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

Good afternoon, ladies and gentlemen. Welcome to BPI's Second Quarter 2021 Earnings Call. This is Chinky Lukban of BPI's Corporate Strategy, Investor Relations and Sustainability Team. I am pleased to introduce to you our speakers this afternoon. We have BPI President and CEO, Mr. TG Limcaoco; and EVP and CFO, Tere Marcial. We will start with a few words from Mr. Limcaoco on the second quarter results and Ms. Marcial will go through the macroeconomic and performance highlights that was in the deck -- that was sent out earlier this afternoon. There after, Mr. Limcaoco will provide an update on Vision 2025, and then we will have a Q&A following that. Just some housekeeping reminders before we proceed, may we request all participants to use the login convention of your company name, first name and last name. We regret that you keep your lines on mute so as to minimize background noise. And please use the raise hand or chat functions for the Q&A session a little bit later. TG, please go ahead with your opening remarks.

Thank you very much, Chinky and good afternoon to everyone who's joining us on this call. Thank you for joining us. As you may have seen in our press release that we released Wednesday afternoon that probably hit the press on Thursday morning, we reported PHP 6.8 billion of profits in the second quarter and PHP 11.8 billion for the first half. The second quarter number was -- as the press report. It was the highest ever quarterly profit since the pandemic started. As Tere will point out, I just want to make several points on this. Our net interest income continues to remain muted, primarily because of a slow loan growth and a lower NIM. Although Tere will mention that we believe NIMs are -- have hit their bottom and should be trending upwards. She'll also be able to give you some color as to how we see [indiscernible]. And -- but we are comforted by the fact that our noninterest income continues to remain strong, particularly on the fees -- fees portion reflecting that our transaction accounts for which we derive freeze continues to grow. On the expense side, expenses were slightly higher but primarily driven by our technology expenses. And again, as Tere will point out, this really is part of our strategy to accelerate our digital build. With that, I'll leave it there. There's a lot of color that Tere will give us today. And then we'll close the meeting off today by me just giving an update, as Chinky mentioned, on some of our progress and the initiatives and the strategy for 2025, particularly around the 5 points that we talk about. So Tere, over to you.

Thanks, TG. Welcome again to BPI's earnings call for the second quarter 2021. Let me start with some macroeconomic updates. Global economic trends improved during the quarter, led by developed countries with the latest economic data all pointing to a reasonably strong economic rebound. These include higher manufacturing and services output, employment, consumer spending and overall confidence. The World Bank and IMF Global GDP forecast for 2021, now higher at 5.6% to 6%. And while there are risks, the likelihood of improvement continues to increase with global vaccine distribution accelerating. While strong economic growth has fueled inflation, particularly in the U.S., The Fed views the elevated inflation is a transitory and is keeping its monetary policy being accommodative as with other central banks. In the Philippines, GDP growth has been weaker than initially expected with a slow reopening of the economy due to the resurgence of COVID infections since March. This resulted in downward revisions in 2021 GDP forecasts now estimated to range between 4.5% to 6%. 15 months into the pandemic, the BSP has remained supportive of economic recovery by keeping policy rates unchanged, thereby providing ample system liquidity. Year-on-year, the yield curve has steepened with lower short-term rates anchored on accommodative monetary policy and higher medium- to long-term rates on expectations of rising inflation as growth recovers. This trend bodes well for bank's interest differential business with the term structure supportive of net interest margins. Since May this year, vaccination has accelerated. The spread of the virus abated and restrictions eased with the June mobility index suggesting highest activity since the start of the year. The increase in business activities is also reflected in improvements, in employment data, manufacturing and consumer confidence. Now let's move on to BPI's performance highlights for the first semester and the quarterly trends. We summarize our results in terms of 4 key areas, growth, profitability, asset quality and balance sheet strength. On growth, our results reflect our diversified businesses benefiting from an increase in economic activity as the country eased restrictions. We process more branch transactions, loan applications, debt and equity originations and remittances, and we generated higher credit card billings and positive net flows into our investment and trust products. Our revenues and operations have been enhanced by our digital initiatives and our clients' strong digital adoption. On profitability, the impact of measured reopening of the economy and lower short-term interest rates are reflected in our loan portfolio balances and in our net interest income performance. Having said that, we should highlight the sequential improvement in business activities during the second quarter, and the impact of this is reflected in the volume related and market-related revenues of the bank. Our results highlight the strength of market-leading businesses, generating solid fee income growth, which mitigated the impact of muted loan demand and lower yields. Our efficiency gains from digitalization allowed us to manage our costs, particularly manpower premises and other operating expenses. We also saw encouraging improvements in our profitability metrics. Moving on to asset quality. Overall, asset quality has been resilient. Our credit cost is declining as we booked lower provisions given the slower buildup of expected credit losses. We have a very comfortable loan loss coverage as well. On balance sheet strength, we continue to strengthen our balance sheet during the pandemic with higher CASA, a very strong liquidity and very strong capital ratios. Our operating performance enabled us to further solidify our capital position. Moving on to our profitability highlights for the first semester. We delivered a net income of PHP 11.82 billion, driven by lower provisions and robust fee income growth. Removing the impact of the onetime tax adjustment, which is the reversal of deferred tax assets, due to lower corporate income tax rate, net income would have been PHP 13.3 billion, up 15% year-on-year. Also reflected in our results are the following: net interest income of PHP 33.9 billion, down 6.6% year-on-year, attributed to lower NIMs. Noninterest income at PHP 14.25 billion, down 7%. The decline in trading income was partially offset by fees and commissions of PHP 11.73 billion, a record high, and this is up 37% year-on-year. Total revenues, PHP 48.1 billion, down 6.7%, operating expenses slightly up 3%, driven by growth in volume and technology costs. Provisions at PHP 6.5 billion, just about half the provisions we booked a year ago, which brought EBIT to PHP 17.5 billion, up 29.4%. Looking at profitability for the second quarter. We delivered PHP 6.82 billion net income for the second quarter. This is the highest quarterly income since the start of the pandemic and up 36% from Q1, largely due to lower provisions and lower taxes. Compared to last year, while net interest income and trading income are lower, this was partially offset by strong fee income, up 49% for the quarter year-on-year. Provisions declined 72.5% and net income was up 28.8% year-on-year. For profitability metrics in the second quarter of 2021, profitability improved after 4 consecutive quarters of decline. Our average return on equity increased 123 basis points to 8.44% annualized, and our average return on assets increased 17 basis points to 1.1% annualized. For balance sheet, in line with the mobility increase in June, we saw a modest expansion in our balance sheet quarter-on-quarter, with assets and deposits up slightly. Moving on to our loan book. Overall loan book stabilized in June, though the performance mixed with corporates largely accounting for the decline while Consumer segment grew. The contraction in our loan book at 4.5% year-on-year compares favorably with a 5% contraction in industry loans. On net interest margin, Q2 results reflect a sequential improvement in quarterly NIM from 3.31% to 3.32%, while modest, this could be an early sign of yields and NIMs bottoming out. We show on this slide the loan portfolio per segment. Total loan book declined given weak demand for corporate and SME loans. However, aggregate consumer loans increased with the growth in mortgage at 16% and credit cards at 6%, offsetting the decline in auto and personal loans. Micro finance loans grew 15.5%, an early sign of recovery in micro enterprises. The next 2 slides will show the trend in monthly loan releases indexed to the average monthly loan releases in 2019. The past few months show that corporate loan releases remain tepid. On the other hand, SME loan releases in June has already exceeded prepandemic levels. The consumer segment is more encouraging. As you can see on the right side of this slide, for mortgage loans, auto loans and credit card billings at the height of the lockdown in April 2020, loan releases dipped by as much as 70% to 90% compared to 2019 and have since recovered towards prepandemic level. As of June 2021, mortgage and credit card loans are near 2019 levels. Releases of new auto loans are still lower by 15%, but the trend is improving. We are back on track in repositioning our loan portfolio mix in favor of SME and consumer loans, which is one of our strategic imperatives. As of June 2021, combined consumer and SME loans were -- accounts for 24.9% of our loan mix from 23.5% in 2019, our goal is 30% by 2025. Consumer loans provide a substantial pickup in asset yields compared to corporate loans. As you can see on the right side of this table, corporate loan yields are lower from a year ago, tracking the movements of short-term interest rates as 71% of our loan portfolio reprices within 12 months. Quarter-on-quarter, loan yields for consumer loans have improved while those of corporate loans have declined owing to weak demand and high competition, which put pressure on spreads, amid an already low interest rate environment. We remain committed to increasing the allocation to high-margin assets and longer-term to repricing for sustained yield pickup. Moving now to funding. A large portion of our deposits is sourced from retail clients with strong CASA base. Retail deposit base accounted for 68.7% of total deposits in May, up from 65.3% in December 2019. We trimmed our high-cost time deposit by 43% and increased our CASA by close to 11%, bringing our CASA ratio to 83%, the highest in the past 5 quarters. The higher CASA mix, but even lower interest rates and the maturity of higher cost borrowings in the third quarter of this year should improve the cost of funds for the balance of the year. Noninterest income declined due to lower trading income, but the strong rebound in Q2 fees and commissions to PHP 6 billion, up almost 50% year-on-year, mitigated the impact of lower trading gains. For fee income, our diversified businesses allowed us to capture growth as the economy recovers and supported revenues, notwithstanding the contraction in loan balances. The contribution of each business to total noninterest income is shown on the left chart and the year-on-year growth of their income is on the right chart. It was a remarkable quarter for all fee-based businesses reporting strong performance. Starting off with credit cards, fees almost -- up almost 30% year-on-year on increased billings and charges. Credit card loans up 6% from a year ago. Asset Management and Trust business reported 25.8% year-on-year income increase. The increase in AUM, 16% for Trust and 27% from Mutual Funds includes the impact of higher market valuations as well as net fund flows driven by strong demand for alternative investment outlets amidst the low interest rate environment. Fees from service charges up almost 38% from a year ago, reflecting higher transaction volumes and resumption of regular fees and charges with expiry of forbearance measures accorded by Bayanihan 2. For ATM -- fees from ATM and digital channels, up 102%, with higher revenues from digital fund transfers and open banking partnerships as we continue to expand our digital offerings. Retail loans likewise increased as the number of applications for auto, mortgage, personal loans increased by more than 100% from May 2021 compared to May last year. Fees from securities, brokerage and investment banking up 70% from higher commissions and stock transactions of retail clients, up 175% year-on-year and higher advisory and underwriting fees on a significant number of important deals. Operating expenses for Q2 increased by 8.8% year-on-year and 3.9% quarter-on-quarter, largely due to higher tech spend and volume-related expenses. Cost-to-income ratio increased to 51.6% in Q2 and 50% in the first half as we remain committed to sustain our investments in digital platforms and infrastructure. We want to accelerate the pace of putting product enhancements and new system functionalities more so now as the pandemic has changed the way customers interact with banks. We plan to spend 10% of revenues building our digital platforms. Our first half [ tax ] spend to revenue was 8.2%. This includes BAU and new digital initiatives. Expenses in premises increased as all branches are now open compared to last year when the country was under stricter lockdown. Manpower costs slightly increased due to one-off CBA-related expenses, partly offset by lower headcount. We continue to make progress on -- in our efficiency initiatives in our branches, doing more transactions, servicing more clients, yet with lower headcount and less branch footprint. We do this with increased digitalization, enrollment in our digital platforms and the number of active clients are on an upswing now at PHP 2.93 million. Transaction volumes continued to shift away from branches with 91% of transactions done digitally, from 90% a year ago and from 85% pre-pandemic. More importantly, these efficiency gains, coupled with continuous product innovations and HR transformation contributed to our higher customer service satisfaction and Net Promoter Scores based on recent surveys. While there is a lot of uncertainty, there are encouraging and improving trends related to asset quality. We booked PHP 2.9 billion in Q2 provisions, the lowest for a quarter since the beginning of the pandemic. Our Stage 2 ECL dropped 32% in last quarter, reflecting our improved economic outlook. Credit cost is beginning to normalize at 100 basis points annualized. This is about half of last year's credit cost. NPL ratio slightly up 26 basis points to 2.94% and our loss coverage ratio at 120%. Restructured loan ratio stable at 1.4 from 1.1 in the previous quarter. Our asset quality compares favorably with the banking system averages. Next, our capital position. Our strong capital position improved further with earnings accretion and declining risk-weighted assets. CAR improved 24 basis points to 17.8 and CET 1 improved 24 basis points to 16.95 and both well above regulatory requirements. This gives us sufficient headroom to take advantage of growth opportunities. So let me summarize some key takeaways. One thing is clear, the bank has grown even stronger during the pandemic. For profitability, first, core income, lower net interest income on muted loan demand, but NIM may have bottomed. Second point, on noninterest income, we showed record fee income reflecting broad-based recovery. On operating expenses, this is driven by tax spend and growth in volume of transactions. On provisions, this is the lowest since the pandemic, reflecting lower NPL formation. As to balance sheet for loans, consumer loan releases are now approximating pre-COVID levels. For asset quality, it remains resilient better than banking system averages. On deposits, strong CASA growth from solid retail base. And capital, we further improved and this is supportive of our strategic growth opportunities. So while short-term profitability will remain constrained by credit demand, the Philippines economic rebound is sure to come, and our businesses are well positioned to enable us to deliver sustained earnings growth as we execute on our strategic initiatives. So now I turn you over to our CEO, TG Limcaoco for an update on our strategic initiatives.

Thanks very much, Tere. Allow me now to talk about the strategic imperatives that I first laid out 3 months ago. Looking forward, we are -- we continue to take steps that I believe will future-proof the bank. Over the medium term, this is what we had set out to achieve. Our key initiatives include the -- establishing ourselves as the undisputed leader in digital banking, increasing the share of the SME and the consumer loans in our loan book as earlier discussed by Tere. We aim to close the gap in the funding leadership. We hope to be using our branches as sales points more than just service points, and we will continue to promote sustainable banking. All of these will continue to be underpinned by what we call the passion for the customer and my desire to improve the customer service experience at the bank. The goal is to leverage our digital assets and capabilities across all our businesses. The focus for this year is to sustain the growth of the platforms we have. To do this, we will have to deliver breakthrough capabilities. We will need to provide features that will deepen the relationship of our customers with the bank. We will need to modernize our platforms and we will continue to support major bank initiatives. What we did in the first half of this year is we established 13 new partnerships, including BPI to cash partners that provides clients with more pickup locations for cash, ability to move cash from an account to an off-site location by delivery. Our total partners for open banking now count 74, and total brands and services that are offered in our open banking is 749. We established 6 new payment gateways including something we call BPI EADA or electronic automatic debit arrangements now with 31 billers, which allows people to set and forget recurring payment arrangements using BPI online accounts. We also set up the BPI e-Gov portal, which allows clients to pay more than 300 government offices and agencies online. In just 2 months from its launch, the BPI e-Gov portal has overtaken other service providers and continues to be #1 in transaction value account. We have also launched our new 2 product account opening and a new-to-bank onboarding capabilities. The latter one, new-to-bank allows people who are not known to the bank to open an account completely digitally. For the remainder of the year, we have 9 new API partners lined up. We also target to tap new markets by integrating with GCash. We plan to launch applications for credit cards and personal loans in August, as well as deposit products and investment products through GCash by the fourth quarter. We will also be launching a BPI Wallet and the financial services platform -- and a financial services platform designed for SMEs and entrepreneurs that will allow them to open accounts, transfer cash, pay bills, manage their portfolios and deposit checks all online. Also this year, our digital footprint will expand regionally. First in the pipeline is Singapore. We will continue to strengthen our position in the digital ecosystem by building seamless customer journeys, facilitating higher transaction outputs and driving repeat transactions. With our open banking APIs components in place, we continue to be a pacesetter for open banking in the Philippines and in the region while growing our ecosystem and digital revenues. As customers adopt digitalization and shift away from doing business -- doing transactions at the branches, we will continue to rationalize the number of our branches through either colocation, consolidation or relocation. As of June, we have already 24 branches co-located, an additional 35 branches have been identified for co-location. This process is ongoing and more branches will be added to the list especially with the forthcoming merger of BPI and BPI Family Bank targeted to close January 1 next year. And because customer preferences and needs vary, a significant chunk of the remaining branches will undergo physical transformation, and it will be segmented depending on the unique preferences of the customers within the cluster. There will be formats designed for high net worth or corporate, for retail and hybrids of clients. We have started retraining our branch personnel as their roles transition from the transactional to high-value activities, such as sales and advisory. This is a step forward in our mission to deliver delightful customer service. As the main operating bank of our corporate customers, the focus of our [indiscernible] platform for corporates is to accelerate growth and adoption, empower end users with self-serve solutions that help them manage their accounts and lay the foundation for a digital ecosystem while deepening client relationships through multiproduct offerings. The amber box on the slide shows the major transaction platforms that are in place and being worked on. For SME, for BanKo, our microfinance and for the BPI E-Wallet and updated securities brokerage trading platform for clients. Our online or mobile new-to-product and new-to-bank features allow clients all digital account opening. This provides simplicity and sign-ups. No need for paper applications, in-person signatures or visits to the branches. The system also has the capability to detect fraudulent IDs. We have processed more than 33,000 applications for new to bank which is a respectable turnout even without a promotion or formal launch, which we intend to do in the first week of August. Our unique onboarding process is able to detect potentially fraudulent identifications and customer identity, ensuring good quality of customers. Part of our funding leadership comes from optimizing our funding costs. 2021 initiatives include rationalizing our deposit products and tapping alternative sources of funding for our capital market maturities. At BPI, we are committed to responsible banking and responsible operations. As part of our Trust for Sustainable Banking, we have laid out here our 2021 key initiatives. We aim to become the most financially inclusive bank through our microfinance arm, BPI Direct BanKo, currently #2 among micro finance banks in the country. We have a robust business model, an expansive branch network and manpower to serve more than 100,000 clients at manageable NPL levels. As part of our digitalization efforts, BanKo will also be getting its own mobile app to bring our services to more of the unbanked. In early 2021, our Board approved the bank's sustainability agenda. And since then, we have embarked on making ESG part of how we do business. We are in the midst of setting our short, medium and long-term goals. We have also rolled out sustainability training for our employees. Finally, through BPI Foundation, we have various projects and initiatives geared towards social upliftment of our communities. Here at BPI, we've walked the talk and have made 2 big commitments in 2021. Number one, signing up as a supporter of the TCFD or the Task Force on Climate-Related Financial Disclosures. Two, putting in place a policy to zero out coal power plant financing by 2032. All this we do with the customer first and foremost in our minds. To be able to address their needs, we are working on various platforms, such as social media chatbots and the 24/7 health and support portal. We have also dedicated teams in the bank focused on improving customer experience, customer process and their service culture. We are confident that doing so will make BPI ready today and ready tomorrow. Let me end here as we open the floor to questions.

[Operator Instructions] We have a question from Robert Kong.

Two hopefully straightforward questions from me. Number one, maybe could you update your NIM guidance and outlook. I think you were suggesting that NIM [indiscernible] cost of funds could continue to be low because you are reducing further, I think on the extensive borrowings. And it sounds like you may also take advantage of the term structure to help improve some of the yields even with relatively sluggish loan growth. So some update on the NIM outlook over the next few quarters? And the second one is simply an update on your asset quality outlook. It seems like you are tracking well below the previous peak NPL guidance of 4%. Could we assume that if we continue on this trend that the current provisions, which I think was less than PHP 3 billion in the second quarter, is that now the new normal? Are you quite confident or some guidance on that would be helpful.

Thanks, Robert. Sorry. Thanks, Robert. Let me make a couple of points, and then I'll turn it over to Tere with the full numbers. You're absolutely right. We think NIMs may have bottomed out, but it's really also part of our strategy to try to increase -- to use the term structure of the yield curve, try to pick up some more assets at the longer end of the curve, to build up the asset yields. We also have a fairly sizable capital market maturity in September that we don't intend to refinance using capital markets as we are fairly liquid, and we will finance that with just deposits. So that will bring our cost of funding significantly lower. Tere can talk about our ECL, even our Stage 2 numbers, and that's why our provisions are lower. Let me do point out, Robert, that even at these levels, they are significantly higher still than pre-pandemic levels. Tere?

Yes. Just to add, Robert, in terms of NIM guidance, as TG pointed out, since we are -- we think NIMs may have bottomed, the third quarter will show some modest -- some further modest improvement in net interest margin. And that's coming from lower cost of funds because of that bond maturity at over 4%. And we think yields will continue to pick up, given the trends in inflation and the long end of the interest rate curve. If you will look at our first half NIM performance, that's actually down 24 basis points year-on-year as we see improvement in Q3 and Q4, that decline will narrow, such that our own internal guidance is for a NIM contraction of about 10 basis points year-on-year, coming from 24 basis points in the first semester. As to NPL outlook, as pointed out by TG, we are actually seeing improvement in terms of our ECL numbers. Improvement, meaning lower expected credit loss. In fact, for the month of June alone, which is quite encouraging, we saw a PHP 3 billion drop in ECL, and that came from across all credit segments. The biggest contribution of which was corporate. And if you will remember from our previous guidance, we said we will possibly peak at 4% NPL. So far, first semester, we're at 2.94%. So far, we don't see any big potential accidents that could happen in the third quarter. So hopefully, we will surprise on the upside in terms of NPL ratio. But that said, we want to be more conservative. We are still keeping to the internal target of 4% NPL and about PHP 15 billion provisions. And we'll see. We'll see if there's room to dial it down, which will surprise net income on the upside.

Next question comes from Melissa Kuang of Goldman Sachs.

Perhaps maybe just a little bit on the loans growth, those momentum has picked up slightly. You have given like a 5% to 6% loan growth guidance for the year. I guess last quarter, you did mention your like not to meet. Where do you think loan growth would be for the year? And what needs to change for you to be a bit more excited in terms of writing loans again? Yes. That's my first question. Then in terms of the second question, you mentioned in terms of your online or mobile app that you are doing this to cater -- and it will have some difference in terms of catering to different segment of wealth or income levels. How is that done in that? And let's say, if the person graduates from one income segment to the other, does it immediately open up certain functions for the well -- for the individual and then you can kind of cross-sell? And then maybe lastly, you talked about you had this government e-billing which has done pretty well. Is that generating fees? Are we going to see some of these initiatives that you do bring about a stronger fee income growth?

TG, you want me to answer that?

Yes, why don't you take the first one and I can take the digital side.

Okay. So yes, that's right, Melissa. We actually earlier guided for about 5% to 6% loan growth. But with what we've seen in the first half where we are at minus 4.5%, in the industry at minus 5%, we have revised our internal target to flat loan book. So we'll be happy to see our gross loans at about 1.4% -- sorry, PHP 1.4 trillion was our level as of June. And we'd like to recover what we've lost year-to-date. So we'd like to see it flat. And we think aside from the momentum that we are seeing on the consumer side, and that is substantiated by the healthy loan releases across all parts of consumer. We really do expect that with the reopening of the economy, a lot of corporates are already talking to us on resuming, filling their funding requirements. So we do expect some significant corporate loan buildup in Q3 and Q4, and that will fill the gap to get us to at least the same level as 2020. Where do we play particularly on the corporate loan side. We're really going aggressive stretching the maturity profile for the very top corporates. In fact, this still gives us very, very good pickup in terms of yield, considering that we're only placing with the central bank at about 1.5, 1.75, and we are teaming with liquidity. So as we channel these to the very top names, we would easily pick up 200 basis points. So that's where we want to take advantage of grabbing market share on the corporate side. TG on the digital?

Yes, I think, Melissa, also on the consumer side, we're seeing very strong growth on the mortgage primarily because we are being very aggressive, not only on the very retail side, but I'm trying to pick up packages by buying CPS from major developers. Because we have the ability. We're now demanding from the developers that we be given information as to how -- how many of these clients are existing BPI clients. And therefore, we have a very good read on how many of these -- these buyers who have existing contracts with developers, we can really transform into end-user financing. And so we're being very aggressive there. On the digital side, the strategy here is, as Tere mentioned in her presentation, is that we will have several platforms for different client bases. Today, we have a platform for what I would call the generic retail customer. But soon, we should have a platform for the microfinance customer and for the high net worth customer. And it won't be a single platform, it will be 3 different platforms. And the way a customer would graduate would be really -- they could really pick whichever platform they want to use. The typical retail customer will have access to the retail platform, a high net worth will be given access to the high net worth platform. But a high network client could also use the retail platform if he or she wanted to. And it really -- we will just have more features and more investment-linked offerings on the high net worth platform. The other question on the e-Gov portal really is a partnership with -- using our open banking platform. We have APIs with a partner that has all the links with the government. And yes, it does generate fees for every payment.

Can I just follow up in terms of -- back on the loan growth a bit. You did mention that you look to grow corporate and that will help in the pickup of yield. But I just want to understand how aggressive are pricing nowadays? Are we able to keep to pricing and not go back to the old days where everybody has been very competitive. Would we be able to do that, the whole NIM so that we can kind of translate that to ROE when we do have credit costs come down as well?

Yes. I think we'll continue to be disciplined, Melissa. I think -- it's very clear that the credit spreads have narrowed for the top corporates, but we are still very disciplined about our pricing. Pricing has to be justified both from an alternative use on the risk-free rate with the treasuries but also a decent credit spread. But I think because of the liquidity situation where the market is extremely liquid, I think people have accepted that for the very top names, credit spreads have significantly come off.

Our next question comes from DA Tan of JPMorgan.

A couple of questions from me. First, on digital. You did mention quite a few projects that you are doing, for example, the partnership with GCash. I'm interested to know if you've basically you have a sense of the revenue opportunity that these projects will give you guys. I do know, I think, if I'm not mistaken, currently digital channels are contributing around 3% to 4% of noninterest income. Is there a target for that number? The second thing also on digital is the cost implication. I think that I mentioned earlier that we are expecting digital expense to move to 10% of revenues. Is that something you should expect, say, second half of the year and for how long? I'll stop there first.

TG?

Yes.

Yes.

Yes. The first question is, first of all, we're looking at the digital -- the partnership with GCash really as a customer acquisition. The first thing that we will be doing with GCash is on the personal loans and the card acquisition. So there that's purely incremental because the cost really is a commission that we will be paying to GCash for every acquisition. So that should be accretive from the beginning. The second thing that we will be doing in terms of with GCash is probably -- as I look at the timetable is to put the investment -- an investment -- some investment products online. And again, that is just building up volume. And the way we look at it is, we have the product on board already, and it's just a matter of fee sharing with GCash. And therefore, these are clients that we would not have otherwise been able to access because it will be a smaller amount. And therefore, again, that's all incremental. And then on the third, really, as we get our deposit product on board, that is a deposit acquisition business that we feel will allow us to tap again clients that otherwise would not have been able to come to us. And therefore, I think we look at that as cheap funding, relatively cheap funding as well because we're not -- our strategy with GCash is not to offer the high rates that you see that they're offering now. We're offering 8 different alternatives accounting on a -- a product variant and the name BPI to attract customers. As to exact peso amounts and profitability that you're asking, I can't give that to you today. The other question is in terms of expenses. We look at it as 10% of our revenues going forward in technology. But you have to remember that includes our BAU. And a lot of the expenses we booked are also part of the operating expenses. So many of the systems we're putting into place have variable costs as well. And it's the way we basically classify the expenses that go to supporting our technology platforms and our technology initiatives. Much of it is also is variable cost.

If I may follow up, I mean the 3% to 4% share of digital [indiscernible], you don't have any specific targets around that?

Not today. Not today.

Okay. I do have a separate question. This one on the rationalization of deposit products, which you mentioned. We do notice that your cost of funds still significantly higher than some of your peers. I do think that's because of some of the special savings products that you guys have. So are those things going away and how soon?

Yes. We rationalized, for example, we have a special savings from Maxi Saver account that if [ depressed ], we are rationalizing that. We have set a higher limit of PHP 5 million, if I believe or PHP 2 million, I can't remember, down from the PHP 50,000. So that's the first initiative, as that thing -- as the market begins to absorb that, we're looking at other -- we're looking at rationalizing other products, other deposit products.

Okay. We have some questions in the chat box from Rachelleen of Maybank, although her first question was I believe answered about loans. Her next 2 questions are on manpower. Manpower saw significant reductions, is this part of BPI's restructuring plans as you transition more towards digitalization? The second question is what do you think is a sustainable growth rate for your fees business?

Tere, do you want to take the -- yes.

Yes. So for manpower, yes, as TG pointed out, we're really seeing a major transformation in our branch distribution strategy. And that entails a significant reduction in the branch footprint over the next 2 years. It has already been kicked off with the recent colocation of branches, 24 and 35. And we see that number going to about 130 in a space of about 2 years, hopefully, earlier. So that translates to a reduction in headcount and manpower cost, but the whole HR transformation initiative that we're doing is because we want to keep the people, we will retool them in doing other functions, whether it's sales in the branches or elsewhere in the bank. Of course, it won't be a perfect fit. At the end, it will definitely generate manpower cost saves after initially after the 2-year branch rationalization program. In fact, you will see in the first half results that we're just showing very modest increases in every expense line with the exception of technology, given our massive push towards investing in our digital initiatives. What do you think is the sustainable growth rate for fees? Let me point out that if you look at the first half, it's not in the slides, but we dissected the components of our fee income and we carved out the fee-based businesses that are directly attributable to digital. And that number grew by between 50% to 60% year-on-year compared to the total fees, which only grew 37% year-on-year. So that is an indication of higher sustainable growth rates for fee business as we continue to push this digital offers and as we add new functionalities. So I would say a 20% growth target in the growth phase, which is the coming 3 years post recovery. Of course, there's still a lot of caveats. But as we hurdle this pandemic, we do expect a decent pickup across all fee-based businesses. And for digital fees alone, it's going to be at least 20%, given the new functionalities that we're putting in place.

The next question comes from [ Bo Kunpale of MT Asset ]. What is your view on rising cases from the delta variant and the impact on BPI?

Well, obviously, we're worried about the delta variant. Today, the government announced that there will be added mobility restrictions in Metro Manila after days of saying that we were over the hump. So clearly, delta is a threat. For me, it signifies that my optimism that we could go to normality by early next year, might be at risk. But that said, at BPI, we still intend to get all our employees fully vaccinated by the end of August. We believe the vaccines are arriving under our program or together with the LGU programs that our employees are using. The delta variant, its effect will really, really be dependent on how well the government rolls out the vaccination program and allows us to open up the economy. I think you need to be realistic. This thing isn't going away. And we're just going to have to learn to live with it. So the sooner people get vaccinated, the sooner we accept that and live with this whatever variant it is, the sooner we can get back to normal or some sense of normality. So for me, it's really the threat that we may not open or the economy may not be as open as we had thought by the first quarter of next year.

Our next question comes from [ Marvin Abordo ] of [indiscernible] Securities. This question is related to the decline in loan portfolio. Is it a function of weak loan demand? Or is it due to loan payments, higher versus loan approvals? In terms of stricter credit assessment or criteria, how will this improve moving forward?

I think, Marvin, it's all, right. It's a combination of everything. You have -- certainly, I think loan demand is fairly weak among the top corporates because I think many of them have funded themselves previously. And until the economy shows signs of opening it up, they're not going to rebuild their inventory. They're not going to be making their CapEx investments. So that's weak on that side. In the meantime, people are able to pay off their loans when -- for many of them, and that's causing -- especially on the consumer side, that's causing flat growth, particularly, let's say, in auto. And then on the SME side, that also is causing a decline on the SME side as people are paying off their loans. Have our credit standards -- have they been raised? I think, yes, you'd have to be a responsible bank. In a time like this, you've got to have stricter credit standards, but we have not closed. We continue to look at credits. We continue to release loans to all sectors. And it's really a question of understanding who the client is. But really, it's just -- in general, it's loan weak demand that's causing the -- for us to say that this year, we're just targeting to be flat loan growth.

Our next question comes from Selvie Jusman from Morgan Stanley.

I just have one question with regard to the digital [indiscernible]. I think you laid out quite comprehensive plans there. But I just wanted to understand, TG, from your perspective or your thoughts, what is the digital landscape in Philippines right now, especially with the emergence of digital banks as well as like the fintech players, which could potentially attract the many -- the different aspects. And I think Philippines is also an area whereby there's a financial improvement agenda. So I just wanted to get your thoughts on it. And also in terms on the partnership with GCash, it is not an exclusive partnership, is it? Yes, so that's my question.

Yes, I'll take the second one first. Yes. No, it's not an exclusive partnership. GCash is an open platform. And as I've always said, I see GCash as a distribution platform that BPI will play on. If anything, I hope our relationship with Globe and my relationship with the GCash people will put us in a favorable spot. But it -- no means is it exclusive on their end or on our end. I mean, we are also talking to PayMaya as well as we have -- for example, we are looking at selling some of our insurance products on Shopee, that's ongoing as well. The digital landscape is fairly fluid now. There are a couple of digital banks that have launched. I think they've made some noise. They've gathered fairly decent amount of deposits for what -- for a very limited launch. And you can see it because they've quickly lowered the maximum amount or lowered their interest rates very quickly. And we see the numbers as they flow out of our deposits. It's nothing to be worried about yet. But they do have an advantage in the sense that they don't have the legacy brick-and-mortar. They don't have legacy systems that they have to integrate with. They also have the ability to move very quickly, which I call the unfair systemic risk, right? For someone like BPI or my peers in the large banks, we have to be extremely careful because anything we do on the digital platform affects our core banking system as well. And a mistake on the system side will cause pain all across the system. And when we go down for 4 hours, we get hold to Congress. And if you get one of the digital banks going down for 2 days, I don't think not much noise is made to be honest. So there's that kind of inequality. But it's open season. Everyone is trying to look at different models. We're toying with the model of can we develop a business model where we just have a bank or an app that's purely used to source deposits because we have the ability to generate assets from our mortgage book and from our auto book that we can put in that. So there's a lot ideas going around. We also looked at the ability of [ acquired ] customers, whether it's GCash or PayMaya, once we get them on our platform, we can cross-sell all types of different products because they become part of our customer base, right? One of our biggest trend is the ability to cross-sell products. And then finally, I'm really excited to find out what happens when we launch our new to bank, full blast with all the marketing come August. Because today, as Tere said, we just put the little tile on our app, and we have 33,000 applications or 33,000 people who have tried to open a bank account. And that's without any publicity at all, people just finding the tile.

Our next question comes from Danielo of Credit Suisse.

Hello?

Yes, Daniel.

I have 2 questions. Actually, the first one is just wanting to clarify or get some color on this. Mortgage loans have been strong for the past couple of quarters. Maybe you can provide additional information on that, i.e., what's driving the resilient growth. I'm actually curious if all of the loans booked in 2Q are from new applications or whether there are some deferred bookings from previous quarter even from last year. Second question is really a follow-up on digital banking. There's been a couple of questions on it already. But what I'm most curious about is whether there is a need to set up a separate digital bank unit as what the midsized and foreign banks are doing. If not, what are the advantages of doing digital banking under the parent Universal Bank? That's all.

Ginbee Go, who runs Family Bank and is responsible for the mortgage portfolio, I think is on this call. And if she's available, I'd like her to answer the question, Ginbee?

Okay. Thank you. Thank you, TG. Danielo, on your question as to where we are sourcing our mortgage applications, whether these are different applications. All of these are new applications. We do not differ application processes -- processing because we, as a customer-centric bank, we want to make sure that we are able to turn around the applications of our clients as they expect them to be. So all of these are new applications. And a large part of it is really still from regular housing loan applications from our tie-ups with developers. Still, a portion of it would be coming from branch generated accounts. But we have seen recovery of our externally generated, meaning, broker accounts and developer accounts to be faster growing simply because our branches had been -- some of them had been closed during the pandemic. But as TG mentioned, the biggest growth is really coming from our wholesale purchase of receivables from our developer partners. And really, this is in support of the liquidity that is needed given the Bayanihan has pushed back some of the payments.

And Danielo, so to just round it out to talk about what's the advantage of a digital bank. I think the digital license as provided by the BSP really only -- their quick advantage is that it's a completely new bank and that gives a couple of advantages. One, there's no need to integrate into an existing core banking system. And therefore, the expectations of the customers are pretty low. In fact, if you ask a customer, let's say, of Tonik Bank, how they expect to get their money out of Tonik Bank, they -- I would suspect many people haven't thought it through how the money gets withdrawn. It's easy to put the money in. It's a little bit more cumbersome to take the money out because they don't really have channels. . The other thing about it is a quirk -- in the way we tax deposits or the documentary [ stamp ] tax on deposits. Anything that's significantly higher than your lowest rate and there's a definition of significantly higher attracts doc stamps. And so therefore, a bank -- a completely new bank can start afresh and have their deposits, their minimum deposit at 2% and that would not attract doc stamps, whereas a legacy bank like BPI, if we were to put up a digital channel that who try to attract high interest rates. Those -- because of our legacy passbook accounts and a very big CASA, anything we did significantly higher than the 12 basis points we pay now would attract doc stamps, which is quite significant because that's 70 basis points per annum. So you need to work around that. The way we look at it is we can't call ourselves a digital bank by license with the BSP. But we have digitalized a lot of our processes, digitalized the way we interact with our clients and digitalized the way our clients can come on board and service their accounts. And we think that that's a proposition. Would we set up a digital bank in the future or something similar? That's open for discussion.

We have a few more questions. First, from [indiscernible], can you talk about the write-offs and the restructuring you've done so far? What sectors and segments are -- were they from?

I'll answer that, Chinky. So far for the first half, a big part of the write-off came from our credit card business, personal loans and some micro finance loans. And that's not surprising. Typically, in a year, credit cards and basically the whole unsecured loan segment really account for a good bulk of our total write-offs. In terms of restructuring, we're seeing really across various segments, but really in the hospitality and some midsized real estate, we're seeing that. I don't know if John-C would like to add in terms of additional sectors?

Sure. Hear me okay, Tere?

Yes.

Yes.

Yes. So I think very clearly, what Tere began to say, the most severely affected for corporate banks book, the most severely affected areas or, of course, were travel entertainment. So we've seen a lot in that area. And the way we're trying to look at it is for those who are doing well, prepandemic, we're definitely entertaining and supporting the restructurings of those loans. There are sectors that have -- that will change in terms of the fundamentals going forward, post vaccine and post pandemic mobility. So those ones were being more conservative on. But generally, it's those sectors that were hardly -- that were hit hard. And for now, we're calling it a setback or a timeout period. So that's -- and we've been supportive to those clients. The most prominent, which we publicized, obviously, is Cebu Air. We did several transactions for them to be able to help them through these crisis.

Just to add some names also in the Construction segment. We have some restructuring there.

Our next question comes from John Te of PEP.

I know we're over time. Just a very short housekeeping question. On the slide on operating expenses. We've seen consistently that headcount in branches are down quarter-on-quarter and yet the cost base has actually increased quarter-on-quarter for these 2 accounts. Any color on that? Or is that something accounting related? And maybe just a follow-up. Any guidance on where cost growth might be for the entire year? That will be all.

Is it John or DA? I'll answer the second question first in terms of full year cost guidance. We're looking at maybe somewhere between 5% and 6% in terms of full year cost increase. And that's really more focused on our additional technology spend because for other expense lines, we're seeing that only the increases are between 2% and 3%. For the second quarter, in terms of some one-off, we just really concluded most of our CBA negotiations and that accounts for some one-off increases in our manpower expense for Q2.

We have one -- a couple of questions from Christina Ulang, related to branch rationalization. What will be the branch count after the 2-year rationalization effort? How much is the reduction? And any estimate on manpower savings? The other question is how much was the income contribution of the investment bank in the first half?

For branch count, initial phase of our branch rationalization will probably bring our -- we right now have about 868, 869 branches. This excludes our microfinance branches. If we successfully bring down this number during the first phase by 130 branches, so that brings us to about 740. But we think this could be a minimum number. It might be lower than that. What's the second question, Chinky? Chinky, what's the second question?

Manpower savings from the branch rationalization?

Rationalization.

Well, in terms of savings, so we're still analyzing the impact because, as I said, they will be retooled and they will be retrained to do other functions within the bank. But there will be savings from premises. So not too much in manpower, but there will be savings on lease expenses and some other premises-related expenses, basically the cost -- the hard costs of operating a branch. So that will be used to invest in what TG explained as new digital -- sorry, new branch formats. So as we refresh branches according to, let's say, there could be a corporate branch or a high net worth branch or a retail branch and so on. So we'll use the savings from this rationalization into the new branch formats.

The follow-up question, Tere, is how much was the income contribution of the investment bank in the first half?

That's right. So the first half, our investment bank showed very strong results, combination of our underwriting, advisory as well as securities brokerage, which is under BPI Capital, that accounts for about 5%, 6% of our first half fee income.

We have a final question from [ Derrick Guarin ].

Sorry. Just one question. Are there any developments in BPI stocks with [ Citi ] in acquiring the latter's retail business?

Derrick, yes, but there is an NDA, so we really can't talk about it, but there are developments and their discussions continue. I did want to add to what Tere said. There have been many questions about the manpower issue [indiscernible] the branches. I think let's just put it clear on the table. At BPI, we're very careful when we talk about implications of our people. While the intention clearly is to retain as many of the people, I think we are going to close 135 branches to [indiscernible] branches because, there will be a person impact. I will try to redeploy as many of those people into new roles in sales and things like that. The reality is not everyone will be able to learn and be able to perform to that standard. And then those will have just to deal with those people going forward. I just wanted to put that on the table.

Thanks, TG. I think that was our last question. Any final thoughts from TG before we close?

Thanks, Chinky, and thank you, everyone, for being on this call. I think Tere has provided a very clear picture of where we are and where we hope to be going forward. I think for us, our mission is clear. We are targeting to end the year with loan growth flat versus last year. That's recognition of an economy that hasn't opened up as we had expected. We do expect NIMs to expand versus what we saw at the start of the year, and we think it's bottomed out. And that will be driven really by our ability to change our funding mix and also to be a little more aggressive on the asset side as we try to build up the loan book and term out the loans and ride the yield curve structure. I think we continue to make investments on the technology side. I'm a big believer in the digital feature of this bank. The team, the digital team has worked very hard to bring more and more of the apps on board and the capabilities of these apps. We have also, together with Tere, we've streamlined the process internally to onboard and to get approval for these new expenses, the development to bring the technology out sooner rather than later. We've also internally given goals to certain businesses and ownership of these apps to make sure that the goals and the objectives of these apps are met. I think that bodes well. Happy to say that we are working on partnerships across the board, not only with GCash but we've begun talks with PayMaya also on some of the products with the insurance side as -- has begun talks with some of the major platforms to also begin selling some of those products. I think in the end, we're a big believer in open banking and open finance, and we will leverage that. And really, our advantage here is the fact that we have a name. And then we have the customer base that we can sell to. And we just like to expand the customer base in the most efficient way possible. That's it, Chinky, and thanks to everyone for being on this call.

Thanks, TG and Tere. Ladies and gentlemen, this concludes today's call. Should you have additional questions, please direct them to our Investor Relations mailbox and we'll be happy to respond to your queries. Thank you for your participation. You may now disconnect. Good afternoon.