the joint venture to optimize the value of TCC's expertise in the full-service operating lease business, while capitalizing on BPI's broad corporate customer base. Now let's move on to NIM. We reported NIM expansion of 14 basis points for the full year. While asset yields declined by 48 basis points, our cost of funds fell by 70 basis points, in line with the movement in interest rates. Year-on-year domestic interest rates across all benchmark tenors dropped by 170 basis points on average. Cost of funds continued to trend lower, in line with the downward repricing of high-cost time deposit, helped by a strong growth in CASA, thus favorably changing our funding mix. On sequential quarter, asset yields continued to decline, particularly on high-quality corporate borrowers and on credit cards where interest charges were capped beginning November 2020, pursuant to BSP regulations. Now on noninterest income. The low interest rate environment is putting a lot of pressure on net interest income, which we counter by expanding our fee-based businesses. We maintain a diversified mix of fee income sources, which includes credit cards, asset management, insurance, trade and supply chain, and branch service fees, to cite a few. The second chart, the one in the middle, shows the sequential quarter results of trading income and fee-based businesses. As mobility restrictions have eased -- have been eased, fee income has recovered in the past 2 quarters. Fee income in Q4 is back to prepandemic level. The weakness in fee income was offset by trading income, which accounted for over 1/3 of our total noninterest income. The third chart shows that, over the years, we have reduced our reliance on treasury-related income, but we continue to take advantage of trading opportunities during periods of market volatility. On the next slide, you see that, as -- we aim to improve operational efficiency through digital transformation. The pandemic accelerated enrollments and use of our digital channels, Digital transactions, including ATM transactions, accounted for 85% of our total transactions pre-ECQ and peaked to 95% during the ECQ. While the number of digital transactions continued to grow as people are forced to stay home, the lockdown also changed customers' behavior, as digital transactions today are even higher than pre-ECQ levels. We see continued growth in active users and enrollments. We have 2.7 million active users as of the end of 2020. This is up 41% year-on-year. New enrollments reached 4.4 million, up 17.5%. On technology spend, which is on the third chart, as the bank transforms its business model to increasingly become more digital, we continued to increase spending in technology. For the past 2 years, tech spend was at 8 -- 7% to 8% of our total -- of our gross revenue. Moving on to our balance sheet highlights. We ended 2020 with a modest expansion in total assets, 1.3%, to PHP 2.23 trillion; loans at PHP 1.41 trillion, down 4.6% on muted demand; deposits at PHP 1.72 trillion, up 1.2%, with CASA growth at 16.6% driven by abundant liquidity; equity at PHP 280 billion; LDR at 82%, lower by 5 percentage points from last year; liquidity coverage ratios and net stable funding ratios at 230% and 152%, respectively. We end 2020 with a book value per share of PHP 62. Now let's look at our loan portfolio. Our portfolio mix remains heavy in corporate at 75.7%, with a greater majority in the large corporate subsegments. In 2020, we saw declines in outstanding loan balances of corporate, SME, auto, credit cards. But this was partly offset by the growth in microfinance and mortgage loans. Corporate accounts registered a modest drop about PHP 34 billion, as working capital and CapEx demand were weak, but this was partially offset by almost PHP 10 billion increase in outstanding mortgage loans. The share of SME and consumer, which are the key segments that we plan to grow at a faster pace over the medium term, improved slightly to 24.3% in 2020 from 23.2% the prior year. On the next slide, we see loan segment performance. Successive interest rate cuts and sustained high market liquidity as well as stiff compensation led to loan yield compression in most segments of our loan book. Total earning asset yield as of end 2020 was at 4.65%, down 48 basis points year-on-year. Corporate loan yields saw the biggest decline, down by 70 basis points. We also noted the decline in asset yield of the credit card portfolio, though full year effect of the interest rate cap on credit cards is not yet reflected as the BSP regulation took effect only in November. Microfinance also showed a hefty decline in asset yield, though this is less than 1% of our loan book. Only yields for auto have held up so far, while yields on mortgage, credit cards and personal loans have declined by between 15 and 51 basis points. The next 2 charts will show that year-on-year -- the changes in loan releases. As of December 2020, volume in all segments have recovered from ECQ levels as mobility restrictions were eased, allowing resumption of business activities and people return to work. SME releases have exceeded pre-ECQ levels, which is a very good sign of recovery. On the next slide, we talk about asset quality. After expiry of loan moratorium granted under Bayanihan 1, new NPL formation started to flow through, which were mainly seen in mortgages, credit cards, SMEs and auto loans. We saw much lower percentage of borrowers who opted for grace period under Bayanihan 2, which is estimated at a very low 10% to 15%. Interruption in business facilities and high unemployment have led to new NPL formation amounting to PHP 13 billion for the year, bringing our NPLs to PHP 38.8 billion, up 56% year-on-year. Higher impairments were also seen in mortgages, auto, credit cards and SME. As we provisioned PHP 28 billion during the year, credit costs remained elevated at 196 basis points in 2020 from 40 basis points to 43 basis points in the past 2 years. NPL cover improved to 115.2% and loss cover, which includes provisions for contingent exposures, to 120%. Our NPL ratio was at 2.68% on year-end, higher than prior year but lower than Q3. As of December, total restructuring loans stood at PHP 15.8 billion. This is 1.1% of our total loan book. Moving on to funding. Lower interest rates from BSP policy rate cuts and our -- RRR reduction enabled us to pay down high-cost time deposits and improved CASA ratio from 69.1% to 79.6% by the end of 2020. Retail deposits grew faster than corporates, driven by personal segment and overseas Filipino segments. Also during the year, we tapped the bond market with the issuance of peso bonds aggregating PHP 70.7 billion, including the CARE bonds, COVID response bonds, which we issued under the bank's sustainable funding framework. It is the first social bond in the country, and its proceeds were earmarked to finance micro and small, medium enterprises. Moving on to our capital position. We ended 2020 with a much stronger capital position with CET 1 ratio of 16.17% and CAR of 17.06%, improving by 100 basis points. Not only do we have more than sufficient loss absorption buffer, but importantly, a capital base that will allow us the opportunity -- the optionality to accelerate loan growth in line with the expected economic recovery. We have maintained our modest financial leverage at about 8x, lower than 8.2x the previous year. Let me move on to Slide 32, please, Nina. So we ended the year with all 3 major credit rating agencies reaffirming its credit ratings for BPI. S&P at -- with the highest, S&P at BBB+, which is 2 notches above investment grade. It's only S&P that revised its outlook on BPI from stable to negative, along with the rest of the banking industry, mainly due to weak macro environment. S&P cited the deep recession and tough employment conditions could impair the banking sector's asset quality, capitalization and profitability. Meanwhile, both Fitch and Moody's affirmed their stable outlook on BPI. The themes across all agencies are basically aligned, 3 areas that are strong: capital, funding and liquidity. And then here we show -- next slide, we show our ESG ratings. These are the ESG ratings from agencies that matter. BPI scored reasonably well in this space. Noteworthy is the upgrade by MSCI from BBB to A in July 2020, as we scored high on risk oversight, governance, commitments to ethical standards. We note other areas for improvement as we move towards enhancing internal policies, processes and business decisions related to ESG. Recently, we announced the Board approval to submit for shareholder and regulatory approvals the proposed merger of BPI and BPI Family Savings Bank. The proposed merger is expected to provide gains from operational efficiencies, allow for branch channel optimization and potential revenue upside...

I'm on the BPI call. But it's okay. It's at Q&A right now. No, no. No, no, [ Ron ], it's fine. You get five minutes to find it. They're still going through the slides.

From harmonized branding and sales synergies.

Yes, yes. Why don't I know that? Wait, I actually know that. I'm interested in this bit, yes. Yes, okay.

[ Archie ], put your phone on mute, please. [ Archie ], can you put your phone on mute, please? Okay. Sorry, guys.

So here is the key takeaways. Next slide, please, Nina. Here, we summarize our financial and operating results that demonstrate resilience during crisis. In this challenging environment, we continue to sharpen focus on financial strength, asset quality and operating efficiency while we position the bank for growth. As we think about 2021, our strategic imperatives are: number one, to deepen our client relationships; number two, to strengthen our funding franchise; number 3, growing our high-margin businesses; number four, execute our 5-point digital strategy; and number five, rationalize our distribution channels to achieve further cost efficiencies. Let me close here and open the floor to questions. Thank you.

Thank you, Tere. We will now begin our Q&A session. [Operator Instructions] Our first question comes from Aakash of UBS.

Sure. And congratulations for a resilient performance during a very challenging year. I have 3 questions. First one is, if I heard you correctly, I think you said that you're expecting a lower NPL peak, but your provisions obviously were higher in the second half of this year of 2020. Does that mean that we should expect a significantly lower provision level in 2021? I believe the question is when do you expect the NPLs to peak actually.

Okay. Aakash, we expect to be -- to have to take much lower provisions this year in 2021. I know I said it a year ago that we would take much lower provisions in the second half than the first half. And while it was a bit lower, it wasn't low enough. But in 2021, our base case is significantly lower provisions. We expect NPLs to peak in the second half of this year, but we don't expect them to peak at the levels that we were worried about as recently as 6 months ago. We expect peak NPLs for us to probably hover around 4%, if that.

Okay. Great. So given your expectation of the NPL peak in the second half, should that also be the point when we should expect loan growth to start reversing? Typically, obviously, loan growth is very highly correlated with this corporation. So should we expect loan growth to bottom-up around then?

I think loan growth will stop reversing much sooner than that, Aakash. January, typically, we see some paydowns. But I expect by March or -- and certainly in the second quarter, you'll see the loan book begin to grow again.

And then another question I have is on the NIMs. So obviously, I know this strong growth in CASA has helped you a lot this year. What sort of runoff are you expecting in 2021? I mean obviously, all this CASA cannot stay. And the related question is, like we've seen the cap in credit card so far. Any other products that you're looking at where we are seeing quite a dramatic similar cap? And I have noticed that your mortgage volumes have not really come down much. Is that another product where BSP might consider putting a cap on?

Aakash, your first question was NIMs. Your second question was?

It was CASA and the rate caps on credit cards versus other products like mortgages, for example.

Right. Okay. Tere, please?

Let me answer, Aakash, your question on NIM. So for 2021, the challenge really is the continued low interest rates, so we do expect some slide in asset yields. And while we're seeing low deposit cost and low overall funding cost, I think for 2021, we won't see a big gap in the decline in funding costs versus the decline in asset yield. So our best case is a flat NIM. We ended full -- we had a full year 2020 NIM of 3.49%. We'd be so -- it would probably be a very good year if we can maintain 3.49%. But our low scenario is a possible slide by 10 basis points, so maybe around 3.4%.

CASA growth?

In terms of CASA growth, last year, we had a good performance, almost 17%. We're targeting double-digit growth in CASA this year on continued liquid monetary environment. So we're going to be targeting somewhere around 10% in CASA growth.

And to your question, Aakash, on rate caps. No, we do not think there will be another segment subject to rate caps other than the credit cards, and those are supposed to be reviewed in about 3 to 4 months from now.

Okay. Got it. Just last question I have in the costs. You've done extremely well on the expenses and costs this year. Can I ask like how much of this is variable versus structural? Like how much of these cost savings can you continue in 2021? You mentioned premises. So I'm wondering like if this premise link and possible flow going to continue in 2021.

I envision fixed costs to be in this ZIP code, 50, low 50s. We expect it to be in this ZIP code for a while. We do not see a repeat of what we saw over the last 7, 8 years, where our cost base almost doubled. And that's because there was massive growth in the whole platform as the industry grew. What we expect to do is we really expect to be able to hold costs. I predict more or less where they are now. If they're up, they'll be up a little bit. And that's because you'll be seeing the cost effects of digitalization really kick in.

Could you please touch upon a little bit more on the areas that you're seeing the cost efficiencies from the system and structural improvement in costs?

Well, the structural improvement in costs will -- is really reflective of the shift in the transaction flow from brick and mortar to digital. That is truly structural.

Is your branch count coming down? Is it exactly that?

Our branch count last year was essentially flat. With the BPI Family Bank merger, there will be an opportunity to rationalize branches.

Yes, let me, Aakash, that maybe the big -- the significant benefit could happen in 2022 in terms of branch cost reduction.

Our next question comes from Rachelleen of Maybank.

So I'm Rachel. So my first question is why did NPLs go down from the third quarter level of 2.98%. I recall you mentioned in earlier meetings that it was at around 8% back in November 2020. So that's my first question. Second question is, is the PHP 28 billion provisions already enough for that peak NPL you're expecting of 4% for this year 2021. And lastly, for my last question, for the BPI and BPI Family merger. How do you expect to recoup the impact of the gap of the reserve requirement ratio difference from the thrift bank and the commercial bank?

Yes. So let me answer the question on NPL. So we reported an NPL ratio that was just under 3% in September. We actually peaked around October. That was 3.2% on the additional disclosure on October numbers. And the decline of 2.68% was a result of 3 things: one is real change in classification, so some -- those in the NPL buckets moved to current, so -- which is a good sign of collections payments. Number two, we had some write-offs in the fourth quarter, which reduced loan balances, the NPL loan balances, specifically for our credit cards and microfinance loan book. And then number three, our official number is 2.68% but we do track an internal number of 2.85%, which includes the NPL from our deconsolidated leasing portfolio. So that's over PHP 2 billion. So on a consolidated basis, our NPL is 4.68%, but that has the benefit of deconsolidating our BPI CTL portfolio. And these are well-provisioned leasing exposures.

The question is do we have enough provisions for the peak.

So for 2021, Bong mentioned that while provisions should remain elevated, we don't see it very close to the PHP 28 billion that we provided in 2020. Our basis for additional provisions will remain to be driven by our expected credit losses as well as our expectation of peak NPL. Based on our latest estimates, we still see peaking of NPL by the second half of 2021. And the number that we're looking at is somewhere between 4% and 5%. But I think that's a very conservative number. We might see something much lower than that. So we will calibrate the provisions that we will provide this year on the basis of how we're seeing our ECLs and the expected worst-case scenario in terms of NPL.

On your Family Bank question, Rachelleen, 9% reserve gap was actually in reality reduced by the fact that Family Bank had to pay some of the savings away in their funding costs. So the reserve gap, in reality, was actually less. That being said, when we did the merger analysis and we figured all the revenue synergies, all the cost synergies, we figured that we could create NPV and talking in EV terms. So anything from PHP 10 billion to PHP 20 billion on the conservative side.

Just a clarification, you mentioned earlier that the Bayanihan 2 opt-ins are around 10% to 15%. Is it a percentage of borrowers or a percentage of loans?

That's borrowers.

Yes.

So but as a percentage of loans, do you have the number?

We don't have it, but it's almost moot and academic. The numbers are insignificant, and we don't think it will add to NPL formation by the time the loans fall due, which is around Feb this year.

Yes. Basically, what really happened is the take-up -- the opt-in in Bayanihan 1 was a lot higher. You saw the effects of that in September and October when NPLs peaked. The take-up in Bayanihan 2 is a lot lower. The NPL rates you see now are real NPLs with Bayanihans 1 and 2 having been separated out.

Okay. Sorry, just last one. Do you have a number of how much you have written off in term -- in your loans in the fourth quarter?

Rachelleen, we will disclose that when we get approval of our full year audited financial statements.

Thanks, Rachelleen. Our next question comes from Selvie of Morgan Stanley.

Can you hear me?

Yes, Selvie. Go ahead.

Okay. I have 2 questions. So the first one, on the NPL, you mentioned earlier, some of the NPL formation are from the retail segment. Could you give more color on that? As well on the corporate side, would that mean that the corporate side are holding up pretty well? And also in terms -- you did mention the take-up of Bayanihan 2 is much lower. But just in terms of the repayment trend for both Bayanihan 1 and also Bayanihan 2, are they pretty much in line with expectations? My second question will just be clarification questions. Earlier, there were some questions on loan growth and the costs. Was it right to say that you are expecting the cost base to be maintained next year? And what is your expectation for how much loan growth will pick up for next year?

Okay. We already talked about the broad NPL breakdowns. On the corporate side, our NPL ratio at the end of the year was a little less than 1.2%. On the consumer -- that's on the corporate side. And the consumer loans, it was a little less than 9%. And the consumer loans was kind of all over the map. You have housing in the 8% area, you have auto in the 9% area, credit cards in the 8% area. You had personal loans in the 7% area. And then not surprisingly, you had microfinance. And microfinance was over 22% at the end of last year. But we're actually seeing with every passing week of this year, we're seeing that the NPL ratios in microfinance coming down. So across the board, the year-end NPL ratios are lower per segment than they were 2 or 3 months before year-end.

On Bayanihan, we actually saw a much better than initially expected. So Bayanihan 1 has lapsed, and every expected new NPL from that would have already been reflected in the numbers that we've shown you today. And then as I mentioned, Bayanihan 2 is almost insignificant. So overall, we actually saw better than what we earlier expected.

And on your last question, cost base, as we said a little bit earlier, Selvie, we expect total expenses this year to be the same ZIP code as it was last year.

Okay. Sorry, I think the line wasn't very good earlier. You mentioned -- was it -- did you mention that the NPL ratio actually went down from what it was 3 months ago? And in...

It went down compared to a few months -- to the third quarter numbers.

Right. And some of this consumer NPL, would you expect it to fall lower this year?

Yes, we do.

Thanks, Selvie. Our next question comes from Harsh of JPMorgan.

One simple question. Market share, would you wait for a recovery to start growing your book? Or would you go with the old dictum and pick up credits when chips are down? And if I could convert it into more explicit market share, how do you think your market share across the board moves, let's say, 12 months from now and, let's say, 3 years from now? So anything on those lines will be very useful.

Harsh, well, the primary reason we took so much in provisions last year was we wanted to lead the recovery, we wanted to help lead the recovery. We wanted to -- we want to get active when we see green shoots, not when the recovery is full-blown and underway, okay? And that's why we took the provisions we did. Our view was if we did that early, we focused on get -- taking our losses, taking our lumps early, the sooner we can focus on growing and making money again. And we think, if we're assessing this right, this will give us a head start vis-à-vis most of our -- basically most of our competitors. Maybe not all, but most of our competitors. And that will translate into market share gains. Now if you look at the loan book over the last 3 years, the loan book has held its market share in total. But really, when you bifurcate that, you'll see that the corporate market shares have been growing. The retail market shares have come down a little bit. So one of the first orders of the day is to regain retail market share, particularly in the automotive space and to a lesser extent, in the mortgage space. Now what we saw over the last few years is that the retail market became very, very competitive. And in some segments of that market, say, auto loans, for example, you had some smaller banks really being super aggressive. And I think -- I suspect that they're hurting for that now. So that gives us an opportunity to regain market share, to continue keeping our corporate market share but to regain our retail loan market share, which will mean growth in overall loan market share. Now as for deposits, what you'll see if you track this over the last 7, 8 years is that we have gradually been shedding time deposits, okay? Because after a while, it made no sense to keep all the TDs on our books. Then we have been growing, we have been focusing on CASA. Now the market, it needs to recover, we might need those time deposits again, and we think we have the pricing power and the ability to get them back. Also, we'd like to do a bit more work on our corporate cash transaction platform. That's looking very promising, and that will also be a source of additional deposits.

Thanks, Harsh. Our next question comes from Fio of SB Equities.

Congratulations on the results. Actually, a few of my questions were already answered earlier, but I just have one question for management. So on the -- on your thoughts on the loan growth, so do you expect recovery to be the same across the board? Or do you expect some other segments will recover better than others?

For this year -- well, I mentioned earlier that the fourth quarter of 2020 already showed very good signs of recovery in our SME book. In fact, I mentioned that our belief that our SME loan book have already exceeded pre-COVID levels. So we can only expect that to continue. And if that is sustained, SME will probably grow by anywhere between 10% and 15% this year. For mortgage, it's still going to be on the modest side because we're still seeing a large amount of paydowns, particularly in our auto book. While -- and we really don't expect a significant pick-up in demand for auto loans. But mortgage should pick up. So it should grow better than the 6%, 7% that we saw in 2020. Now on the corporate side, that's the part that's -- I think we could see a mixed bag, depends really on the requirements across the different corporates. What we could see immediately restarting in terms of demand is for working capital loans for large corp and some of the what we call middle-market corporates. For this year, all told, it's still probably going to be a modest single-digit growth in our corporate loan book. Now other parts of consumer, for example, credit cards, we -- given the caps, the cap on interest rate, it prompted us to be more selective in our credit card underwriting process, such that we will be more targeted. We will focus on existing customers as well as existing depositors. So there'll be challenge there in terms of -- compared to what we have seen in terms of very fast growth in prior years growth in the teens. So I think for this year, because of the need to balance this cap yield and the credit risk, we might just target somewhere in the high single-digit level for credit card loans.

Thanks, Fio. Our next question comes from Robert Kong of Citi.

Sorry, I was struggling with my mute. The question I have is on digital banks. I'd like to hear management's sense of...

Sorry, Robert, can you repeat that? Robert, can you repeat that? You cut out. You're cutting out. Can you repeat that?

So I'm talking on digital banks. I'd like to understand management's sense of the landscape now. So for example, we have some small banks like CIMB, ING. You also have some EMI players just like GCash, PayMaya. And I wonder if you envision that these will be the...

Okay, Robert. The digital banks still have a very, very small piece of business. Right now, we are seeing them in the deposit-taking space and ING and CIMB and others have paid pretty high rates to get their funding. The question we're asking ourselves is where do they lay that off. Our own experience here tells us that you could certainly lend digitally. But it may not be so easy to collect digitally, especially in this market. We respect, in the case of the EMIs, GCash and PayMaya, they have done a tremendous job, especially in the payments space. And I'm sure that they too would look to take all that data and lend. But we haven't seen it in a big way yet. And again, they will face the same challenge that pure digital banks will face. You can lend digitally, but very hard to connect without some form of brick and mortar. So that's our assessment so far. But 2, 3 years from now, that may change quite a bit.

Okay. One more small question. Could you just settle [indiscernible] reduction? I think you said [indiscernible] the 3.8 billion. What is the job of that? And will that potentially [indiscernible] NPLs?

Robert, we can't hear you. Robert, could you repeat that? Could you repeat that? You cut out too often.

Yes. So on restructured loans, the current number is about...

Robert, you're cutting out. We can't hear you.

You may also type your question in the chat box.

Yes. If you type your question in, then we'll if we can because we cannot -- you're dropping off. Thank you.

Okay. While waiting for Robert's question in the chat box, Danielo of Credit Suisse.

Three questions from me. You have a slide on year-on-year loan releases. At what extent do you have a quarter-on-quarter picture on this, specifically for the fourth quarter? The second question will be on loan repricing. I believe that you have repriced your loans given the rate cuts last year. Just curious if there's more repricing, assuming that the BSP wouldn't cut rates for the remainder 2021. Third question would be on the absorption of BPI Family. Can you run us through one of the things that you mentioned on that slide, the streamlining of properties? Just curious as to whether it would significantly improve loan application turnaround among others.

Okay. Tere will take your first 2 questions.

On core -- on loan releases, you're asking, Danielo, the trend in loan releases during the fourth quarter?

Yes, if there's a quarter-on-quarter number.

So what we're tracking is every single month, what are the amounts of releases, particularly across our consumer and SME segments. And what I will conclude from those numbers are, at least for SME, fourth quarter numbers are already at pre-COVID levels. So which means the -- Q4 was better than Q3, which is a good sign as these SME businesses, particularly those focused on wholesale, retail trade. So they actually restarted -- they needed working capital and we saw new releases in the segment. For the others, generally flat to slightly better. And the -- for the cards business, for example, because of the typical increase in spending and billings in the fourth quarter, so that's natural to expect Q4 better than Q3. Now on the corporate side, what we see is there's typically a demand for working capital loans for the large corporate prior to the close of the books, particularly to fix their cash levels. So we saw that as well, although we typically pay down in Q1. So the takeaway is we're seeing better numbers in Q4 versus Q3.

Then on loan repricing?

What's your question on loan repricing, Danielo?

Yes. Just curious as to how much more of your book would have to reprice for 2021, assuming that the BSP wouldn't cut rates for this year?

Okay. So there's probably 70% to 80% of our loan book that reprice in less -- in a year or less. The -- it's not so much about a trigger from further policy rate cuts. I think it's more the competitive pressure because while rates will probably be at these current levels, because of the banks seeking short-term loans from the best names, there's competition in that segment. So with risks staying at where they are, it's a question of how much more banks are willing to reduce, lower pricing, particularly in short term. So there is some pressure there, but these are typically just short-lived.

On your last question, Danielo, as to BPI Family. On average, a BPI Family Bank branch has about 3/4 of the deposits of a regular BPI branch. And the BPI Family Bank branch can't accept corporate deposits, which explains that. The BPI Family Bank branch focuses on selling retail products, retail loan products, specifically. But more than half of retail loan products are actually originated from a BPI branch. And then when you consider that more than half of the BPI Family Bank branches are within 400 meters of a BPI branch, you can understand the kinds of synergies that this combination will create.

Okay. We have a question from Melissa.

Is this from Robert or from Melissa?

From Melissa. You mentioned earlier that you would like to increase market share in retail. How do you intend to do that? Would it be through pricing? Or what other ways can you do to increase your market share?

Understand. I think we have [ JB ] on the call and she's calling in from the U.S. [ JB ], would you like to answer that?

Bong, are you referring to the question on the releases quarter on quarter?

No, no. Market share in the retail loan space. How do we grow market share in the retail loan space?

Yes. We're growing market share on the retail loan space, particularly for 2021 because we're already poised to capture the growth, having provisioned much earlier in this -- in 2020. And we have seen our auto loans releases actually tracking faster than auto sales. On mortgage, we have been moving and bringing in more releases. In fact, as you had mentioned earlier, as Tere has mentioned earlier, our releases in mortgage has been actually higher and we've grown our mortgage books in 2020. So we expect to grow 2021 even faster than 2020 as the economy opens up. The feedback on the front lines for the dealers is that the dealers had been expecting a recovery in late 2022 on auto sales as the economy improves with a vaccine already in the pipeline and available in the pipeline by the second half of 2020 -- 2021. So this is faster than what we had expected it to be originally when we started this pandemic, when our trajectory for auto would be a recovery of sometime in late 2022 and housing to be in the first half of 2022. We can expect that releases would be moving up further this year. So we can capture -- we are in a good position to capture market share for 2021.

Thank you, [ JB ].

Thank you, Bong.

We don't have any other questions in queue or in the chat box. Thank you, everyone, for your questions. To wrap up this call, let's hear some final thoughts from Bong. Bong, go ahead.

Thank you, Chinky. 2020 I think reflects a lot of what BPI is about. Nothing fancy, no smokes and mirrors, doing the basic stuff, we think, reasonably well, play a good ground game and really prepared for the future. And I think our future is a good one. We are in an important juncture in the economy. The recovery is sure to come. We want to meet that recovery. And we will lead that recovery with leadership. We are, by April, we will have a new CEO. I'm sure most of you know him in his role as CFO of Ayala Corporation, TG Limcaoco. He is a fabulous choice to lead this bank over the next several years. He's a digital-native. He is very comfortable in the retail and the corporate space. And having been CFO of Ayala for the last 5 years, he is in a perfect position to really extract synergies that we may not have extracted before. So in closing, thank you for your engagement with the bank. Thank you for your partnership. And be excited by what we can do in 2021. Thank you.

Thank you, Bong. Ladies and gentlemen, this concludes today's conference call. Should you have additional questions, please direct them to our Investor Relations and we shall respond to your queries. Thank you for your participation. You may now disconnect.