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

Good afternoon, ladies and gentlemen. Welcome to BPI's Second Quarter Earnings Call. This is Chinky Lukban from BPI's Corporate Strategy team. This afternoon's presentation will begin with opening remarks from our President and CEO, TG Limcaoco; followed by our CFO, Eric Luchangco, who will walk you through this quarter's macroeconomic updates and performance highlights. We will then open the floor to a Q&A session. This call is being recorded. Copies of this presentation has been provided to you earlier via e-mail, and please take note of the legal disclaimers at the end of the report. Now let me turn over the floor to TG for his opening remarks. TG?

Thank you, Chinky. I don't know if -- I can't start my video because the host has stopped it.

Hold on, we'll have it fixed.

Thank you.

Can you try again, TG?

There you go.

Okay.

Thanks very much, and good afternoon to everyone on the call. It's a great pleasure to be here and present our first half results or second quarter results. As you may have read in the disclosure we made yesterday, we reported PHP 20.5 billion in net income after tax for the first 6 months of the year, recording the highest-ever level of net income after tax that the bank has had in any 6-month period. This was really driven by a very strong revenue saw throughout, both in the noninterest income and the non -- sorry, in the interest income as well as the noninterest income and some muted spending, which we believe we will need to catch up as the year progresses. Our CFO, Eric Luchangco, will make a more detailed presentation on this, and we'd be more than happy to answer any of the questions you might have going forward. The first half of the year was characterized really by a renewed mobility in the economy, and we saw a lot of business activity in the back. For example, we're seeing very high billings in our credit card business and other little anecdotes like that, which we'd be more than happy to share during the Q&A section. But let me now turn it over to Eric for the formal presentation. Eric?

Yes. Let me also just try to get my video up here. I'm also having issues with my video. Okay, there we go. Okay. So thank you, TG, and good afternoon to everyone. Welcome to our call. Let me just start this off with a little bit on the macro situation. So global growth prospects have deteriorated over the quarter, as I'm sure all of you know. IMF has indicated that it may downgrade global growth again following a negative revision to 3.4% to 4.4%. The Russia-Ukraine conflict has amplified supply chain disruptions and contributed to inflationary pressures, and central banks around the globe are responding by raising policy rates, which is leading to concerns on an economic slowdown. Domestically, amid concerns over inflation and the rate environment, we expect Philippine GDP to grow -- to still grow this year, albeit at a pace of 4.5% to 6.7%, slower than the 5.5% to 7.3% that we indicated at our last meeting. Recovery and consumption on the back of economic reopening will continue to drive growth. To address inflation concerns, the BSP has delivered a 75 basis point increase in the monetary policy rate last week for a cumulative 125 basis point increase since May. This brings our policy rate to 3.25%, with the BSP not ruling out the likelihood of another rate hike in August. Year-on-year, the yield curve has shifted upwards and has steepened. In the banking sector -- for the biking sector, rising interest rates bode well for our bank's net interest margins. This, coupled with the reopening of the economy supporting loan growth, will translate to stronger bank earnings. Looming headwinds, however, may weaken the momentum and adversely affect loan demand and asset quality. Moving now to our operating performance. Strong business fundamentals contributed to positive results for the second quarter. We generated PHP 12.5 billion in after-tax earnings, translating to a 13.98% return on equity. This result includes the gain on the sale of a property. And as we go through the details, we'll exclude this one-off gains so that you can see where we are in terms of our recurring incomes. Even excluding the asset sale, second quarter of 2022 is still a strong quarter. As the pandemic winds down, asset quality is becoming less of a concern after several quarters of continued improvements. Our NPL ratio at 1.99% and our NPL cover at 171% are at very comfortable levels, allowing credit costs to trend closer to its pre-pandemic level. Our asset quality remains more favorable than industry averages. Loans and deposits continue to grow, posting the highest year-on-year increase since the pandemic. We finished the quarter in a strong capital position, with an indicative CET1 ratio at 16% and CAR at 16.9%, despite the pace -- the strong pace of loan growth and the higher dividend payments. Lastly, we expanded our client base and increased our client engagements. We reinforced our digital leadership position with our new platform and on-boarding of new partners and products. Looking at our first semester performance, we delivered a net income of PHP 20.45 billion, up 73% year-on-year. This result is inclusive of the gain on sale of property and tax adjustments due to the CREATE law last year. Excluding the asset sale, the bank delivered a net income of PHP 16.71 billion, which is up 41.4% year-on-year. And excluding both the asset sale and the tax adjustments, net income was up 24%. Also reflected in our results are the following: net interest income of PHP 39.34 billion, up 16.2% year-on-year, which we attribute to strong loan growth and higher NIMs. Noninterest income at PHP 18.3 billion is up 28.4%, largely driven by sale of assets. Total revenue of PHP 57.64 billion is up 19.8%. Operating expenses are up slightly at 7.3%, driven by growth in volumes and technology costs. Provisions at PHP 5 billion are 23% lower compared to the previous year, which brought net income up to the PHP 20.45 billion mentioned earlier. Looking just at the second quarter performance, we delivered a record net income of PHP 12.46 billion. This is 56% up on the sequential quarter, driven by strong revenues. Compared to last year, net income was up 82.9% on higher revenues and lower provisions. Even excluding the gains from the asset sales, it would have been a record quarter, with income at PHP 8.72 billion on a record revenue of PHP 27.29 billion and a record pre-provision operating profit of PHP 14.03 billion, despite having higher quarter expenses. The record income of PHP 12.5 billion is up 83% versus the previous year, keeping annualized ROE in the double digits, increasing, as previously mentioned, to 13.98%, and this surpasses the pre-pandemic levels. Growth was underpinned by accelerating loan growth, NIM expansion and higher transaction volumes driven by the expansion of the asset base and gains from customer engagement. The bank generated PHP 32.3 billion in revenues for the quarter, up 35.6% year-on-year and 27.3% quarter-on-quarter. Net interest income is up 19.6% from last year on strong volume growth and continued NIM expansion, reflecting the rising interest rate environment. Noninterest income is up 75.4% from last year, primarily from the gains from the asset sale, which offset moderation in our trading gains. Our balance sheet expanded, marking 5 sequential quarters of improvements. Both loans and deposits increased, posting a 14% and 18% growth, respectively. This is the highest year-on-year growth since the start of the pandemic and quarter-on-quarter growth of 6% and 5%, respectively, as well. Our liquidity remained healthy supported by a stable and reliable franchise, while CASA stood at 79%. NIMs also improved, continuing the trend of previous quarters, with NIM for the second quarter increasing 10 basis points to 3.51%. This is up 18% from -- 18 basis points from last year, driven by recovery in asset yields. NIM for the month of June was up further at 3.56%. So even within the quarter, we are seeing NIM expansion. And these numbers do not yet reflect any impact from the most recent 75 basis point hike from the BSP last week, and we expect this to further support the asset yield expansion. Cost of funds also improved as higher cost borrowings paying between 3.05% to 4.3% per annum were partially refinanced at a lower yield of 2.8% with the balance replaced by lower-cost deposits. As deposits grew more than loans, excess funds were channeled into investments and securities at amortized cost, which is also positive for NIM. We anticipate net interest income to remain strong in the second half of the year, benefiting from continued volume growth and hefty increases in interest rates at 70% -- as 79% of our loan book reprices within the year, paired with a larger portion of CASA deposits. All segments posted sequential quarter growth and have exceeded 2019 levels, except SME and auto, which continued to grow since third quarter of 2021. Growth was driven by strength in the corporate and credit card segments. CASA dipped slightly from the first quarter figure, but remain generally within its recent range. On fee income, excluding the gain from the asset sale, fee income in the first quarter of the year was relatively flat, declining actually by 0.3% year-on-year. Fees from cards, securities brokerage and investment banking offset the decline in branch service charges, retail loans and insurance. On branch service charges, which dropped 24% year-on-year, as we shared during our earnings call last May, the decline was largely due to fees collected last year for following below minimum balance requirements for a high-yielding deposit product, which we restructured. On the retail loan fees and corporate client fees, which both dropped about 18% year-on-year, the decline is attributed mainly to the improving credit standing of our clients, which led to lower late payment penalties being charged. On the insurance income, which dropped 29%, the decline is primarily due to lower equity income due to the challenging market conditions, but branch commissions also declined slightly. As to the performance of our biggest fee-based businesses, cards and asset management, for cards which contributed 16% of fee income, fees increased 12% year-on-year. From the easing of mobility restrictions, clients are now able to go out and use their cards more actively, generating higher transaction-related income, in addition to higher membership fees on fewer requests for reversals this year. This improvement does not yet reflect a full recovery in foreign travel either. For Asset Management, the flat earnings are largely attributed to the recent sharp decline in market valuation, which lowered the fee-based assets. For stock brokerage and investment banking, which posted a 46% increase in fees year-on-year, the growth was driven primarily by the closing of 2 project finance deals, which funded the telecom tower deals that were closed in May. We also see good growth in digital fees and transaction banking, which we'll discuss also a little later. Operating expenses stood at PHP 13.3 billion, up 8% year-on-year and 5% quarter-on-quarter, with tech and manpower being the 2 largest components. Increase in technology spend, driven by software maintenance and IT outsourced services, was partially offset by decreases in depreciation and amortization attributable to investments in digitalization projects. Although up our -- versus our spend last year, we expect this to grow further as a significant portion of our tech spend is scheduled for the second half. Manpower costs increased slightly due to one-off CVA-related expenses, but this was partially offset by a lower headcount. Expenses in premises declined on continuing branch rationalization, where we have either co-located or consolidated 113 BPI and BPI Family Savings Bank branches since December 2020. We continue to make progress in our efficiency initiatives. We have served more clients with lower headcount and reduced branch footprint. We attribute these cost savings to our enhanced digital capabilities, coupled by our clients' strong adoption. Our client base expanded to 9.03 million, up nearly 570,000 over the first 6 months of the year, and half of that increase are new clients acquired through our partnership with GCash. Cost-to-income ratio declined to 45%, inclusive of the revenue impact of the asset sale. Excluding asset sale, cost-to-income ratio stood at 49%. We remain committed to our spending plan for the year. We expect to accelerate OpEx through the coming quarters in line with the bank's marketing push. And as mentioned, as we ramp up IT spend and book milestone payments for various ongoing technology projects. Asset quality metrics improved again in the second quarter of 2022, marking 4 quarters of improvement, with the recent quarter posting the biggest decline in NPL levels and NPL ratio and increasing our NPL coverage. NPL ratio stood at 1.99%, the lowest in 2 years, and the NPL cover is now up to 171%. Our credit costs declined to 67 basis points for the quarter. While this continued improvement should ease concerns about asset quality, the bank's allowance coverage remains elevated to allow for ongoing economic uncertainties that could potentially affect credit performance. If asset qualities holds, the elevated NPL cover bodes well for our future earnings. Our CET1 ratio is at 15.98% and CAR at 16.86%. Both are lower by 28 basis points from last quarter, mainly reflecting growth in our risk-weighted assets and higher dividend payments, as well as the unfavorable impact of fair value on other comprehensive income adjustments from higher interest rates, but these were partially offset by internal capital generation. Last May, the bank announced a dividend policy where it will now pay out between 35% to 50% of previous year's income from a fixed payment of PHP 1.8 per share per year. For the first half of the year, the bank declared a dividend of PHP 1.06 per share, reflecting an increase of PHP 0.16 or 17.8% compared to last year. Effectively, the bank distributed PHP 700 million more to shareholders against 2021 income, affirming the bank's commitment to delivering shareholder value. Let me proceed with an update on our digital initiatives. While work continues on adding functionalities to existing client engagement platforms, we have launched in recent months deposit products and an all-digital account opening functionality to our platforms, as well as a third-party platform, through GCash, to further customer acquisition and gains and share of wallet. We are pleased to report that we launched in May a digital deposit product with our BanKo app called TODO Savings, our answer to the higher deposit rates being offered by digital banks. In addition to sending money to other banks, paying bills and buying load, clients can now open a digital savings account by paying -- which pays 4% per annum up to a PHP 50,000 balance through the BanKo app. The product is on pilot launch and in over -- in a bit over a month, we have opened nearly 600 accounts with about PHP 4 million in total deposits. Full launch activities will start next month. BizLink, which is our platform for corporate cash management, registered a 40% increase in transaction volume year-on-year and a 14% increase in enrolled accounts to 38,300, which is about 35% of our total corporate clients. On the customer acquisition front, the new-to-bank and new-to-product features of our BPI Online and BPI Mobile app allows new and existing clients access to an all-digital deposit account opening experience. One year to the launch of the new-to-bank, we have opened 92,000 accounts with total deposits of PHP 474 million. While for the new-to-product, we have about 130,000 accounts with total deposits of PHP 3.23 billion as of end of June this year. We have also engaged more actively with GCash. And in May, we launched MySaveUp with GSave, which allows clients to open a digital savings account for as low as PHP 1. This product has attracted an average of nearly 3,500 clients daily. In its first 2 months of launch, it has acquired nearly 300,000 deposit clients. Our 2 mutual funds with GInvest and our insurance product with GInvest continue to show progress in terms of increasing number of clients and volume. GCash remains our top partner in open banking. We are pleased with how fast GCash has added a sizable number of new clients to the bank. Over the past 6 months, about 586,000 GSave and GInvest accounts have been opened by 532,000 unique clients, 278,000 of which are new to BPI. Digital fees are becoming a stable and reliable source of income. It reached nearly PHP 4 billion in the first half of 2022, up 17% year-on-year, accounting for 34% of total fees excluding the asset sales, which is up from 29% last year. In the succeeding chart, we show metrics which we use to monitor our progress and the value we create for our shareholders through digitalization. In looking at the value added by our digitalization efforts, we wanted to look beyond digitalization as a product in itself, and instead look at what kind of customer use our digital products and services, and therefore, define digital customer based on their behavior. If they open an account in any of our 7 digital platforms or if more than 50% of self-initiated financial transactions are done via the digital platforms, then the customer is a digital customer. However, all digital customers must requalify as such on a rolling 12-month basis, and all revenue and costs associated with digital customers are then attributed to -- as digital cost and revenues. Following this definition, the number of our digital -- retail digital customers stood at 2.15 million as of June 2022, which is up 283,000 from the beginning of the year. 25% of our retail customers are digital today compared to just 6% in 2019. During the quarter, digital customers did 4x more transactions than non-digital customers, which is up from 3x in 2021. As a result of this higher engagement, digital customers generated 2.6x more revenues than nondigital customers. This revenue multiple is largely -- is relatively unchanged from the first quarter, but the revenue per capita for both clients increased by 10%, driven by higher deposit balances. We show on this slide in red the increasing digital customer count, vis-a-vis, the higher revenue multiples that they provide relative to nondigital customers. Moving on to cost per capita. Digital customers cost 9% more to serve as they transact more and generate more revenues. Digital customers, though, remain more efficient with cost to income at 22%, which is 31 percentage points lower compared to nondigital customers. This is why differential in cost income ratio was maintained for the quarter. Overall, our digital initiatives continue to add value to our shareholders over the quarter. We acquired more digital clients who provide more value driven by their higher engagement and lower cost to serve. Let me summarize our key takeaways. On profitability, we have positive growth momentum underpinned by accelerating loan and deposit growth and an increasing NIM, plus our expanding customer base and gains from customer engagement are supportive of incremental income growth. On the balance sheet, our robust capital position provides an adequate buffer for ongoing economic uncertainties with room to deploy capital to support strategic initiatives. On asset quality, continued improvements in asset quality are sustaining a decline in credit costs towards prepandemic levels. On digitalization, we continue to make good progress and strengthening digital capabilities, enabling us to maintain our leading position in the digital banking space. We continue to closely monitor the potential impact of higher inflation, rising interest rates and ongoing pandemic and geopolitical tensions to our business. However, we are confident that the bank is well positioned to respond to a changing operating environment in order to deliver growth and enhance shareholder value. Thank you. We now open the floor to questions.

Thank you, Eric. Ladies and gentlemen, the floor is now open to your questions. [Operator Instructions] We have the first question sent via e-mail. I'll take this one first before the -- those that have raised their hands. The recent rate hikes by the BSP have been quite aggressive, and this might continue for some time. If these translate directly into higher borrowing rates for consumers or SMEs, it can lead to sudden asset quality pressures rising. How is the group thinking about balancing this trade-off that is higher profitability from higher NIMs versus not overburdening borrowers? Are there plans to mitigate this pressure? Eric, TG?

Sorry. Yes, so I can take that. And in fact, it's something that's very much present in our mind, something that we've been thinking about. In general, from what we see of our clients, customers should be able to absorb some level of higher rates. It's not that long ago that rates were at more elevated levels than they are right now. And therefore, we believe that our customers are able to absorb these higher rates. As well as -- I mean -- and from what we've seen, up to about 200-or-so basis points increase which -- they should be able to absorb it with minimal change in terms of customers that are going to go and need -- additional customers that are going to go into restructuring. But we continue to monitor this, however, because we do realize that the situation is fluid and that we will need to continue to monitor how they progress through the pandemic.

Okay. Our next question will come from Karthik of Buena Vista. Karthik, the line has been unmuted, go ahead.

This is Karthik here from Buena Vista Fund. I have 3 sets of questions. The first one is if you were to look at our asset quality, the NPL balances are declining in absolute terms and our coverage is now almost 170%. So should we think of the credit costs in absolute terms starting to normalize going forward? In the sense, should we expect a reduction from the PHP 2.5 billion of quarterly run rate that we are running at right now? That's my first question.

Eric, you want to take that?

Yes. So actually, on that, it's something that we actually have been thinking about as well ourselves. I guess the reason that we haven't done so yet and the reason that it's not on a radar yet to reduce our provisioning is because of the uncertainty of the environment. With the way things are going, it's difficult to say that we are clearly on a trend towards an improving environment. We certainly are on that trend, but there is that overhang of rising inflation, and therefore, we want to be a little more conservative.

Got it. My second question is basically on the OpEx. So the first half has actually seen a very, very modest growth of 7%. And you did talk about a significant portion of the tech-related spends coming in the second half. So what is the kind of OpEx growth that you're looking at in the second half? And why do you think there has actually been a delay in spending this in the first half?

There are a couple of reasons for the delays. We continue to be committed to our tech spend. The delay is partly intentional or was partly planned that way that the second half would really have a higher level of payments. And this is because as we implement technology projects -- and again, technology is one of the key drivers of our increased plans for tech spend -- of OpEx spending. And as we implement projects, typically, a large part of the payment will be reserved for after the project is successfully implemented, which naturally means that it will tend to be more back ended. And therefore, we can really expect the second half to be -- to have more of the expenses from the implementations that we're doing this year. There is also the potential for delay in projects and -- as they get implemented. And in fact, some of our projects are slightly delayed, and that may push back some of our spend a little further as well. But that being said, we remain committed to these projects and we expect the spending will happen.

Perfect. My last question is given that the BSP has actually done out of cycle hikes and that to a sizable one, what should we think in terms of our own NIM expansion? Does this mean that the NIM expansion gets preponed simply looking at the degree of the hikes that the BSP has actually done?

I'm sorry, you're asking if we expect our NIMs to increase as BSP continues to increase?

No. We have been seeing an increasing NIM trend for us. But given that the BSP has actually front-loaded some hikes and even taken out of the cycle hikes, should we then expect that, for BPI, the NIM expansion will actually now start reflecting sooner and with a greater magnitude than what originally we thought?

Yes. Yes. I mean the -- we will adjust our loan pricing as the benchmark rates increase. And with the increase in -- basically the front loading of the increases, we should expect it to happen sooner rather than later.

Thank you, Karthik. Our next question will come from DA Tan of JPMorgan.

A few quick questions from me. First, I wanted to follow up on NIM. I wanted to check, with the BSP hiking 75 basis points, do you think you can pass on the whole thing to clients? Does it really matter whether the hike is smaller or larger in terms of the ability to pass through? And in terms of sensitivity, has there been any change in terms of the expected NIM impact per, say, 25 basis point hike?

With regard to the pass-through, we do expect to be able to pass through these increases, of course, not on a 25-to-25 basis. But we do expect to consistently increase our loan pricing as the BSP raises rates. And for many of our top customers, whose spreads are really quite thin, there's really -- we really have limited options but to increase, and they do recognize that as well. With regard to the ratio, I don't recall what the last number we told you specifically, but our computations have it at about 8 basis points per 25 basis point increase in -- 8 basis points of increase in our NIM per 25 basis point increase from BSP.

All right. That's clear. I also wanted to follow up on Karthik's question on the cost side. Just wanted to check, with the delays that have happened, is there any -- are you now guiding for lower cost growth, you previously were looking at 20%? And what does it mean for next year, does it mean next year we might get higher cost growth and lower this year?

Well, as I mentioned, we typically don't like to pay for projects before they're implemented, right? So if the projects do slide, then we can expect the payments to slide as well. We are committed to try to get our projects implemented on time. But as -- I'm sure anybody that's involved -- been involved in such implementations know that there are risks of sliding. And so because we are committed to the projects, if they do slide, then the spending will slide from second half of this year into next year.

Okay. And last one from me on loan growth. We did see first half very strong growth, but you've also actually revised down your GDP growth forecast for this year. So in terms of second half, what type of loan growth are you expecting? And any particular sectors or drivers for this growth?

I believe at the earlier part of the year, we had projected a loan growth rate of between 8% to 10%. We believe that it will be at the higher end of that range. So probably at about the 10% range total for the year.

Can I -- let me add something to the answer because I know DA is very focused on our OpEx and how it [ goes through midyear ]. Some of the -- most of the delays this year, DA, are -- have to do with what I would call back of the house technology. For example, our -- we're a little bit delayed on our remittance system, delays on our tellering system and very delayed on our card management system, which we are changing completely. And that's why some of the expenses that were supposed to be done this year for those 3 and some other back of the house systems are being pushed or will probably be pushed to next year. But that means also that if it's pushed next year, some projects that were supposed to be next year will also be pushed to the year after. So we don't expect the increases next year to be significantly higher from what we had originally guided before, which was going to go back to normality. Also, a lot of our tech expenses, as you know, is we -- we do a lot of technology. We do get a lot of service where we pay as we go. And obviously, some of the volumes haven't been coming as strong as we thought. And therefore, it might be probably coming towards the end of the year rather than early of the year. So that's why it's also lower at the first half of the year.

Okay. Our next question will come from Melissa Kuang of Goldman Sachs.

Just back on the provisioning, you mentioned that you're not ready yet to kind of bring it down because of the environment. Does it mean that we'll stay at this kind of 66, 70 bps range? And then as the rate rises, do you think you are likely to provide a little bit more given that there will be asset quality concerns? I mean maybe you won't see a sharp rise in NPLs, but there will be a gradual kind of trickle up in terms of the NPL ratio. That's my first question. Then maybe I'll just ask a second question here. In terms of -- you showed very nice charts in terms of digital customer, that they have higher revenue spend. But I just wondered, in terms of the -- have you done any analysis to see whether or not these customers that you bucket into digital has always been those customers that actually do more transactions with you per se and that's why the needed to engage more, and that's why they went digital and that's why you see the higher revenue? Is that like they go digital and then the revenue increase? Or they were already a very high revenue customer then just adopted digital?

Okay. Let me address first your question on provisioning. On provisioning, as mentioned, we don't, at this time, foresee increasing -- or decreasing our provisioning. As rates go up, obviously, the risk of customers -- of more customers running into issues increases. But at this time, I guess we are -- it's not on our radar yet, at this time, to increase provisioning, in part because we have quite a big buffer, right, at 171% NPL cover. I think we would need to see NPLs themselves really start to rise rather than to increase provisioning in anticipation of higher NPLs. So we would wait for it to show up. Unless something really severe happened and we believe that there might be a need to, in a sense, front run that. But overall, I think we're probably going to remain at about this level for the remainder of the year. With regard to the digital customer, I myself am not aware that we've done any past comparison to -- of what the customer was doing in the past. But in many ways, we see -- because of the way we're thinking about the customer as a digital customer and because they're using the digital services, we see that providing them these digital service as necessary to retain the customer. And therefore, we associate that revenue with being able to provide digital products to the customer. Does that answer your question?

Yes, kind of. I was just wondering like in terms of your pickup rate, the sign-ups has still been a bit low at about 25% of the customers are digital. I just wondered like as you onboard more and more, should we really see the revenue move up essentially? Like can it be one-for-one? Or maybe it wouldn't because whoever else you get on, perhaps they don't really actually do much transaction but you just put them on digital, and then it's more cost saving versus revenue generating?

That's a good point. But I guess the counterpoint to that is that -- I mean and certainly, there will likely be some customers in that category. But I think a couple of things. One is that this qualification as a digital customer is reassessed on a rolling 12-month basis. So just because they do -- just because they sign up online and then did maybe 1 or 2 transactions, but the bulk of their transactions are nondigital, they will fall off that digital customer list. So they have to really be a digital customer and remain a digital customer for us to be counting them in that category. I think there is the potential that they could become digital, but not really do that much more with us. But there is also the potential that as we bring on more digital customers, they will bring some of the transactions that they were doing with other banks to us because it's more convenient to be doing it with us.

Okay. Thanks, Melissa. We'll address questions in the chat box. There's one from Samin Reza of Maple-Brown Abbott. What's the outlook for the rest of the year? And from which section of the loan book do you see NPLs potentially rising from?

We've been seeing limited impact so far -- limited negative impact so far from kind of this negative overhang from inflation. We've continued to see growth. We have continued to see loan growth from our customers and kind of the reopening of businesses has allowed our customers to start to come back. We do recognize this risk. And therefore, the outlook, I would say, for the year is -- it's not so clear. We wish it were more clear. But it's difficult to predict so far. The trend has been good, but we do remain very conscious of what is out there. Where do we see NPLs potentially rising from? This is -- mostly, we've been seeing tightening in our NPLs -- in our NPL numbers, and therefore, it's difficult to say exactly where it's because -- where it's going to come from because we've been seeing overall the NPL numbers get better. I think the risk, as we saw through the course of the pandemic, is maybe for the SME sector because the SMEs tend to get worse hit as things get worse and because they're -- oftentimes, their buffers tend to be lower. So that is a potential risk for us. Thank you.

The next question is from Jeff Liu of Buena Vista. What is the average deposit per account and product per account for digital division versus average branch customers? Is the digital division able to generate enough deposits to fund the product growth?

I don't have on hand with me the answer to the average deposit per account and product per account in the first part of the question. But in regards to the second question, I think one of the things about the new way or the different way in which we're looking at digital customers is to not look at the digital product generating in itself enough revenue to say, we -- let's say, we invested x amount in order to develop this digital product, and is this digital product specifically generating enough revenue to earn back that PHP 1 billion that we invested in order to develop this. Instead, we look at it -- this new way of thinking is meant to look at it as in this digital product or service allows us to increase our engagement and increase customer loyalty and customer retention with these customers, and are these customers really worth retaining. And so I think it's a bit of a different way to think about it.

If I can add to Eric's point, I guess that's exactly the way we're thinking about it, that we're not looking at a clear line between digital and nondigital from a product basis or a division basis. For us, digitalization is key to increasing our revenues, driving the bottom line, and therefore, trade-offs have to be made as to what you do at the branch versus what you do digitally. For example, when we take a look at this concept of the digital customer, we've noticed that the digital customer has a profitability on their deposit that's 70% higher than a non-digital customer. From a loan point of view, a digital customer has profitability that, I think, is 3x higher than a non-digital customer. And yet, we don't really have a digital loan product per se. It's just that the behavior of people who do things digitally, they do more with the bank. And therefore, the concept of creating a digital customer, to think of a digital customer, is to really think of the full relationship because customers who transact digitally with us just do a lot more. And therefore, going forward, we will have to be thinking about things like whether we give certain digital products for free only to drive deposit growth or loan growth, which in the traditional sense are not digital products. But that's the only way to think about this going forward.

Thanks, TG. Our next question is coming from Nick Yumul of ATRAM. Can you provide some color on any notable difference of the new digital or nondigital customer acquisition from a geographic standpoint? Is the traction in provinces similar to Metro Manila?

Hard to tell, to be honest. We've not really done it. I would suspect the traction is better in Metro Manila, but that's just seat-of-the-pants.

Okay. Thanks, TG. The next one is from Jeff Liu again of Buena Vista. For the corporate loans growth, if the demand is mostly coming -- is the demand mostly coming from CapEx increase or working capital loans?

We have John-C on if he wants to take that.

Sure. Thank you for the question, Jeff. So the quick answer there is in terms of size, the CapEx demand is still larger. But in terms of number, and as you might imagine with commodity prices having gone up, even for a similar volume or same volume transactions, the dollar or peso values for working capital have gone up. So we've seen a request -- we've seen a demand for increase on both counts. On the CapEx side, the only thing I can comment on is, generally, given the recent -- more recent volatility arising from the change in the approach of the local central bank for interest rate hikes is that those that have gone out and already commenced their CapEx programs, they're going to continue. So there's no lack of confidence there that eventually demand will catch up. But for those who have not started, they're taking a bit of a cautious position. And that's not a generalization, but we've seen it from clients that we've been in most contact with in the last few weeks. So that's it. Thank you.

Thank you, John-C. From Nick Yumul again. Can you talk about KPIs of physical branch managers now? Are they rewarded for digital customer increase? Or are there any potential conflict of interest between the branch managers and the digital platforms, for example, in terms of customer acquisition?

Maybe let's -- Ginbee, do you want to take that?

Sure, TG. Again, thank you for your question. We definitely, and it's not just now, we've always had the KPI of our physical branch managers and relationship managers to include digital enrollment and digital usage. So in fact, all new accounts or customers acquired are automatically bundled and cross-sold at enrollment in digital. At the moment, about 70% of new-to-bank customers are already enrolled in the digital channel. The remaining 30% is really more because of the profile of the clients who are still unsure about enrolling in digital accounts. Are there any potential conflicts? None at all. And I guess this is really because of the organizational transformation that we have put in place wherein each and every branch personnel is also required to transform our clients to become more digital. And you can see that our digital customers have really ramped up in the recent years.

As a follow-up, Ginbee, you grew your deposits with customers at an impressive rate despite not adding branches. Is the pace of growth beating or within your initial expectations when you first set out your digitalization plan?

We're very happy with how we've been able to acquire new-to-bank customers through the digital channels. In fact, this June, our new-to-bank sources of acquisition is already 50-50, branch and 50% digital. We are -- we already beat our end of year new-to-bank target for GSave. And of course, are we happy? We're very happy, but we never would stop at that. We can be happy with more.

Okay. That's great. We'll go back to people on the -- in the room. Joseph Sinay of T. Rowe Hong Kong, Joseph, you can unmute your line. Joseph, are you there?

Can you hear me?

Yes, we can hear you, Joseph. Go ahead with your question.

Excellent. Are you conducting additional credit reviews related to inflation similar to the COVID situation? Or do you view this as still within the range of -- you're not going to do more on the credit checks? That's the first one. And related to that, in your credit risk models, is there any period that you would use to benchmark that's going on right now? Or how do you factor in that credit risk of inflation given the uncertainty of what's yet to happen? That's my first question.

Yes. Maybe I can take that. So first on the -- for additional credit reviews due to the situation. I think during COVID as you -- I think you alluded to, we did some current reviews more frequently. That practice continues not just on a COVID -- under a COVID situation, but even now under our kind of increased vigilance towards risks of inflation. When we review accounts, a number of accounts that come up for review that in other situations we might normally have renewed for a year, some of them were saying, okay, this account that's revisit it in 6 months because we think that the risks are higher. So we are applying monitoring more frequently. We don't have a -- on your second question, there's no specific model saying the increased risk of inflation applies to this account with a factor of 0.5 or 1 or something like that. We don't have that kind of model. But we do the assessment on a per account basis and say that this is an account that we believe is at higher risk and then, therefore, maybe we need to review it after 6 months or sometimes could potentially be even sooner than that.

Got it. And then I know you answered the question earlier on potentially which specific accounts, and you mentioned SME being a highlight. But from an industry standpoint, any sort of industry group that you think would be of elevated inflation risk based on what you're seeing so far?

The way we do it, Joseph, and we just did this about 3 weeks ago. But I should remember, 3 weeks ago, we had our credit team, our corporate credit team did the study on which industries are at high risk, medium risk and no risk to rising inflation going forward. And what we do is we take those industries, especially those that are high risk, and then we review the accounts more diligently or more frequently. And I don't know if John-C remembers which industries were at the high risk because of inflation.

Yes. So I mean -- yes, thanks, TG. So Joseph, what -- and you are following these, too, I guess, from the equity market standpoint. For -- and then just to name an obvious one, the construction industry is one, whereby we may have committed to long-term contracts prior to the impact of higher commodity prices and the depreciation of the peso. So we -- that's one high-risk industry where we have to monitor closely because of their long-term contracts. And at the same time, they're directly dependent on the industry that's also going through an inflection point. As you know, the real estate industry, which is quite fragmented, first, in terms of players, second in terms of type of product, and there's going to be a shift in demand there. So those are interconnected. So that's an example of one. But for the more mainstream ones, maybe agri and the food supply chain sector, there will be selective reviews that we are doing there, both because of a lack of and increase in cost of inputs for those industries. So I think you have an idea of what industries were talking about, what I'm referring to. And we're staying close to them because commodities have gone up. And as you know, different countries have already tried to protect each of their industries or promote each of their industries depending on the situation they're in. So we're talking commodities both coal, for instance, so hard commodities, and also those that are in direct input for food, so the fertilizer industry. So we're looking at that globally. Because what's happened is with the current crisis in the Ukraine, even the equilibrium in our part of the world are shifted. So -- but we're very -- having said that, we're very confident that the borrowing client base that we have are sophisticated enough to adjust to these moves. And TG, in fact, has joined us in some of our meetings with the bigger players to get a first-hand feel of what's going on.

That's very helpful.

And then just to add, Joseph, obviously, that's what John-C and I talked about on the micro side, where you look at it from a borrower's point of view. From the macro and risk management side, inflation is part of one of the independent variables of our ECL model, which we are going to run a new version given what's been happening. And maybe that's also why we're a little bit being conservative by keeping our provision at these levels. Obviously, I think if you run the new macroeconomic factors that have taken place, to me, it's very clear, ECL should be rising, right? Although I think we're still over-provisioned because we've got 170% coverage, right? But I'd rather face that at the end of the year with the auditors if they feel that we have over provisioned. But we just don't know what's going to happen. People ask me what's the thing that keeps me awake at night, it's really food prices that might be out of control. So we will be conservative and we'll face the auditors at the end of the year as to whether they want us to take our provisioning down.

That's super helpful. One final question from me. Any other pandemic-related over or under charges on the fees or operating expense side? Thinking along the lines of your high-yield deposit product in-branch service charges, anything else like that still left in the books that we should be aware of?

None. I think in the pandemic [indiscernible] disappear, right? So that's good. But nothing I see going forward. I mean, obviously, if mobility closes down, if mobility shuts down, that has a little effect both on the spending on the cards, branch service charges that happens, but I don't expect mobility to be hampered going forward. .

Thanks, Joseph. Rachel Rodriguez of Maybank. Rachel, go ahead.

Congratulations on the results. I have 2 questions. First one, you saw that NPL declined a huge amount just quarter-on-quarter. I'm just curious whether this is driven by corporate or consumer. Also, had there been lots of write-offs in the second quarter? So that's my first question.

Sorry, sorry. I missed [ what you said ].

What's driving the drop in NPL and what's the level of write-offs in the second quarter?

Yes. So the drop-off in NPLs is because we think our customers are doing better. As business has been returning, it's increased their ability to service their loans. And I think we, in terms of write-offs, we will continue to -- with probably about the same level of write-offs or same pace of write-offs as we have in the first half of this year.

All right. So just to be clear, so does this mean that we didn't see NPL improvement both on the consumer and corporate side?

We're seeing improvements in both the consumer and corporate side.

All right. Just another question from me. Could you give us more details on the asset sale? Are you looking at more foreclosed assets to be sold? .

That's more of a one-off, right, especially of this scale.

Yes. No, let me explain the asset sales, so that it's very transparent. The asset sale was a property in Makati that we sold because it had the Globe data center. It was a long-term lease. We figured we'd just take the better than the present value of the lease. This is a property on Pasong Tamo Extension that we sold. The value was very good for us. And part of the deal also was that we had to keep the branch in the location. So for us, it was monetizing and realizing better than the present value of the long-term lease that the data center was on. So it's a one-off.

Okay. The next one is from Rafa Garchitorena. Rafa, are you there?

Yes, you touched on NPLs -- on [ rising ] NPLs about impact of inflation. Have you looked at the impact of the currency? I mean there are some good-sized companies who shall remain nameless who are heavily USD indebted. Are you looking at how -- are you more worried about inflation or the currency when it comes to NPL formation? .

Rafa, it's both. When we do both the micro, like the one we talked about the corporate credit team, they look at it, it's both the inflation and the currency risk, right? And then also our ECL model from a macro point of view, currency is obviously one of the factors that goes in it as well.

Yes. So right now, you're not particularly worried about any one specific?

Is there anyone on our watch list, John-C?

I'm not sure who you're referring to, but we have none of those that have mismatched -- big mismatched liabilities versus revenue streams. For those that are dollar -- that are reporting currency in dollars, we know that their revenues are also dollar-based. If any, in our book, where there might be some mismatch is on the short-term working capital, where some -- well, in the more stable of times, borrowers thought it advantageous to continue to borrow in dollars and either have lower borrowing rates or a gain from the currency movement. But we're seeing less of that now. And we're being more proactive -- we're in more proactive discussions with such borrowers to manage that risk.

Got it. Just one more. On the NIM side, are you seeing -- I guess, the system is still extremely liquid. I mean you guys are still generating fantastic deposit growth. I think the system-wide LDR just north of 70% and there are other banks who -- Metrobank is one of them obviously with their loan book is still much lower than it was pre-pandemic. Are you seeing any competitive pressures that might limit your ability to raise your loan rates more aggressively?

Not really, Rafa, because where the liquidity really plays and where it gets very competitive is the very top corporate, right? So what happens there is that we compete on the spread over like the minimum lending rate, whenever you define your minimum lending rate, is it the RRP. And so when the BSP raises RRP, if they raise 25, we are able to pass on the full 25, right? Because if there's spread is like 2 basis points or 3 basis points, we just pass on the full rate increase for the top corps.

Yes. So you don't see -- remember, there was a time, like, I think, in 5 or 6 years back when some loan rates were being priced below sovereign.

Well, I guess when you look at U.S., right? But for the peso, I think the banks will realize that you can throw it to the BSP, right? And therefore, 5 or 6 years ago, the spreads came in, the credit spreads really came in. And to my knowledge, I think, John-C, those spreads haven't gone back, right? But because everything is based off a benchmark rate and the benchmark rate is rising, that's what's giving us the lift in our asset yields. And that's one for one.

Okay. Our next question is in the chat box from Jeff Liu of Buena Vista. Should we be expecting cost-to-income ratio to start to increase from the second half in 2023 going forward due to the digital initiatives and normalization of the headcount spending?

Cost-to-income ratio, I mean, we'll probably increase versus where we -- this quarter, right? Because obviously, we had a good one-off. But on a recurring basis, stripping out our one-off gain, I wouldn't expect it to increase significantly. In fact, as we start to -- as our digital initiatives are implemented, we should see that allow us to add more customers at a more cost-efficient rate.

Okay. Thanks, Eric. We have one question from Cristina Ulang of FMIC. What's the outlook for the flattish LDR? Is there really too much liquidity in the system that even if your loan growth looked [ bleak ] versus industry, the LDR remains steady?

Sorry. The LDR...

Does the outlook on LDR and liquidity in the system...

Yes. Obviously, as mentioned, there has been quite a lot of liquidity in the system, and therefore, that has been keeping our LDR rates fairly low. We're -- as loan demand starts to pick up, we should see - we should be seeing some increase in terms of the LDR rates and greater usage of the funds, and this will add some tightening to the market.

Okay. There is a question from [ Luis Francisco ]. Could you comment on the tepid loan growth of the mortgage segment? Ginbee?

Thank you for the question. The tepid loan growth that you're seeing in the mortgage segment is actually a blended growth of both the wholesale and the retail segments, or some segments of the housing loans portfolio. We have part of that contract-to-sell portfolio, which is the one that's contracting simply because in the -- during the time of the pandemic, the demand for -- among our developer partners for contract-to-sell receivables is higher. And -- but now as the economy opens up and borrowers are now more confident about their ability to service the loan, we've seen our regular housing loans book releases, in fact, grow significantly. Just as a -- some numbers, our regular housing loans releases actually grew year-on-year by 58%, whereas our contract to sell is the one that's contracted by 89%, although the contract-to-sell portfolio is really a smaller amount of the total housing loans portfolio. So all told, you'll see a flattish portfolio on the housing loans. But really, it's the regular housing loans is growing extremely well to augment the contraction of the contracts itself.

Ginbee, just so there's no confusion. Those numbers were releases or outstanding balances?

Releases. Releases, TG.

Okay. Thanks.

Thank you.

Karthik -- the next question comes from Karthik. Karthik, go ahead.

Just 2 follow-ups. The first one is the credit card loans have grown almost like 16.5%, and I believe the spends were also -- the growth was also quite healthy. Why then is the fee from credit cards only up 12.2%?

So the fees are not up as much in part because of reduced penalty charges. So as customers have been servicing their obligations more on time, it has reduced the amount of penalty charges.

So the revolvers are actually down there, I mean, those are basically the late payment ones, right? So it's more transactors. The ratio of transactors have risen among the spends, is that a fair [ reason ]?

I think it's fair to say that at BPI, the bulk of our cardholders are transactors. But when you look at the card business, 60% of the revenues go into interest income, right? And the noninterest income, the fees that you see, come from late penalties and then, I guess, our interchange fees as an issuer. And I think that the muted growth for this year versus last year, and we're seeing it across our different lines, whether it's credit card, retail loans or corporate loans, the late penalty fees that we collected last year are significantly higher than this year. And that's why the fee income for cards, for repay loans and even corporate loans is flat versus last year. .

Got it. Got it. My last question is, in one of the earlier comments on the fee income for both the retail and corporate loans, which are down 17% and 18% year-on-year, the remark was that the client profile has actually improved, which means there are lower late payment charges, et cetera. On a like-to-like basis, if the client profile has actually improved in favor of prompt-payment clients, what is the difference in interest yield typically for a prompt-paying, high-quality client versus, let's say, a late-paying okay kind of client?

No, I think -- at least on the corporate side, it's not so much the client profile has changed. But the client -- there's less late payment charges or default interest charges being accrued, right, because the payments are being made on time. Ginbee, if you want to comment on the profile on the retail side.

Yes. Well, we've looked at our overall profile and really we have, as I think I chatted it, generally, our client profile are primarily depositories. 80% of our clients in the mortgage and auto businesses are depositories, which means that our quality is extremely good. From an NPL ratio standpoint, we are actually much better than the industry. For auto loans, we are 300 basis points better than the industry, and for housing loans were at 400 basis points better in terms of NPL ratio. So when you think about those -- that differential, then you can see that our loan books and our returns on our -- our risk-adjusted returns are much better than the industry.

I think to be totally fair. Your question really revolves around are we giving up same hard credit spreads, right? And correct me, Ginbee, I think when you look at -- you need to look at the different loan products. For example, auto, we originate auto loans 2 ways, 1 at the dealership level and 1 at the bank level. Clearly, the loans that originate at the bank level are better credits and we also charge a lower rate than the dealer-originated. So that's one. In the housing, I'm not sure there's a real difference. We have the same thing, things that originate from the broker and the developer side and things that originate at the branch level. There's probably less of a difference there. And then I think in corporate, the spreads are really based on the size of the corporate. To your point, and this is one thing that we're trying to drill down, because my thesis is that the late payment fees that we are collecting less this year versus last year is not a result of this year being better, but really last year being worse than the year before, right? So actually, we haven't done this yet. But I've asked the team, I've asked Eric, can we take a look at what our late payment fees in 2019, 2020, 2021 and 2022 were. And I suspect 2021 was probably a badder year for late payment fees. And therefore, 2022 is going just back to the normal trend.

Sorry, Eric, what's the -- this is John-C again. What's the question of Karthik relating to fees, is that it?

Yes, late payment.

Okay. Yes, so...

Is our client profile better now that's why we're getting less late payment fees?

Which numbers were you referring to, Karthik? Because we...

On the fee -- so John-C, on the fee -- the Slide 14, where you have retail loans, which is down 17.9% year-on-year and corporate clients which down 18%. The earlier comment, I think, from Eric and TG was that basically the late payments have come down, the client profile has actually improved. So I'm just trying to see whether because it's in favor of customers who are higher quality which might come in with lower risk spreads.

I see that. Okay. There's a quirk also there in the way the corporate one is reported. Apart from the late fees, we also include -- if we wrote off something and we're able to generate revenue from the sale, that's also booked there. So we had a few of that also last year. So it's actually not good necessarily. And what happens is you take a write-off prior period, you get obviously, the tax impact. And then when you -- if it's written off, but we realize -- because we don't let up on our collection efforts even if we've...

Written it off.

Yes. That's -- so we still change them.

Now you've confused Karthik completely.

But Karthik, part of it really is that our client base have already recovered a significant number and owing largely to the better curing, which means that a lot of our clients in the past who've had hardships financially are now able to pay. That's one. Second, we've also written off some accounts that had dragged -- had been a drag in our NIMs and risk-adjusted margins. And so when you write off, you don't any more collect late payment charges.

And maybe I can just add to that, TG, I know you asked me for that data. It came in just before this call started, so I didn't get to give it to you yet. But yes, in fact, the 2022 late payment fees are looking very similar to pre-pandemic, so 2018, 2019; versus the 2020 and 2021 late payment fee levels, which are elevated.

So my thesis was right.

Yes. So it's not just almost back to trending. Okay. This is very clear.

Ginbee, there's one question from [ Elle Neil ]. Do you count GSave as part of deposits?

Yes. Yes. GSave, we -- is on our books.

And let's expound on that. We count it because they are deposits with us, they're not deposits with GCash. They're not [ logged ].

Yes.

And in fact, you can access your account on our app. You don't need to go to the GCash app.

That's right.

So guys, open your GCash accounts and open your bank accounts.

Okay. I think we have one final question in the chat box from Cristina. In a high inflation environment, what risk variables are you closely monitoring aside from asset quality? What opportunities this high inflation environment opened for the bank aside from wider loan spreads?

Well, I guess in terms of opportunities, to be honest -- obviously, as you mentioned, the higher loan spreads is an opportunity for us. But the higher inflation does create risks for us as well. And I think that's what we're more conscious of, is the risks created by this higher inflation, aside, of course, from the opportunities of higher interest rates, higher NIMs. But we are very conscious of watching out for how things are going to pan out and watching the risks.

Okay. I believe that's our last question. Thank you, ladies and gentlemen, for your questions and your participation. To wrap up this call, let us hear some final thoughts from TG.

Thanks a lot. Again, thanks to everyone who participated on this call. I have never been in a more transparent call than this. And I hope that everyone found this call useful and informative. At BPI, let me just talk about how we see things going forward. I made a couple of notes based on the questions. We do expect loan growth to continue to be strong. And we see -- as John-C said, we see continued interest from our clients, both from the CapEx side and the infra side and also to expand their working capital. Our credit card business is moving along really well. When we lost the Citibank bid, we made a very concerted and aggressive effort to increase our customer content to acquire new cardholders, and that's proven to be very successful. We expect funding costs to rise marginally as the BSP continues to raise their rates. But -- and we will -- obviously, our funding costs will rise because we do fund part of our book with TDs. But this will be muted because our CASA ratio is about 80% and our CASA deposits continue to grow strongly at about 13%. Obviously, asset yields will continue to rise also as the BSP actions continue, Eric has said, and we foresee that as every 25 basis point increase in the policy rate, we see our NIMs increasing 8 basis points per annum. Finally, we are very excited about the digital products. We will do a very full-court, full-on marketing campaign with TODO Savings in August, in which we will be celebrating our 171st anniversary. And we continue to expect our platforms, such as our equity trading platform and our mass market platform, our wallet cum loyalty program, to be launched in the fourth quarter. So I hope this was useful. And I want to thank everyone for being here. And I thank Chinky and her team, and Eric and all my colleagues for participating in this call. Thanks, guys.

Thank you, TG, and Eric for leading this afternoon's earnings call. Ladies and gentlemen, this concludes today's earnings 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.