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

Good afternoon, ladies and gentlemen. Welcome to BPI's Third Quarter 2021 Earnings Call. This is Chinky Lukban, Head of BPI's Corporate Strategy and Investor Relations. I am pleased to introduce our speakers this afternoon. We have with us this afternoon, BPI President and CEO, TG Limcaoco; and Executive Vice President and CFO, Tere Marcial. We will start with a few words from Mr. Limcaoco on the third quarter 2021 results, and Ms. Marcial will briefly go through the presentation deck that was sent out earlier. Thereafter, we will have a Q&A session and wrap up with some final thoughts from Mr. Limcaoco. Just some housekeeping reminders before we proceed. [Operator Instructions] We can now proceed. TG, please go ahead.

Thank you, Chinky, and good afternoon to everyone on the call. Thank you for joining us today after we report our third quarter numbers. Allow me to make a couple of comments before I ask Tere to go over our financial results. And as Chinky said, I'd like to provide everyone with an update on our digital initiatives. Our results, I think, are generally in line with expectations. The revenue numbers, the net interest income numbers were a little weak, driven by lower NIMs. But I guess, helped a little bit by, but we're now seeing growth in the loan book, there's a little growth in the loan book, but also helped by a strong fee income, which muted the relatively lack of trading income. Our provisioning continues to be on target as we budget. Our coverage is now healthy at 130%, which leaves us room to enter 2022 with a very strong balance sheet. And then finally, also want to highlight that we showed very strong growth on the deposit franchise as we grew our deposits significantly in the third quarter. With that, let me allow -- turn it over to Tere and then I'll come back later to talk about our digital. Thanks. Tere?

Thank you, TG. Thank you, everyone, for joining BPI's third quarter earnings call. I will start my presentation with a brief macroeconomic update. The global economic recovery continued into the third quarter, but the momentum has weakened. The IMF slightly trimmed its global GDP growth forecast for 2021, from 6% to 5.9%, citing concerns on supply constraints and rising inflation that may limit policy support. Nonetheless, economic growth prospects remain intact. Global inflation rates have increased rapidly and, in most cases, reflect pandemic-related supply disruptions and higher commodity prices compared to their low base from a year ago. In contrast to its dovish views in the second quarter, the U.S. Fed stated that it will soon begin to slow the pace of asset purchases. Major central banks delivered a similarly hawkish tone. Amid these prospects, U.S. yields increased to levels seen at the beginning of the quarter. Philippine economic growth forecasts were also revised downwards. We estimate 2021 GDP at 4%, down from 4.7% in the middle of the year and 7.3%, as we earlier forecasted at the start of the year. Nonetheless, we expect economic recovery to continue given the positive developments on vaccination. Latest economic data points to a rebound, with the Purchasing Managers Index reflecting sustained economic expansion, now at the highest level in 6 months. Increasing global goods demand has sustained the growth in exports, while unemployment rate, which increased in July due to mobility restrictions, may recover in the coming months. The BSP kept monetary policy rate unchanged despite inflation hovering around -- above its 2% to 4% target. Year-on-year, the yield curve has steepened with lower short-term rates anchored and accommodating monetary policy and higher medium- to long-term rates on expectations of rising inflation. Much of the increase in interest rates happened in September and are yet to be reflected in asset yields. The prospects for increased economic activities and higher interest rates bode well for net interest income going forward. We have seen meaningful progress in the country's vaccination program. The country's COVID cases appear to have peaked in September. And with the slowdown in surge of COVID cases, we may expect sustained reopening of the economy. In October, the mobility index is nearly the highest recorded since the start of the year. Now moving on to our financial performance. On growth, in the third quarter, we acquired more customers and increased our customer engagement. We have more clients who are not just enrolled, but are also active users of our digital channels. This, coupled with the reopening of the economy, resulted in growth in consumer volume -- customer volumes across loans, deposits, assets under management, securities, brokerage, remittance and insurance. If mobility is sustained, we may see more robust growth across our businesses moving into next year. We also remain focused on accelerating the bank's digital transformation. We had a fundamental review of our digital initiatives and reimagined end-to-end value propositions for each customer segment to make the bank ready for a digital future. On profitability, we continue to benefit from the diversification and scale of our fee-based businesses. Our performance in the third quarter was largely driven by the normalization of credit costs and continued expense discipline. On asset quality, consistent with the last quarter, asset quality continues to be resilient. Our credit costs, though marginally higher for the quarter, is approximating half of what we booked in 2020. Our NPL ratio declined while our provisions increased in the last quarter in a conservative move to strengthen coverage ratios. On strength, our organic growth allowed us to further strengthen our balance sheet. We continue to accrete capital, which provides the bank with hefty buffer to invest in growth opportunities. Moving on to our P&L highlights. For the first 3 quarters of 2021, we delivered a net income of PHP 17.47 billion, up 1.8% year-on-year, driven by lower provisions and a strong fee income. Removing the impact of onetime tax adjustment, net income would have been PHP 19.4 billion, up 11% year-on-year. Net interest income was at PHP 51.17 billion, down 5.6% year-on-year, attributed to lower average loan balances and lower net interest margin. Noninterest income at PHP 20.45 billion, down 7%, is a result of a decline in trading income, but this was partially offset by fees, commissions and other income at PHP 17.13 billion, up 27.2% year-on-year. Total revenues at PHP 71.62 billion, down 6%. Operating expenses slightly up by 3.5%, mainly driven by investments in technology. Provisions of PHP 10.25 billion brought net income before tax to PHP 24.88 billion, up 21.4%. Looking at the profitability quarter-on-quarter. We delivered PHP 5.66 billion net income for the third quarter, down 17% from Q2, largely due to lower noninterest income and higher provisions, which strengthened our loss coverage ratio. But compared to last year, provisions declined 35.5% and net income up 3% year-on-year. Looking at our revenue mix. 26% of our total revenue was contributed by noninterest income. Year-on-year, noninterest income declined by 6.8%, with a slowdown in trading income after an extraordinary performance last year. Sustained fees and commissions amounted to PHP 5.4 billion in Q3, up 9.8% year-on-year. Moving now to our funding. Deposits were up 6.6% from a year ago, largely from CASA growth, which is up 12%, while time deposits declined 11%. A large portion of our deposits is from retail clients, contributing 67% of total deposits as of September 2021. We booked more time deposits in the third quarter as a result of fund maturities in September. This resulted in a moderate decline in CASA ratio, but nonetheless, it remains healthy at 80%, reflective of many quarters of growth in CASA. On net interest margin, NIM declined from last quarter and settled at 3.28%, as we booked more time deposits while asset yields remained flat. Moving forward, we expect a large part of our NIM improvement to come from higher asset yields. Moving on to fee income. We continue to benefit from improving macro environment as reflected in the performance of our fee-based businesses. On this slide, the contribution of each business to total fee income is shown on the left chart and year-on-year -- the year-on-year growth of fees on the right chart. All businesses produced improvement in fee income year-on-year. Starting with credit cards. Credit card fees, which account for 21% of our total fee income, were up nearly 17% from increased billings and charges. Credit card loan balances were up 10% from a year ago, while our market share for credit card billings also increased by 109 basis points to 18.34% as of June 2021. Assets under -- Asset Management and Trust business reported 15% year-on-year increase in income. Client net fund flows and favorable market performance have led to record investment balances in fee income. Our AUM has crossed the PHP 1 trillion mark and is up 32% from the start of the pandemic to September 2021. Our market share increased by 132 basis points to almost 21% as of June 2021. Year-on-year, we also saw higher service fees in the branches as well as higher fees from loan origination, securities brokerage, advisory and underwriting fees from investment banking. Our balance sheet moderately expanded quarter-on-quarter and year-on-year. We saw a modest lending growth in the quarter. Net loans was up 2% quarter-on-quarter and nearly 1% year-on-year. Looking at the loan book per segment. Overall, we are seeing encouraging trends. Corporate loan book was up 2.5% quarter-on-quarter. Average consumer loan also expanded, with the increase in mortgage loans up 1.8% quarter-on-quarter and credit cards up 0.4%, offsetting the decline in personal loans and auto loans. The decline in auto loans was due to tepid car sales, which affected our loan releases. Our performance, however, was better than industry average. Our market share in auto loans increased by 143 basis points in the past 12 months. Microfinance loans also increased 1.7% in the last quarter. Moving now to monthly loan releases and credit card billings. Corporate monthly loan releases remain weak, but is now above the lows we have seen last year and in July this year. Consumer loan releases for across auto, mortgage, credit cards recovered in September after a slight dip in August, which could be attributed to mobility curbs. Rebound in loan growth may likely continue going into next year with the reopening of the economy and the push of the BSP to drive credit growth. Operating expenses were higher for the quarter, year-on-year and 0.9% Q-on-Q from technology spend and volume-related expenses. Our tech spend is about 9% of revenue, which covers running the bank and strategic digital investments in new builds. Aside from income generation, digitalization also drove cost savings. Our digital capabilities, coupled with our customers' strong digital adoption, enabled us to operate with a leaner organization. We also lowered our branch footprint. In the third quarter, we co-located additional 10 branches, bringing to 33 the total branches already co-located, in line with our initiative to rationalize the number of our branches and to transition the role of the remaining branches from transactional to high-value activities such as sales and advisory. On asset quality, we booked PHP 3.7 billion in provisions in the third quarter. While NPL ratio fell 21 basis points from previous quarter to 2.73%, we have earlier guided for NPL ratio to peak in the coming months, though the prospects for continued reopening of the economy may allow us to dial down the NPL ratio guidance. Credit costs, though slightly higher, is beginning to normalize at 97 basis points annualized as of the third quarter. Coverage ratio improved to 131%. Restructured loans remained manageable at 1.98%. In sum, the bank's asset quality remained resilient and better than industry averages. On capital ratio, we continue to generate capital organically from earnings and decline in risk-weighted assets. Our capital position remained strong with CET1 at 16.81% and capital adequacy ratio at 17.69%, well above regulatory requirements. This quarter earnings, coupled with our excess capital, provides the bank flexibility to fund growth, fund growth opportunities. The bank ended the quarter with lower leverage ratio as bond maturities were not refinanced. Allow me to summarize some key takeaways. On profitability. For core income, we posted soft revenues due to low yields and still uneven recovery in loan demand. A rising interest rate environment will support NIM expansion going forward. For noninterest income, we saw sustained strong fee income growth across all businesses. For operating expenses, it's up mainly on tech spend, which boosted digital revenue and operating efficiency. For provisions, we saw slightly higher provisions in Q3 as a preemptive measure, and our NPL coverage further improved. On our balance sheet. For loans, we expect this to continue to grow as the recovery accelerates, particularly as we enter 2022. For asset quality, we saw a sequential drop in NPL ratio that's improving our asset quality, and this is better than banking system averages. For deposits, quarterly CASA growth remains intact, supported by solid retail base and growing transaction banking services for corporate and SME. On capital, we further strengthened our ratios, and this is supportive of strategic growth opportunities. In closing, our financial and operating metrics have shown resilience throughout this pandemic, supported by a well-diversified portfolio of businesses that are steadily gaining momentum as the country and the economy safely reopens. We continue to bet on this recovery, and we remain focused on the execution of our strategic initiatives that will surely redefine banking regardless of the shape of economic recovery. On this note, let's move on to the next topic. Our CEO, TG Limcaoco, will provide an update on our digital strategy. Thank you.

Thank you very much, Tere. Our goal to really push digitalization across the bank is based on our belief that this is truly a necessity, as I am convinced that banking, as we know it today, will be very different in 5 years' time. Doing nothing -- next slide, please, doing nothing will erode customer count and will give up profits to our emerging competitors. And this is really driven by a very young and educated population that is willing to switch to digital banks due to convenience of ease and experience, and an increasing number of fintechs operating in the country, which has clearly accelerated in number in recent years. The changing regulatory landscape, such as the BSP Circular 1105, which allows for the establishment of digital banks, with now 6 licenses granted to date for both local and foreign players as well as various BSP initiatives aimed to enhance financial inclusion. And finally, what I really believe, there will be a likely compression in margins, especially in payments and in consumer finance to already complement the big compression margin in corporate finance and the traditional fee businesses giving way to new revenue streams of this challenging overall profitability. In the local banking industry, BPI has been a technology-first leader. We were responsible for the first ATMs in the country, the first to banner Bank Anywhere and offer Internet banking since 2000. And as part of this legacy, we embarked on digitally transforming BPI as early as in 2016. This was known as BPI Digital 1.0, where we established a technology foundation for our digital aspirations. We set up our 24/7 cybersecurity operations center, we upgraded our core banking systems and rebuilt our digital infrastructure, including delayering our legacy architecture. To respond to market dynamics, we recalibrated and simplified our digital road map of becoming the everyday bank of our customers into 5 key imperatives. First, mobile first, given the high penetration of mobile full-feature phones; second, shaping the experience into one that was relevant and focused on the customer; third, making sure that we combine high-tech with high-touch service, if required by the customer; fourth, a deliberate pivot to open banking to ensure that our APIs were available to any partner; and finally, an industry-class infrastructure to ensure reliability, scalability and security of our technology systems. Our road map allows us to seek opportunities around 9 focus areas, for which fall into 3 big themes. The first theme being what we call moonshots in the gold boxes, which build partnerships and ecosystems that go beyond traditional banking. Secondly, we look for white spaces in the gray boxes, where we look to penetrate new and underserved markets. And third, the red boxes, which we call transforming the core, which means transitioning all our operations and our products to a digital operating model. These themes obviously will evolve -- will continue to evolve as we work towards achieving our digital vision. Our -- in line with our strategic imperatives, our digital vision of being the everyday bank can be summarized into 4 key points. One, as the undisputed digital leader in banking, our customer-focused execution complements our advantage as the most trusted banking brand. This will certainly delight our customers as every customer will have digital access, should have digital access to their transactions and information at any point in their financial journey. We have broadened our definition of customer to beyond the traditional depositor. Anyone in our ecosystem should be our customers served with the same level of excellence and given the same digital access. Against this backdrop, our traditional physical channels will also be redefined. We have begun reimagining what the new role of branches will be, rationalizing our branch count, retraining and redeploying our people and putting in new systems into our physical branches. And finally, our industry preeminence will be cemented as we hope to regain deposit leadership, increase penetration in the high-margin businesses and become the most financially inclusive bank. Our objective is to make banking easier and more convenient for all our clients, all our customers through 7 digital banking platforms. Each of these platforms is designed with a particular client segment in mind. These platforms will allow our customers to manage their financial journeys from their smartphones or other online channels, from payments to loans to insurance, investment products, investment advisory for retail clients to payroll management, collection and invoicing and to links to business communities for small, medium enterprises and our corporate accounts. The designs underneath all these platforms aim to provide useful, easy to navigate and intuitive user experiences on aesthetically appealing platforms to maximize user interface, customer loyalty and revenue generation. We have committed a significant amount of capital. Our technology spend is about 8% to 10% of revenues, close to PHP 10 billion annually, to deliver these 7 platforms to address the changing customer needs and behaviors. Four of these platforms are live today, with 3 more lined up to be launched next year. Our early investments in technology and our commitment to open banking paved the way for us to be the most API-ready bank. Our open finance business metrics as of September 2021 show us having 72 partners, 2.5 more than a year ago, ranging from various e-wallets, utility providers, remittance centers, e-commerce platforms and even government agencies. Our APIs alone account for around 300,000 daily transactions, that's up 22% from the same period last year with close to PHP 890 million daily transaction volume, 80% higher year-on-year. We look to GCash as one of our major partners and not as a competitor. We continuously collaborate with them in providing various financial products and services, and we view them as a distribution channel. For example, currently, we are the largest cash in, cash out, and we have GCredit functions online today. By the end of the year, we will be launching investment and insurance products on the GCash platform. And in early 2022, you can look forward to BPI deposit products and loan products on GCash. We also have agile off app, but mobile-based capabilities such as local remittances, instant QuickPay, e-government payments, insurance and electronic auto debit arrangements, which people can easily access without having to log in into the app. Today, a little over half our client base is enrolled in our digital platforms, with 65% of our enrollees active users with at least 1 transaction in the last 3 months. The pace of digital adoption of our customers over the last 4.5 years is strong at a CAGR of 13% for enrollment and 19% for active users. Over this same period, active user penetration has doubled, from 17% in 2016 to 36% of our total client base as of August this year. On the right-hand side, these 2 charts illustrate the divergence in transaction behavior for digital and branch channels. The top chart shows the increasing shift from transacting in person at a physical location to transacting online, no doubt accelerated by the pandemic. In September 2021, 91% of total transactions were done digitally versus 9% done at the branches. However, in terms of transaction amount, we do see an encouraging trend that the concentration of transaction value is now shifting from the branch network to our digital platforms. So about 70% -- I think it's 72% are still -- of the value still gets transacted in the branch. And we see this shift continuing as we continue to introduce new digital functionalities, products and services. Our overall digital metrics as of August 2021 can be summarized in this dashboard. 3.1 million active users, up 24% year-on-year and 14% year-to-date; a 2% increase in digital propensity from 89% to 91%; 1.1 million, on the average, daily transactions, higher 18% year-on-year, and this was as of September; and PHP 17.5 billion in daily transactions, a 51% increase from the same month last year. We are seeing transaction values, the line in red and transaction counts in gray for both retail and corporate platforms on an uptrend, and we expect this to be sustained moving forward. It's worth highlighting that we expect PHP 5.6 trillion in estimated full year transaction value for 2021, 36% higher from last year's figure. Drilling down into the progress of our retail, online and mobile platforms. As of August 2021, we had 3 million active users out of our 8.4 million customers, growing at a strong pace of 24% and 14% year-on-year and year-to-date, respectively. We have also sustained above 90% digital propensity in the last 2 years. In September 2021, the platform boasts an average daily transactions of 950,000, 17% more than the same period last year, with an average daily transaction amount of PHP 6.5 billion, higher by 41% year-on-year. We have noticed -- we have noted continuous growth in our daily average count and amount per month, as shown on the 2 charts on the right-hand side. One key insight that we have from our customer behavior studies is that each enrolled client, each client enrolled in our online platforms brings more deposits compared to their non-enrolled counterparts. In the segments, we see a 3% lift for preferred, a 26% lift for personal clients and 2.2x lift for our overseas Filipino clients. Moving on to the highlights of our BizLink corporate platform. We see only a modest increase in active users, a single-digit year-on-year and year-to-date growth to 24,100. We noted a 5% improvement in digital propensity from last year's 77% to 82%. On user behavior insight, active user penetration has increased 4% compared to 2019. Average daily transactions are at almost 190,000 a day, 22% more than the same period last year, with an average daily transaction value of PHP 11 billion daily, 60% higher than last year. Our full year estimates or transaction data -- on transaction data also shows sustained growth as illustrated on the chart on the right-hand side. Personally, I think this is where we have a lot of significant upside as I think we have still underpenetrated the corporate market and really looking to market our corporate digital capabilities to our clients and increase usage on our platforms. I think that about summarizes an update on our digital initiatives. Going forward, we aim to produce more data to tell you about our journey and our success in this field. I just wanted to end this slide with basically the rallying cry that we have within the bank of achieving our goals by providing banking excellence anchored on trust and the best digital offerings. At this time, I think I'll turn it back to Chinky to moderate the Q&A. Thank you.

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

I just have 3 sets of questions. The first one is on asset quality. I just want to check if it's fair to say that bulk of your provision this quarter was used for write-off, NPL write-off. And if that was the case then, could you help us understand the rationale for making extra provisions as opposed to using the buffers that you've already created in the last 18 months or so, especially when you see the asset quality outlook improving from here on? So why aren't you using the buffers as opposed to providing more? And a related question is, if you did write off NPLs this quarter, which sectors did they come from, like what was the nature of that write-off? And then a related question on is, has the provisioning also peaked in your view? Should we expect normalized level from here on for provisions in the coming quarters?

Aakash, let me answer that. Well, a quick answer to your question on why add provisions and not release. The -- essentially, we just want to be more preemptive. We want to complete 2021 with a steady provisioning as we have planned, and that's despite the reduction in NPL ratio that we have seen and despite the reduction in ECL, particularly shown in June. So it's really nothing more than being more preemptive and continuing to build on that overlay for our provisioning buffer. That will allow us for next year to be able to be more, I guess, steady such that the decline in credit cost is probably going to continue into 2022. Is that -- so the other question is whether we use it for write-off. Not really. For the most part, the accounts that we write off are almost 100% provisioned. And the sectors typically would be credit cards, some personal loans and microfinance and then a little bit of corporates. So -- but it's primarily credit cards. Do we expect -- do we say that NPL might have peaked? Well, our base case is that peak NPL will -- is not really 2.73% that we're seeing today. But with the benefit from some improved domestic demand with the reopening and we actually saw some pay-downs in addition to some write-offs. So that's an actual peso reduction in NPL amount for the past quarter. So we'd like to keep our peak NPL forecast of 4%, but I think there could be some upside if this reopening story continues.

Great. Okay. So I think just to follow up on that. Would you say that the Q4 provisions could actually come down but really lower than the run rate that we have seen so far this year given this kind of outlook?

We expect it to just maintain the run rate that we're seeing. In fact, I have given an estimate of around 100 basis points for the full year. And right now, we're around 97 basis points. So not materially different from that. It's next year where we will see a significant lift in earnings coming from lower provisions.

Okay. Understood. The second question I have is on noninterest income. I just wanted to understand like what was the reason for the Q-on-Q decline that we saw. And I think if I look back the last 18 months, like you've said, you've made a lot of investments in digital, which is kind of bearing fruit now. But when I look at your chart that you showed on transactions, it shows that 30% of the total transaction value is coming from digital channels. But when you look at the noninterest income breakup, it's only 7%, 8%, like you're showing in that bar chart. So where is the disconnect here? Like is the reporting different? Why is this number not higher? And yes, if you could help us understand what was the decline that led to the Q-on-Q decline in noninterest income?

The quarter-on-quarter decline in fee income has to do with some accounting-related items and some reversal of prior periods, some adjustments. But this is not a reflection of the trend. That's why importantly, we look at the year-on-year trend in fee income where the top 3 businesses generating high teens growth in fees, almost 20% each for cards business, service charges across various products, our trust income and even transaction banking, which is really showing very strong performance, up almost 30% in terms of fee income. I don't want to dwell into detail as to the -- some peculiarities on some accounting treatment. It has to do with our Swiss bond issuance that matured. So we take up the hedge cost as a part of noninterest income, but there's a corresponding reversal positive effect in our other comprehensive income, it's related to our cross-currency swap.

Okay. So this is not something that will show up in the next quarter's numbers?

No.

Next quarter, we should go back to a normal level?

Correct. Correct.

And do you have any thoughts on the disconnect between the 8% of noninterest income coming from digital versus 30% of total transaction value happening on the digital channels?

Well, when we look at the whole value creation from digital, we're really looking at it two ways. One is the direct revenue from digital transactions, so where we actually generate fees. Every time clients use the platform, there are services or products that are availed and there are fees generated. So that is growing quite strongly. In fact, across the 4 platforms that we have, we're seeing anywhere between 40% increase year-on-year to as much as double year-on-year. So that's one way to look at it. And overall, I think we're seeing a growth of north of 50% year-on-year. The other way -- the other measure is when we look at the what we call revenue from digital customers. And here, we look -- we define customer as digital, depending on the percentage of transactions that they perform in our digital channel. And if we consider that probably 50% of our customers are considered digital, and you can just derive the corresponding contribution to revenue. The third and importantly, is as we -- all of this will converge as we gain efficiencies from these digital transactions because it frees up branch capacity. But that branch capacity is still there, which is why, as I mentioned, there has to be a major branch transformation, where we will address the culture, change the mindset and be able to -- and upskill for them to be able to offer sales and advisory and generate more selling and cross-selling. So that's the only way we can take out cost. But right now, the current approach to digital revenue can be cut in many different ways depending on how that value is created. And it's a combination of revenue lift as well as cost efficiency gains, and the cost efficiency gains will be felt over time as we reduce costs from our traditional branch network.

Okay. Got it. The last question I have is on loan growth. Based on your current assessment, when do you see corporate loan growth like picking up meaningfully? And do you think like next year could be a 10% -- 8% to 10% sort of loan growth here?

I would like to go for 10% target, Aakash. The good news is, if you recall from one of the slides, we're actually showing a 2.5% quarter-on-quarter increase in corporate loan balances. So that's meaningful because coming from several quarters of decline. So we're hoping that's a sign of things turning up. And it can only be related to the whole reopening story. So next year, maybe an 8% to 10% loan growth across -- on average would be reasonable. And we think the consumer growth will probably lead this recovery. But over time, as we see corporates going back into CapEx spending mode and as demand recovers, that should also follow. So 8% to 10% next year, Aakash, is what we're looking at.

And if I could just make a little comment on what Aakash said because it's something that's close to my heart. And you know this, Tere, because we really talk about digital revenues. And I think Aakash's issue with the disconnect is one of the things that we're trying to do really here is really quantify and measure our digital revenues. Now when we showed the chart of digital channels there, Aakash, for example, that's the revenues that we attribute to a group we call digital channels in this group. And they split -- they're responsible for all our partnerships and our APIs and building the payments, but they share their revenues with different businesses. So the revenues they report are only a partial of the total digital revenues we have. So we're trying to consolidate everything under one roof under a single entity so we can report true digital revenues. And Tere was explaining the 3 methodologies we're going. So for another example is securities broking. A significant portion of their revenues are digital, but we report those revenues under securities broking. So we are going to be -- we are going through a process where we will measure and begin reporting what we feel are our true digital revenues.

Thank you, Aakash. Our next questions will come from Robert Kong of Citi.

I also have a few questions. I'll go one by one. First of all, just coming back to the asset quality. I think the message is you're trying to be as conservative as possible here. It's not because if I have anything, the underlying NPLs have stabilized or indeed improved. So could I get a sense as of this 9-month results, how much cumulative preemptive overlays have you built in? Because that buffer is obviously the worst-case scenario. So if you get some numbers to what that cumulative overlay will be, and what do you think would be a best guess for 2022 credit costs? So that's the first question.

Let me pull it up. The -- just very roughly, there is probably -- our NPL is around PHP 40 billion and provisions of close to -- allowance of close to PHP 60 billion. So there is roughly PHP 20 billion in overlay, which we consider as additional preemptive provision for what we call a moderate and adverse scenario using our stress testing for our NPLs. So -- but I have to get back to you, Robert, on the impairment. Today, it's about PHP 20 billion overlay.

And the rough idea about credit costs for next year?

Around 75 basis points.

Okay. And the second question is on the NIMs. I think you're guiding that NIMs are bottoming. So it did slip a little bit in the third quarter, but not really that materially because -- and so could you talk about what is going to drive that NIM higher? I know you mentioned asset yields. Are you talking about how you're dealing with your investment book? Or are you dealing -- are you talking more about pricing power? Just want to see what will drive that up. That's the second question.

Well, first of all, we really think that we might have seen NIM bottomed already, and that's what we're seeing in terms of NIM for the month of September. Next year, we do think that we have exhausted much of the benefits from lower cost of funds, both on the deposit side as well as our capital markets borrowings. So the lift will really come from higher asset yields going into next year across all loan portfolios. Of course, in terms of net interest income lift, a part of it -- a large part of it will come from our corporate book because that's around 75% of our loan book, where we probably will see 70% of that book repricing, but it's closer to the second half of next year, where the base case is that short-term rates will actually start to move up towards the second half rather than the first half. So the quick answer is NIM in expansion should come from higher asset yields across most portfolios.

Okay. And the next question is on -- just could you remind us about your cost goals? I think previously, it was mentioned that we want to keep costs capped at below PHP 50 billion, which was sort of the pre-COVID level. I just want to see if that is still the goal. And related to that, I think you said that you already co-located 33 branches. What is the number now? And where is the sort of -- I don't know, it's going to be a 2-year goal as to where that branch network would be?

Robert, first on cost. We are actually in the process of taking a look at our long-term investment plan, while the cost to run the bank is probably in the PHP 50 billion ZIP code, more or less, and will just increase nominally in the coming years. What we plan to do is we took a look at our 5-year big ambitions. And we think we will be better off if we front-load the investments that we need to make to really redefine our whole delivery of financial products and services through various digital platforms. So the base case for a PHP 50 billion OpEx will probably just stay flat and just grow nominally with inflation, particularly for staff cost. But there will be an increase that will be front-loaded coming from how we want to -- how we'd like to allocate digital spending forward rather than later. So in our minds, we're looking at about 10% of our revenue being spent in our technology initiatives, which is a combination of new builds as well as operating the bank. So that's the increase in costs that we will expect at least in the next couple of years. On the branches, yes, we have co-located 33. And as we -- once we secure approval from the regulators to combine our thrift bank subsidiary, we can easily do another maybe 80 branches that we can reduce. Right now, we're about 869 branches. There's physically 33 that are in co-locations. And by the end of 2022, we should make a decision to give up that license. So easily, there will probably be a 33 branch count reduction, plus the 70 that will come from the integration of our thrift bank. So that's 100 over the next 12 to 18 months.

Okay. Very small question. What is your -- ignoring the one-off tax adjustment, what should we be using for your ongoing effective tax rate? Is it like around 22%?

That's about the range, Robert.

And then maybe the final question to TG. I just want to get your sense on the new digital banks. Are they -- I'm sure you're assessing them. There are different types, right? Some of them are backed by international banks, some are backed by local banks, some are unique setups. Just want to get your sense as to the landscape, what kind of threats do you think they pose to the incumbent banks and how you'll respond?

Thanks, Robert. I think they're interesting. They clearly -- because of our APIs, we actually see the money that leaves when they go. For example, one of the early entrants had an aggressive marketing campaign. And so we see the money leave when there's an aggressive marketing campaign. But as soon as the marketing campaign stops, the money stops flowing as well. So I think they continue to attract people today with high deposits. Ease of opening. I still have a question on the business model because none of them -- and I speak to them, none of them have a clear model on what the asset side would be. And they all know that it's a losing proposition today. The way we're looking at them, Robert, is that we want to compete head on. So we have a micro finance bank called BanKo. We hopefully aim to reposition that not only as a micro finance or an SEME platform, but we also believe we can use that as a platform where we can raise high deposit -- high-cost deposits for what we call the basic accounts, which are limited to about PHP 50,000. So it doesn't really impact our whole base. It doesn't cause any doc stamp issues to our whole base because we house it in a different vehicle, and yet it gives us the opportunity to bring these people onto our platform under the BPI name and derive revenues from transactions, which I believe is the point of building this basic deposit accounts rather than trying to make the spread of the NIMs.

So my final, final question, just to add on to what you said. What do you think the difference is in wallet value between the 3.7 million digital customers that you have versus the new customers that the, let's say, the GCashes or the PayMayas? There must be a significant difference in the wallet value between them.

Oh, the size of the wallet?

Yes.

Yes. I would suspect GCash, size of the wallet there is probably PHP 500 on the average. I would suspect like a typical bank, like a digital bank like CIMB or -- which is on the GCash platform, probably has an ADV of about PHP 3,000. And that corresponds are very similar to what we see. We launched a pure digital product June, which is the ability to open a new to bank account completely digitally, not having to come into the branch. And our average deposit there for the successfully opened ones is about PHP 4,000. So I would say the digital banks are about there. Clearly, someone like offering a very high rate, like, let's say, Tonik, probably would have a significantly higher rate, probably closer to maybe PHP 10,000. But that's, again, that's a basic deposit account because after PHP 50,000, you don't earn the rate anymore.

Thanks, Robert. We now go to -- we now go to Rachelleen Rodriguez of Maybank.

I also have 3 questions. So first one on asset quality. So can you just give us more color on what caused the improvement in the ratio? You mentioned that there was a huge repayment. Was this coming from huge corporates? Or is it more across the products? Or is it more of a function also of a loan recovery -- loan growth recovery? That's my first question.

Sorry, I didn't understand.

Sir, where was the difference in asset quality coming from, where was the huge repayment from? Is it from corporate? Is it from coming from the consumer side? Or is it...

Rachelleen -- yes. Can you hear me?

Yes.

So the quarter-on-quarter decline in NPL amounts actually came -- it's not big, it's about PHP 2 billion, but it's across various portfolios. It's really across. As I look at the list, both on the corporate and SME, we're seeing a decline. And then for credit cards, it's bigger. But a bulk of that is related to write-offs. But the actual payments from -- or curing, if you will, of nonperforming loans was for corporate, some housing. Yes. So those are the big ones. But there are also nominal declines across the other portfolios. I wouldn't say huge. It's not a huge -- but it's -- I guess it's the trend that's more important to highlight. Rather than seeing continued new NPL formation, we're actually seeing some modest reduction.

All right. My second question is we've seen some improvement in the corporate sector loans. Can you share which sectors -- which specific sectors in the corporate sector has been showing growth?

We can't really link to specific sectors. I can't name a particular trend in a sector or in an industry. It's just, I guess, some existing corporates drawing on their limits. I don't know if our corp bank head would like to add some color to that. But the way I see it, it's really broad-based and depending on the specific balance sheet positions of individual corporates. I see John-C here, if you want to...

Sure. Thanks, Tere. Good afternoon, everyone. Yes. So I think the -- what we see in the corporate space, and it relates to some of the questions asked earlier about where the loan growth might come from. But I think of all the segments, client segments of the bank, where we can really feel or witness the so called K-shaped recovery is in our space. Because we are seeing some of our clients doing better during the pandemic and some that have really slowed down and probably will not be able to recover post pandemic, and those that are just buying time. So -- and that's pretty easy. So as Tere mentioned, there are sectors that are obvious to you. So those that are performing well in the stock market price-wise are also exhibiting growth requirements, and therefore, their a source of loan growth for us. And there's those that are really -- will slow down and really cannot pivot post pandemic. So therefore, those are -- even with mobility, they have to transform their businesses. So we see a slower recovery there. So broadly, it's few things. But you can guess which sectors these are. The hardest hit remain the travel and hospitality sector, those are really hit. And there will be some -- in that space, we expect those that are big and strong to obviously outlast the smaller and weaker players. And the other obvious areas, telco and tech, they've done well. So the borrowing there is for growth. And the rest are probably waiting for mobility to come back, and they'll come back also to some normalized level.

Would you be able to give her any specific industry where people have come in?

John-C, retail and wholesale trade, I think we're seeing those drawdowns.

Yes. So we are -- what we've experienced, TG, is for 2020, there was demand destruction and therefore, overcapacity. So even in that case, not only were expansion plans held off, even the working capital was slowed down. So we saw a lot of decline in working capital requirements there last year. So now with consumption and mobility coming up, so the nonessentials are beginning to begin activity that through the supply chain, and Tere mentioned consumer coming up first, feeding those recovering sectors. So there, TG, those that are -- as some Tere mentioned, the wholesale part, they're going to start feeding the need for more retail activities. So we're seeing that. The ones that are really slow, if you want to mention that, is construction, and that's not unexpected. And that's a function of both demand and supply chain slowdowns. And they are -- even there, within the real estate construction, you're following that -- I think some of you are following those sectors, too. It's also -- there's also a divergence there. So for instance, those that were related to POGOs versus those that were not, there's also a difference within that subsector. So just to name a few big examples.

Okay.

So just last short question. So any update on the Citibank asset acquisitions, if you can give some light in this?

No, we can't.

Thanks, Rachelleen. Our next questions will come from DA Tan of JPMorgan.

Just a couple of quick questions from me. One is on margins. You mentioned that we are expecting higher margins going into next year on higher interest rates. Well, my understanding is that loans here are not linked to particular interest rates. So it's kind of determined by banks in a way. How does that play out given that excess liquidity in the system is still quite high? So do you see competition increasing, limiting that potential increase? Or do you think you can reprice loans quite next year?

Yes, DA, let me take a stab first, and then I'll let Tere answer it for the whole one. But I think interest rates, while they're not really linked to any index, the reality is the top corporates are the largest borrowers are really priced against the government also. So if the BSP raises rates, then we will be able to raise rates with the top corps as well. And then, obviously, a lot of it is linked to treasuries, which are on the rise. So you're able to reprice those as well. And then Tere has others on how margins can expand.

Yes. Well, that's right, TG. So as I mentioned earlier, our assumption is the increase in loan -- the higher loan repricing will probably be felt towards the second half, at least that's how we are modeling our NIM evolution from January to December of 2022. So it's going to be flattish for the most part of the year, getting a lift from higher P&L, working capital loans repricing towards the second half. It's really going to be hinged on policy rate hikes because while we have seen already some movement in the yield curve, particularly a bearish steepening of the curve, showing long-term rates rising, short-term rates have actually stayed the same. And that's where most benchmarks are. So next year, hopefully, that will change.

And just another quick one for me on the cost side. You did mention that we are expecting potential increase. Is there any guidance to that? Are you looking at mid-single digit, high single digit in terms of cost growth the next couple of years?

I'd say high single digit, DA.

Thanks, DA. Our next in line is Selvie Jusman of Morgan Stanley.

Thanks, both, for the presentation. I just have a question on the digital banking side. So I guess, on that, I have a couple of questions. The first one will be just as TG mentioned about the stamp duty, and I remember there was some form of like limitation as to what you can offer on the existing infrastructure. Could you remind me on that? And also on the second question relates to the fee side. So last year, because of COVID, actually, a lot of the fee on the transaction was waived. But has it been like restated or what is the plan going forward, especially with the coming of some of the digital banking, do you see like they might start affecting from the payment side to gain more traction there? And thirdly, on the -- I guess, TG mentioned briefly on how some of the digital banking players, they might not have the idea on the asset side. But some of like the foreign players, they do have a strong presence in their home country. And I guess my question will be on the segmentations that they are targeting, do you see them having some -- sorry?

Sorry, sorry. There's someone's -- extraneous sound. Go ahead, finish your question.

Okay. So on the -- yes, so I was like asking on the -- some of the digital players who has like a strong presence in their home country. They do have a strong presence in the retail side also as a credit card. So coming into Philippines, which is an area whereby the retail segment is still highly underpenetrated, do you see that as a lease? And just in terms of the way they get the deposits, do you think that at the end of the day, it might actually cause you to increase your marketing spend or even like you mentioned earlier that when there is like a marketing campaign growing, you see an outflow. Do you see -- and after the marketing campaign actually stopped, do you see that deposit actually coming back or that is like a permanent outflow? Because maybe some of these digital bank might be quite aggressive in the marketing campaign at the start. So yes, so I guess just asking on the implications on your expenses going forward, and the retail segment, which might be one of the potential areas in the business.

Sure. Let me tackle your questions one by one. So let me remind you about the stamp tax issue. In the Philippines, we have this strange quirk, where deposits are -- they apply a stamp tax to time deposits or any deposits that the tax authorities might construe as a time deposit. And one of the rules there is that if the rate you offer for a deposit is 50% higher than your lowest account rate, then that is construed as something that might attract -- that should attract stamp tax. So when you go out and offer a 4% deposit, since BPI, our lowest deposit is only 6 basis points. That would attract a stamp tax. And the stamp tax of that is 70 basis points per annum. So it effectively raises the cost of that deposit. And that's why it's very hard to offer a high-yield basic deposit product at the main bank. Whereas, as I mentioned, we could do it at our micro finance bank because the deposit base there is very small. And we could literally just raise everyone up to 4%. And therefore, new deposits that we attract will not attract the stamp tax. So that's the advantage there. And then secondly, you were talking about the transfer fees. Last year, the BSP encouraged all the banks and I guess all the players to waive transfer fees, but that has become voluntary since then. And today, many banks and many wallets now charge. We charge Gcash charges. And the reality is while we thought that you would see a drop in usage when we started charging, we have not seen a drop in usage. So I -- the BSP tries to encourage banks to continue to lower the fees and waive them. But I think the major banks and the major wallets are not doing so, and I don't think we will do so. And finally, your question on marketing and how aggressive the these new players could be. I think there is some game to be played there. I think part of the expenses that we're looking at next year is not only to build the technology, but also to build some marketing spend into getting people onto our platform because I think there is a land grab going forward. And I think -- I really believe that if we offer a product that has even the same functionality and the same user experience as any of the new entrants, the name BPI will attract more people to us because it will be a more secure and safer platform.

I just have one follow-up question. Would it be possible to actually set up a digital bank subsidiary? Or do you think you just like...

Selvie, my argument with this is, why do you need to set up a completely digital bank, right? We have a micro finance bank that has very small branches that really caters to SEMEs today. We rely a lot on agency banking there as well. We could digitize that and provide the same experience to a millennial and rebrand the skin under the same legal entity, and it will be no different. It would not be technically legally a digital bank because the BSP defines a digital bank as a bank without any office. But we could have exactly the same functionality, the same reserve requirements, the same regulatory advantages as a digital bank. And yet, it would have the BPI name behind it.

Thanks, Selvie. Our next question will come from Melissa Kuang of Goldman Sachs.

I have 3 questions. I'll just start with the first one. In terms of your NPLs, the maximum NPL for the high end that you mentioned earlier, 4%. When do you think you'll be comfortable to say that, that doesn't hold anymore given the trends that you have seen? What do you think needs to tick that box? And also then with you're mentioning you have a buffer, when can we then see those buffers being released?

Well, in terms of peak NPL. So as I mentioned, maybe if we can see a sequential decline in NPL ratio for a solid 2, 3 quarters, then that gives us more comfort that the cycle has really turned. But again, it's moving because all of the developments that we're seeing are quite unprecedented. So we got to see a solid signs of complete reopening. We got to see the rate of vaccination really happening as forecasted. Our own internal assumption is around April or Q2 next year would be the time we'll probably get to herd immunity. So all of this will also be dependent on how this whole pandemic evolves. So -- but given all the uncertainties, I think it would be reasonable to start thinking about dialing down provisions in the next, as we see, 2, 3 quarters of sequential NPL ratio decline. And then whether we should release provisions is another consideration, we're not really thinking that far yet. We're just initially looking at the normalization of credit cost from 100 this year, perhaps 75 next year and closer to 50 basis the year after that, which is our normal credit cost, 40 to 50 basis points, towards 2023, if all the assumptions hold.

Right. Moving on to the second question. A little bit more about your ecosystem for digital. I mean you have GCash. Is there any other ecosystem that you are thinking that you will do to kind of enhance this whole entire digital experience?

GCash is -- I wouldn't say they're really part of our ecosystem, right? They're part of the ecosystem of the whole network. We just happen to believe that we should work more closely with them given that they're an affiliate. But we also work very closely, let's say, with PayMaya. I think we have insurance on with them already as well. And we have other features with them. I just don't pay as much attention to pay as we do with Gcash. But I know the team also works with PayMaya. We also are looking at working with Shopee and Lazada for some of our products. So it's really working with all the major players. We also are now talking with some people who are looking at working with, let's say, the retail trade and asking them to help us build up ecosystem so that our major clients on the corporate side where distributors can work and function better with their customers. And so those are the types of things that we look at, Melissa. But in general, because of our thinking of open banking, we really work with anyone who wants to integrate with us because anyway, we charge for access to our bank accounts.

Right. And just lastly, in terms of your -- perhaps maybe you have some investment in fintechs. While you're thinking about it, banks across the region have been doing some investments there and people are talking about spin-offs and things like this, and you start to see that actually, banks have done quite a lot in the digital space. Do you have any that you have put investment in, that you're looking to do or thinking about...

Yes. We've made a -- we've made, in my mind, about 1 year, 1.5 years ago, maybe even 2 years ago, we made an investment with a fintech company that's now working with us and developing one of our platforms. We have some investments in some funds that look at fintechs as well. In general -- and then as I mentioned, we are working with this company that's looking at working with suppliers and the trade. So those are the types of alliances we're working on. There is an ongoing discussion, which was really about how do you accelerate your growth and your capability to roll out new platforms, and do you continue to rely on providers who give you turnkey solutions? Do you build your own team? So those are the things that we continue to look at.

Our next question will come from Cristina Ulang of First Metro.

My question relates to the income results. If I may ask whether bank management is happy with the result and whether this is something that's within expectation or above expectations, that's number one. Because I'm reading some of the brokers' report and saying it's in line with consensus estimates. So I just want to know what's the thinking of management? And then secondly, I heard Ms. Tere talk about credit cost normalizing to 50 by 2023. So is it correct to think that maybe by 2023, this is when the bank is going to have some meaningful -- more meaningful recovery compared to the flattish trend that you're seeing? And if you -- what's the -- sorry, this is the third question. What's the income result for investment banking? And did you combine for investment banking and securities brokerage? And then some of your initiatives on the sustainability finance, sustainable finance, ESG.

Well, generally, we're happy with certain items, particularly on fee income. With the reopening and lots of businesses turning across various businesses, the 27% increase on average is quite encouraging. The other part that we're happy about is what we call green shoots in terms of core intermediation where we're seeing loan releases picking up. The chart I showed earlier where you see the red lines generally higher than the gray lines, meaning the gray lines are the COVID 2020 levels. So the loan releases are higher than 2020 now, and particularly the pickup in September and Q3, in particular, was encouraging. In terms of when we expect meaningful recovery in earnings. Actually, as early as next year because of the -- driven by lower provisions from 100 basis points to 75 basis points, plus the -- there's no more -- remember, the one-off impact of the tax adjustments actually had the effect of close to PHP 2 billion decline in net income because of that adjustment. So that will not be around next year. So easily, we'll see a very strong earnings pickup in 2022 compared to this year. And then it will only accelerate beyond 2022 as we further normalize provisions. And then the other thing is all of these new initiatives where we expect better fee generation from across our digital platforms will continue to show results as early as 2022 and accelerate towards beyond 2022. Investment banking and securities brokerage is actually seeing a phenomenal year, record-high fee income from underwriting and corporate finance and advisory. That's probably the highest ever that I've seen in BPI capital. For BPI securities brokerage, we're seeing a 100% increase in income from our online trading platform, revenues from our online trading platform. So it's also another record year for our securities brokerage.

Yes. If I can just add a little to what Tere said, right? Cristina, for me, I'm just -- I think things were in line. I expected net interest income to be as they are. I was actually happy that we saw some loan growth, particularly the 2.5% on the corporate side. We expected the NIMs to be flat versus the previous quarter. We look to NIMs to be rising from here on as a result of higher asset yields and also a lower cost of funding. We cut our CASA rate to 6 basis points at the start of October. We had a high yield, an expensive bond, a 3-year bond, if I'm not mistaken, roll off and mature at the end of September, which we just replaced with time deposits, which effectively have halved the cost. On the fee side, very happy with the progress of all our fee businesses. Credit cards were clocking. AUM for the asset management business, that grew double digit. Tere mentioned the corporate -- sorry, investment banking and brokerage. To me, I was completely struck by -- at the Board meeting of BPI securities for year-to-date September, they are the fifth broker in terms of volume traded. So as Tere said, I've never seen that figure or that ranking so high. I think the only -- I think where I would say I was a little bit disappointed or -- I guess it was also expected, is our trading income. It was a very difficult quarter to trade. This is a market where you can't make money as rates are going up. And I'm not one, and my treasury knows this, I'm not one to window dress by taking things out of FVOCI just to sell to profit. I mean there has got to be a real business case and a view why you would do that, and we're not there, and I completely agree with my treasurer.

Sir, just to remind my question on the sustainability finance. And 2 more if okay, sustainability finance initiative, whether you believe in it and whether you think it's going to improve share prices, help shareholder value creation?

Tere?

Well, we have seen evidence that performance of stocks or companies with a solid commitment towards ESG actually generally outperform key indices. There are many ways to analyze the data. But at least on average, we're seeing MSCI emerging market, ESG-focused funds outperforming standard MSCI EM funds. And I think over time, it's really a philosophy that we have to do business the right way. And really when we look at sustainability for BPI, it's really focused on ESG and economic growth, where to be sustainable, we embed E, S and G metrics into our performance measurements. But it has to also generate profit. Otherwise, we're not generating the right value to our shareholders. Specifically, our focus for 2022 is to very closely focus on how we expand lending across activities that we map with sustainable development goals. We're looking at our [ SEME ] book as well as micro finance as the areas where we can really make a difference towards financial inclusion, nation building. And then on the corporate side, we really have a very strong focus in terms of putting in more capital towards lending to renewable energy financing. We also are focused on some sectors like food and agriculture, where we're also tracking the growth in our loan book going into food. And then on the risk side, when we look at -- when we evaluate our exposures, our investments, we really take a close look at environmental risk assessment. This is something that we have put in place in the bank since about a year ago. And we are rolling this out across various lending units to really focus on environmental risk because it's a real risk across not just around the issue on GHG emissions, but really the risk to nature. Like for instance, where our clients operate, how they are affected in certain areas that are typically hit by typhoons and all that. So we're incorporating those what we call ERA assessment or environmental risk assessments into our processes.

Can I just ask one more, one more question on the -- just to refresh my memory, what's the motivation or the top 3 motivation for the merger of the thrift and the uni bank? And maybe you can identify some revenue cost synergies, if there's any or what's the quantum of it? And then, last, last question would be, how is treasury strategy? What's the expectation on treasury income and how is treasury strategy shaping up in light of the rising interest rate yield curves steepening? Your expectations on the results in that area.

TG, you want me to answer the thrift bank merger?

Go ahead.

Yes. So when we looked at this transaction, we really looked at both cost synergy as well as revenue synergy. But the big part is really revenue synergies coming from offering what we call One BPI brand. Because right now, there's a lot of leakages or because of confusion around, particularly for our clients, certain products that are not available in Family Bank. And also, we're not really fully maximizing the ability to cross-sell Family Bank products to BPI customers and vice versa. So a lot of those will be addressed once we present to the market One BPI brand. So that's the bigger part. And the other motivation is cost synergies, where while we are going to take some revenue reduction because of the differential in reserve requirement ratio, because that advantage is now with our Family Bank subsidiary. The reality is the parent bank actually has a much lower cost of funds. So we will be able to offset the benefits from loss from reserve requirement differential as we migrate thrift bank deposits at lower cost of fund in the parent. The other item is the whole branch rationalization. So as we are able to reduce branch footprint, particularly in areas in Family Bank that are not generating -- that are not meeting the metrics, whether it's deposit volume or transaction value or cross-sell. So we should be able to rationalize those branches, in some cases, close the branches and achieve cost savings. And then finally, all of the whole operations, double operations, governance structures where we have to duplicate everything in Family Bank. So Some of those will be saved when we integrate with the parent bank.

On the impact on the treasury?

So your question is where do we...

How is -- what are your expectations on treasury results income given the yield curve steepening, rising interest rates, inflation? How is capital being allocated there along funds allocation strategy?

For this year? For this year, we're obviously seeing a much -- a very significant decline in treasury income. But that's coming from a very strong year last year, where we generated close to PHP 7 billion in securities trading income. I think in this quarter or next, our traders are looking to reposition because the curve has already steepened quite significantly, and they are looking at positioning liquid funds that we have sold -- that we generated from selling some positions in the early part of the year. So they're looking to take advantage of the higher medium- to long-term rates and reposition. I think for the whole of next year, they're also seeing a continued rise in yields. So there will be opportunities. It's just really a matter of timing.

Okay. We have 2 more in the queue. Rafa Garchitorena from Regis.

I see it's quite late, but thanks for the call. Just one thing. The digital initiatives are great. But for us old and ugly analysts, how should we expect -- where should we be looking at the P&L and balance sheet to look at -- to follow the progress of BPI's digital initiatives? Is it more on fees? Is it more on the cost side? You talk about front-loading the IT spend. But as I understand that these things can be addictive. So what do you think is front load is actually constant upgrading of the system, et cetera, et cetera. I guess, ultimately, it has to boil down to increased ROEs, right? So yes, are we looking at customer count, revenues, costs? Where should we be following the impact of the digital initiatives on the P&L?

I guess, Rafa, that -- well, many things, right? As we digitalize, we expect our fee income to rise particularly from transaction fees. So you should be seeing that, and that's why we track that quite a assiduously. And secondly, one of the strategies really is if we get the platforms right, we should be able to generate significant uplift in our deposit balances. So we should see that in a relatively, I guess, lower cost of funding versus if we hadn't digitalized. And so we -- one of the things that Tere will be looking at also is generating what we call our digital revenues out of digital customers, meaning even tracking the interest income from digital customers. On the cost side, you're right, technology is expensive. The cost is, too. We pay as we build new systems to strengthen our infrastructure, but we also have many providers so it's a pay-as-you-go. So I guess the objective for us when we look at the cost is as our revenues increase, our cost-to-income ratio should hold steady or fall slightly. I wouldn't say there'll be a tremendous drop, like from 50% to 20% overnight. But you'll see -- you should see it steady or coming down. But we should see a significant lift in revenues if we do this right. So that's what I would be tracking. That's what I would be tracking, sorry.

Yes. I mean I guess just another thing. BDO, I think, has launched their BDO pay e-wallet thingy. Is there something like that on the -- in the pipeline for you guys?

I won't comment on that, Raf.

Okay. .

I can tell you about BDO Pay, but offline.

Got it.

Okay. Rafa, that's it?

Yes.

Okay. Then finally, last but not least, we have Samin Reza of Maple-Brown Abbott.

What's the average transaction value of GCash and what's the fee income year-to-date from that product?

On GCash?

Yes, on GCash.

I can't say. You're asking me what the average fee of GCash is to their customers?

I'm basically asking what the fee income.

Oh, for us?

Yes, for us. Yes, yes.

Oh, for BPI. Okay. The biggest transaction we have for GCash, we have 3, which is basically when you move your money from BPI to GCash. And there are 3 ways of which you can move money from BPI cash. You can do it as an InstaPay transfer. That one, we charge PHP 25. There is a transfer where you originate the transfer from GCash, where you go on the GCash app and you pull it from the BPI -- your BPI account. In that case, GCash pays us a single-digit amount. And then there's a third way, which is like a bill payment, where you load your GCash as a bill, and we get paid slightly higher than the second method per transaction.

And what has been the total income from GCash using those 3 methods year-to-date?

I don't know year-to-date. On a monthly basis, I'm trying to think. I used to know that. It's -- I think just on the third method, because we don't break up the first method, the InstaPay, because that goes under the full InstaPay. But the second method, I think we make anywhere, I think it's like PHP 20 million a month.

One last question from my end. What's management's outlook on looking at inorganic ways to grow its retail base, whether that be through M&A or other methods? So looking to grow its retail client base.

We are looking at that. As you know, the Citibank consumer assets are up for sale.

Yes. Exactly.

Okay. I think we've used up the list of people who want to ask their questions. Thank you, everyone, for all your questions. And before we wrap up, maybe TG, some final thoughts from your end for our audience today.

Yes. No, I guess nothing really on my end. I think we had a very detailed Q&A session. I hope people got the information they wanted. And I think we've been -- Tere's financial report, my digital update, I think we've been as open as we have ever been. What we want to do is convey the message to investors in the community that things are doing well. Our strategy is moving as we had planned. The numbers are moving as we had expected them to. And we're always here to answer any questions as openly as possible. And thank you for staying.

Okay. Thank you, TG. Ladies and gentlemen, this concludes today's conference call. Should you have additional questions, please direct them to our Investor Relations mailbox at [email protected], and we'll be happy to respond to your queries. . Thank you for your participation tonight. You may disconnect. Good evening.