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

Good afternoon, ladies and gentlemen. Welcome to BPI's Third Quarter 2022 Earnings Call. This is Chinky Lukban from the Strategy Office. I'm your moderator for this session. I am pleased to introduce to you our speakers and panelists this afternoon. We have TG Limcaoco, our President and CEO; Eric Luchangco, our CFO and Chief Sustainability Officer; Juan Syquia, Head of Corporate Banking; Theresa Marcial, Head of Wealth Management; Jojo Ocampo, Head of our Mass Retail Products; Ginbee Go, Head of Consumer Banking. We also acknowledge the presence of the rest of the BPI leadership team joining this call. This afternoon's agenda will begin with opening remarks from our President, TG Limcaoco, followed by our CFO, Eric Luchangco, who will walk through this quarter's macroeconomic updates, performance highlights and digital updates. Just some housekeeping reminders before we proceed. Please identify yourself by your name and your company, so we can address you accordingly. Keep your line on mute to minimize background noise, and this call is being recorded and do now read our disclaimers at the end of the presentation. Now let me turn you over to TG for his opening remarks. Please go ahead.

Thank you very much, Chinky, and a good afternoon to everyone joining this quarterly earnings call of Bank of the Philippine Islands. As we disclosed last week, last Thursday, our third quarter numbers and indeed our 9-month year-to-date numbers reflect very strong profitability that is brought about by what I would call, above market growth of our business as well as expanding margins. As my colleague and our CFO, Eric Luchangco will explain these we expect to continue into the future. And one of the issues that we are trying to push is to provide you more information and more detail as to how we see this growth and how this growth is taking place. Our results also reflect improving asset quality and credit costs that are approaching normal levels. We also have a balance sheet that, as I said, is growing above the market pace and is maintaining -- and we continue to maintain a very strong capital position. Finally, I'd like to point out that our initiatives are beginning to bear fruit through our increased customer count. We are also -- Eric will also explain some of our new digital initiatives that we are launching that we recently launched and that we are launching this quarter and as well as I'll provide in our Q&A some more details about our strategic moves, particularly our business combination with Robinsons Bank. With that, I'll turn you over to Eric for our briefing and then talk to all of you later during the Q&A. Eric?

Yes, hi, good afternoon. Yes. And thank you for joining us for BPI's third quarter earnings call. I'll start off my presentation with a brief economic update -- macroeconomic update. So on global growth, data releases over the third quarter pointed to elevated inflation and slowing growth. Early this month, the IMF kept its global GDP growth forecast for 2022 unchanged at 3.2%, but downgraded its 2023 growth projection to 2.7% from 2.9% and one that overly rapid tightening may push global economy into recession. Core inflation remained well above our Central Bank's targets, in most countries [ end ] markets to price in a much more aggressive path of rate hikes, as Central Banks reaffirmed their commitment to file inflation. On the domestic side, we have seen economic growth forecasts were also revised downwards with our research team expecting 6.3% growth for 2022, lower than the 7.3% projection provided at the start of the year. Despite elevated inflation, we expect a rebound in demand to drive our growth. On the interest rate side, BSP delivered a total of 175 basis points in terms of our rate hikes in the third quarter, just in the third quarter, bringing the policy rate to 4.25%. We think inflation will remain at an elevated level for the time being, and the BSP will continue hiking rates another 100 to 125 basis points within the remainder of the year. Interest rates continued to rise in the third quarter, and the yield curve started to flatten with more increases on the shorter tenors in line with the expected policy rate hikes in the near term and the weakening confidence on the growth outlook. In the banking sector, the rising interest rates have so far not slowed down demand for loans, while asset quality metrics continue to show improvements. The tightening cycle has lifted bank margins, as you will see in our results. However, looming headwinds, including steep and rapid increases in rates may dampen demand for loans and weaken asset quality. Moving on to our own financial performance, we're pleased to report another quarter of strong profitability underpinned by continued loan growth and NIM expansion. For the third quarter, the bank generated PHP 10.1 billion in net income for a return on equity of 13.73% and a return on assets of 1.66%. Asset quality further improved during the quarter and credit costs trended towards -- trended closer to its pre-pandemic level. The NPL ratio declined to 1.94%, while NPL cover improves to 177%. Loans and deposits continue to expand for the third sequential quarter at growth rates above industry averages. Liquidity and capital position remained robust with liquidity coverage ratio at 205%, the CET1 ratio at 15.9% and CAR at 16.8%. Finally, we expanded our client base and increased our client engagements. Last week, we launched the BPI e-wallet, the sixth installment of our 7 digital platforms. And in September, we announced our emerging plans with Robinsons Bank, which is value accretive to BPI. Many of you will already have seen our highlights. So let me discuss it now in more detail. Looking at our performance in the first 9 months, we delivered a net income of PHP 30.55 billion, up 74.8% year-on-year, inclusive of a gain on sale of property in the second quarter and tax adjustments, both to last year due to the CREATE law. Excluding the asset sales, the bank income would have been PHP 26.81 billion, up 53.4% year-on-year, and further adjusting for the effect of CREATE law last year, net income would have been up 40% year-on-year. Notably, net interest income at PHP 61.65 billion is up 20.5% year-on-year, attributed to strong loan growth and higher NIM. Non-interest income of PHP 25.81 billion is up 26.2%, largely driven by the asset sale in the second quarter. Total revenues at PHP 87.46 billion are up 22.1%. Operating expenses are up nearly 10%, driven by growth in technology and volume-related costs. Provisions at PHP 7.5 billion are 27% lower than last year, which brought net income to the PHP 30.55 billion I mentioned earlier, which is up 74.8%. Looking at -- looking at our sequential quarter performance. We delivered the PHP 10.1 billion net income for the third quarter, which is down 19% from the previous quarter, again due to the one-off gain that we bought in the second quarter, excluding that one-off gain and focusing only on our recurring income, the PHP 10.1 billion was another record income with record revenue at PHP 29.82 billion. Compared to the third quarter of last year, net income is up 78.5% due to strong revenues, which increased 26.8%. Manpower and premises spending remained well contained, but there was a large growth in the technology spend, consistent with our focus on digitalization and on other costs driven by volume-related costs, such as card fees on increased card usage as well as increased spend on certain marketing activities, including an aggressive company to acquire new credit card customers after we missed on the acquisition of the Citi portfolio. We report 5 consecutive quarters of income expansion, which you see in the red columns on the left table, extending the -- excluding the impact of the one-off gain that I mentioned on the second quarter of last year. Profitability remained high with 9 months return on equity of 13.73% and return on assets of 1.66%, the highest since 2016. Excluding one-off gains, ROE would have been 12.05% and ROA at 1.46%. The bank generated revenue of PHP 29.8 billion, up 27% from last year. Recall another strong quarter in net interest income of PHP 5 billion or 29% year-on-year to PHP 22.31 billion as interest rate increases have exceeded our projections at the start of the year and loan growth has been trending strongly in the right direction. Non-interest income increased 21% year-on-year to PHP 7.5 billion, with trading and fee income, posting 60% and 15% growth, respectively. Loans increased 3% quarter-on-quarter and 15% year-on-year, above industry averages. NIM improved significantly during the quarter and posted much higher increment compared to previous quarters. Average NIM for the quarter increased 15 basis points to 3.66% and 38 basis points from last year, driven by a recovery in asset yields. Cost of funds increased last quarter after 3 consecutive quarters of decline, and it's flat to earlier. I also wanted to take a moment to show you in a little more detail how our NIM has been moving and what that means for our future NIMs. Our current loan portfolio is composed mainly of floating rates for short-term loans with 32% repricing within the month, 52% repricing within 3 months and 71% repricing within the year. You can see this on the table on the right, showing the term over which these loans tend to reprice, so 3% -- 71% repricing within the year. This should give you a good indicator of what the lag effect is with regard to policy rate increases filtering into the loan book pricing and bodes well for future interest income, particularly in 2023. In the prior slide, we showed the NIM for the quarter at 3.66%. But this figure is the average NIM over the course of the entire quarter. While the average NIM ties in more closely to net interest income for the current quarter, it is a less accurate indicator of the NIM with which we start off the next quarter. With the increases in policy rates being implemented throughout the course of the quarter, the average rate through the course of the quarter is lower than our exit rate for the quarter and therefore, the rate at which we start NIMs in the fourth quarter. We show you here the monthly NIM, which provides a more accurate picture of what is happening. We finished September with a NIM for the month at 3.75%, which is up a solid 50 basis points from a year ago and is 9 basis points higher than the average of the current quarter. The bank also stands to benefit from an additional boost in NIM as we rebuild our securities portfolio from the current low base. Looking at the loan portfolio per segment, we are seeing growth across the board. Our largest portfolio, the Corporate and SME both maintained the high growth levels posted last quarter. While credit cards further accelerated its growth, close to 30% up versus last year, backed not only by the strength in spending activity amongst existing cardholders, but also by an aggressive campaign to acquire new customers after we missed out on acquiring the Citi portfolio directly. Other areas are doing well, which are personal loans, which were up over 40% versus last year and microfinance up 17%. Auto loans also posted growth in the double-digit area of 12% versus the more moderate growth shown in the second quarter. Our balance sheet expanded 12% year-on-year and 2% quarter-on-quarter going to PHP 2.5 trillion, backed by the strong growth in earning assets, including the loan growth discussed on the previous slide, but also by an expansion in the securities spot. Our liquidity remained healthy, supported by a stable and reliable franchise, with the liquidity coverage ratio at 205% and CASA ratio at 76%. Deposits increased 2% quarter-on-quarter and 13% year-on-year, above industry averages. Growth was posted in all segments, led by retail clients. Over the past 12 months, high-cost bond maturities were partially replaced by a bond issuance in January at a much lower rate and by time deposits, also improving the cost of -- our cost of funds. Looking at fee income, the 9-month fee income increased 34% year-on-year. Excluding the asset sale, the fee income increased 4.6%, driven by growth in fees from cards, transaction banking and digital channels. These segments posted notable year-on-year declines though. These are branch service charges, which dropped 15%. This was due largely to the fee changes in the first quarter, largely through the fee charges in the first quarter of last year on a now discontinued deposit product. Looking at just the third quarter this year versus last year, our service charges are actually up 7%. On insurance income, the 24% decline was largely due to lower equity income driven by lower market valuation of the investments. Meanwhile, the decline in fees from retail loans by 14% was due to the lower late payment charges on improving NPL rates, as to the performance of our biggest fee businesses, cards and asset management, card fees increased 21% following a 14% year-on-year increase in active cards and 53% increase in monthly biddings. Asset management posted a slight increase of 3%. We attribute this to lower assets based on lower securities valuation and net outflows as appetite for investments remain weak this year due to higher market volatility and redemption of the BOI portion of the PAMI funds, which were managed by DE. Asset sales were up mainly due to the one-off property sale. But other than that was largely flat. Looking at operating expenses, the OpEx stood at PHP 14.2 billion, up 14.9% year-on-year, led by growth in technology, volume-related expenses and marketing spend. Manpower costs increased slightly due to salary increases and performance incentive accruals, partially offset by lower headcount. We continue to make progress in our efficiency initiatives. We serve more clients with lower headcount and reduced our branch footprint. Our client base expanded to over 9.1 million, up nearly 640,000 since the start of this year, however, 1/3 of which our new clients acquired through our collaboration with GCash. We serve this increasing customer account with a slightly lower headcount, increasing the productivity of our average employee supported by our digital initiatives. Cost to income ratio declined to 45.8%. Excluding the impact of the asset sale, cost to income ratio stood at 48.6%. So we expect OpEx to accelerate in the fourth quarter, driven by the Bank's marketing plans and milestone payments, related to various IT projects. We estimate full year OpEx this year to increase by 15% to 18% lower than the north of 20% guidance at the beginning of this year, due in part to some delays on the delivery of some of the tech projects and also to some cost savings implemented on the tech side as well. We remain committed to our digital strategy. And for any projects that may be delayed into next year, we expect the tax spending of those to materialize still in 2023. Looking at asset quality, the metrics further improved in the third quarter with NPL ratio at 1.94%, down 5 basis points from the previous quarter. NPL coverage improved to 177% from 171% and the Bank continues to remain conservatively provisioned as it continues to monitor the effect of less favorable economic outlook on asset quality. Credit costs declined slightly to 63 basis points. On the capital side, our indicative CET1 ratio was at 15.91% and CAR at 16.8%, unchanged from the previous quarter as the impact of growth in risk-weighted assets from the growth in lending, the higher dividend payments in the first half of the year and the unfavorable fair value -- fair value other comprehensive income adjustments from higher interest rates was offset by the capital accretion from the net income. The Bank's strong internal capital generation supports future growth and shareholder returns. In our last meeting, we disclosed the Bank's policy to payout 35% to 50% of previous year's net income, up from the previous PHP 1.8 of dividend per net -- per share per year. For the first half of the year, the Bank paid PHP 1.06 dividend per share, which is up nearly 18% from the previous year. Let me also give you some updates on our digital initiatives. Last week, we introduced BPI's e-wallet, VYBE, the sixth installment in our 7 digital platforms. We envision this platform to be a one-stop -- to be a one-stop app where the wallet rewards and loyalty coexist and to be a major vehicle for client acquisition, financial inclusion and business growth. The initial version of VYBE only has basic features and is currently available only to BPI online clients. This allows ending and requesting money from via the VYBE and payments to merchants using QRPH. VYBE comes with rewards program to increase customer engagement. In the future, VYBE will be available to non-BPI clients and will allow person-to-person transfers using QRPH, bills payment, micro-insurance, micro investments and high-yield savings. We're excited about this new platform and its immense potential to expand BPI's client base and become a leading form of payment. We are making significant progress in the digital strategy we laid out in the third quarter of last year, particularly on digital onboarding, digital engagement and digital partnerships that accelerated the growth of the BPI ecosystem, improved customer experience and generated new revenue streams for the Bank. Since its launch, we've acquired close to -- excuse me, we've acquired close to or about 120,000 new bank clients and about 160,000 new product accounts with our seamless safe and fully digital onboarding process. In the past 12 months, we have enhanced existing and build new customer engagement platforms that integrate a wide range of products and services that meet the needs of the customer. We now have 6 platforms available and expect to soft launch the seventh platform, which is designed for high net worth clients this quarter, with a full launch scheduled for next year. We also expect to launch the BPI trade map. These platforms are enabled by our open banking infrastructure that allows customers to access over 2,100 products and services offered by over 100 partners. Our partnership with GCash is also progressing well with our partners -- with our products in GSave, GInvest and GInsure, gaining us more clients and generating revenues that would not otherwise have been there, if not for this collaboration with GCash. I also wanted to provide some context on how we have updated our thinking on digital metrics and digital customers, starting with what we think the digital customer is. A digital customer is one that has opened an account with us to be our digital platform or does more than 50% of their financial transactions with us via the digital pipelines. Customers must re-qualify as digital customers on a rolling 12-month basis by continuing to meet these criteria on an ongoing basis. As of September 30, our retail digital customers stood at 2.5 million, up 638,000 from the beginning of the year. 20% of our retail customers are digital compared to just 6% in 2019. In terms of engagement, digital customers did 3.9x more transactions than non-digital customers in the third quarter compared to 3x in 2021. As a result of this higher engagement, digital customers generated 2.46x more revenues than non-digital customers. This revenue multiple is slightly lower compared to the 2.6x in the previous quarter as we converted more non-digital customers to digital customers in the third quarter. These non-digital customers currently have lower engagement and revenue per capita, thereby bringing down slightly the total for digital clients. However, moving forward, we expect their engagement to increase as they rely more on digital on channels, thereby increasing their profitability. I've shown on this slide in red, it's the increase in the digital customer accounts from 2019 to September of this year vis-a-vis the higher revenue multiple they provide compared to the non-digital customers. In terms of cost per capita, digital customers cost 1.09x more to serve as they transact more and generate more revenues, even so they remain more efficient, with a lower cost-to-income ratio at 23%, which is 30 percentage points lower compared to non-digital customers. This wider digital -- this wide differential in cost-to-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. Finally, an investor I meet recently mentioned that we do not highlight actively enough what we're doing on the ESG side. And so we also wanted to share with you the various ESG awards that BPI has received just this year alone. We have received 7 awards so far this year from well-recognized publications demonstrating the continuing leadership that BPI has in the sustainability space. The sustainability initiative has always been very important to BPI and will continue to be so as we move forward. As I close, allow me to summarize some key takeaways. On profitability, strong 9-month performance shows strong results as revenue generation remains strong. On balance sheet, our robust capital position provides adequate buffer from deteriorating economic outlook with room to deploy capital to support our growth. Our asset quality has continued to improve and remained more favorable than industry average, assets been the case as typically for BPI. And lastly, our digital agenda is progressing well as we continue to grow our digital ecosystem. Overall, we are pleased with the Bank's performance for the first 9 months, and we are on track to deliver solid results for the year. We are mindful of the elevated macroeconomic uncertainties, but we remain confident about the position of the Bank and the strategy moving forward. Thank you. And I now open the floor to questions.

Thank you, Eric. Ladies and gentlemen, the floor is now open to your questions. [Operator Instructions] We have a question in the chat box from Aakash Rawat. The first question is, will VYBE be a direct competitor to GCash. How does this align with the strategy of working closely with GCash.

Let me take that, Eric, Chinky. Aakash, thanks for your question. Let me take the first question, and then, Eric, you can take a look at the questions and if you can take the next 2. I think VYBE, we look at this as sort of complementary but also, I guess, we'll compete a little bit with GCash, but they're very different animals. We don't expect -- we don't want VYBE to be a super app or we were going to keep VYBE very light, whereas I believe GCash is trying to build a super app to meet everyone's requirements. I was spoken to Ernest. We both believe that there is room for at least 2 wallets in the country, where one provides the super app functionalities for every day -- for all the usage, use cases, whereas ours would be primarily a rewards and a payment app. We think we have some advantages over GCash, where one of our use cases will be the ability to withdraw cash from VYBE using BPI ATMs without a card. We also wanted to be particularly linked to the BPI rewards program, which will allow usage -- greater usage among our customers. While we are not limiting VYBE to our depositors, we also want VYBE to be used by what I would call the ecosystem of our depositors, people who work with our depositors and therefore, want to use VYBE as means for sending cash either for a small payroll, de minimis payments or person-to-person payments. I think this does not take away from the continued working and cooperation between ourselves and GCash. We're both independent. We both have slightly different deals of where e-cash, e-money, e-wallets might go. And I guess just within the our group, it's part of just making sure that we've got all bases covered of VYBE. Eric, why don't you take -- sorry, Chinky.

Yes. Thanks, TG. The next 2 questions, Eric. You earlier highlighted the risk of slowing loans or deteriorating asset quality as rates rise. What levels of rates does the internal stress test suggest that these rates -- these risks might materialize?

Yes. So thanks for that. Yes, obviously, as I mentioned, we do believe that there is a real risk that asset quality may suffer a bit as we move forward under these conditions. We've run our ECL models and come up with some projections. Under our adverse scenario, we believe -- or the model shows that NPL levels can get up to the level of above 3%, so close to 3%, which is very close to the levels that we came from during the time of -- during the time of the pandemic, which is kind of where our NPL levels peaked, sometime last year at about 3% level. And so we think -- or the model show that we can come back to that level potentially. We've actually done some -- we've done a line by line in terms of our larger accounts and then seeing where those might go. And actually, the 3% level looks like it might be a bit conservative from the perspective that we don't see a lot of problematic loans on our book. And therefore, we think we might not get to that 3%, but that is what the model shows. And when we think about it, that 3% level would be roughly about 50% greater than where we are right now. And then that's more than covered by our current NPL provisioning. I think…

Okay. Then the -- we're finally from Aakash, how is the CASA declined this quarter or first in a long time compared to your expectation? How much CASA outflow as a percentage of total use will be reasonable in the next 12 months?

Yes. So we did see a bit of outflow on our CASA about 2 percentage points. This was in part due to some shift into higher-yielding assets, including time deposits, and therefore, we saw some of that growth into our time deposit book. Where do we think it will go? Right now, we think it's kind of at above the level that where it's likely to be -- if you haven't shifted yet, then there's a good chance that they will remain at or above this level in terms of the CASA. And so we think that somewhere from the 75% to where we came from the 79% to 80% range is a reasonable range for us to be in.

I think Eric also on the question on cash, and I'll let Ginbee chime in and talk a little about what we're doing on the CASA side. We sort of expected that as the differential between time deposits and CASA grew either, you'd see some of the more sophisticated depositors reduced their CASA balances. So the consumer bank, and I'll have Ginbee address that. We have started some promos and some marketing to try to keep the people within -- keep their CASA balances. But obviously, as the differential gets bigger, the smarter investor, smarter depositors will move more and more. Ginbee?

Yes. Thank you, TG and Eric, chiming in to the CASA question. First is that we've actually seen the CASA on the retail side hold up. And therefore, levels have been pretty much stable. However, the CASA swing is really coming from our corporate and SME, and that's really because of the increase in mobility. Therefore, working capital requirements are higher this time around. And looking forward, our outlook for the rest of the year is that we will continue to sustain our CASA at these levels. Understand this, as TG mentioned, we have some very strong initiatives coming into the fourth quarter, we have promotion in GCash targeting particularly the non-BPI customers in our -- in the GCash subscriber base. We have our Togo deposit, which we launched a couple of months ago and is gaining traction, particularly in the lower income. And in our core detailed clients, we are very, very targeted in our campaigns, stores, those who are still with opportunities to bring up their CASA levels and continue to migrate them to digital. So we sustain the CASA levels in their current accounts. So we have maximum saver push bonus credits. We have permanent savings push as well and a lot of branch underground activations. TG and Eric over to you.

Thanks.

Thanks, TG. I will take a couple of questions from the audience. First from DA of JPMorgan.

Congratulations on the results. Just 2 questions from me. First one is on costs. If I look at it, you've been below your cost expectations for the year so far. Could you just discuss, I guess, where the savings came from? And what we are expecting going forward? And second one on NIM. If I look at the transmission on our estimate, it's around 5 basis points for every 25 basis point rate hike. But going forward, you did show that chart, are you expecting that moving to around 10 basis points for every 25? That's all.

Yes. Thanks. On -- the first one was on the cost. As I mentioned, we haven't grown tech spending as aggressively as we had indicated at the beginning of the year for 2 reasons, right, which I mentioned earlier. One is that some of our projects haven't quite moved along as quickly as we might have hoped for. But we were able to get by out. And for that, obviously, we should be making milestone payments on that in due course. And so you'll see some acceleration in terms of costs as we are in the fourth quarter. So we should be seeing some of that catch up. On the other hand, we have also actually been generating some cost savings in our tax spend as we're working out arrangements with our vendors to do things more efficiently and including to move from owning some of these assets into paying for it on a pay-as-you-go basis. And so that's created some cost efficiencies for us on the tech side as well. So the combination of those 2 has helped us keep our expenses below projection, although, as I mentioned, some of it will catch up. On the manpower side, it's been fairly well contained, the increases that we've had to the payroll have been mitigated by managing the headcount, and I think we're doing fairly well in that respect. Premise has also remained flat. Again, on the margin side, with the delay of some of the launches, the marketing spend is also being delayed. But again, for some of these, we'll be seeing some catch-up as well as we move forward. And then, the second question now was on the NIM. We are not projecting NIMs to grow 10 basis points for every 25 basis policy rate increase. Our range is really going to be more along kind of like a bit lower than that kind of more in the 5% to 8% -- 5 to 8 basis points per 25 basis point or 25 basis point. Yes. So but we do expect NIM to continue to increase as we progress because what you'll see is that we do have a lot of loans that reprice monthly. And therefore, as the policy rate increase continues to happen month-on-month that you'll continue to see these loans increasing as well.

I think people have to understand that trying to predict the sensitivity of policy -- our NIMs to policy rate hike is kind of an art because it also depends on where our borrowers do their fixing, right? So if people begin to think that the BSP will become more regular in raising rates, you'll find that more and more of your borrowers will tend to get longer and longer fixing. The estimate we gave of 5 to 8 -- roughly around 8 is the number we're using for 25, assumes the current portfolio mix that we have as well as that is the expansion in the NIM after a full year, right? So that's the way we look at it.

Thanks, TG. Next, we go to Karthik of Buena Vista. Karthik, please unmute the line.

So I have 3 questions. The first one, if we were to look at our sequential improvement in asset yields this quarter, which was very strong relative to the first 2 quarters, how much of this actually came from asset mix changes versus repricing?

It's probably most of our repricing, Karthik.

Okay. That's surprising because if I were to look at our sequential growth in loans, which is somewhere close to, let's say, 3%, we had our personal loans grow double-digit sequentially. Credit cards also grew strong. Microfinance also grow strong. And these are all our higher-yielding loans. Why haven't they made an impact yet in the assets?

Because they're such a small percent of our book, right? The only thing that's significant -- our personal loans -- I can't even remember the number. Personal loans is what percent of our book? It's very small, right? The one that's grown outside of corporate loans, Karthik, the one that's gone significantly is credit cards, right, and credit cards are capped. So that one doesn't even have any increase.

So by and large, as yield improvement majority is still just coming from repricing. The asset mix shifts are not having an impact yet, right?

Yes. That's correct. That's correct. And in fact, when you look at it, we're benefiting greatly because of our corporate book, which is about 70%, right? And a lot of that is skewed to top corporates, who really have been playing a very short on the curve but basically paying a very small credit spread versus the policy rate. So as the policy rate goes up, they're not getting any compression on the credit spread. And so we're passing on to them the full interest rate hike.

Yes. So which is why, the observation that Eric made on the ECL models pointing out to a 3% max is a bit surprising, because our loan book that refers 70% is still corporate, most of it large corporate. In the last 2 years, they would have deleveraged significantly as well. Although we are seeing interest rates high right now, their health should be better than what they were going into the pandemic, isn't?

Yes. As Eric said, it's what comes out of the model and we're going to have to review the smaller, because when we -- when I -- when we looked at the number and we went name-by-name, I just couldn't figure out where this additional 1% where it comes from.

Yes. Okay. Got it. My last question is basically on the fee income. If we were to look at our fee income from cards, and if I were to just compare that with the growth in our card loans, that gap is actually widening. I mean, in the second quarter, our card fees grew 12%, while our card loans was 17%. This quarter, the card loan has down 29%, but the card fee has only grown 20%, which means that gap continues to widen what would be…

Jojo, would you be able to explain that?

Yes. I can explain that. Firstly, late payment fee was a significant portion of our non-interest income in the last 2 years due to the pandemic, but we have basically lost those late payment fees. And late payment fees are now just up by 3% versus prior year. That's basically the largest chunk of why our non-interest income is not growing as fast as our loan growth and credit cards.

Okay. It could also be a reflection of improving health of the customer. They've been able to pay on time as well as?

That's correct. And that's also reflected by our best impact PDOD.

Okay. Last one, again, on the fee income, if I look at asset management and insurance, of course, in your opening comments, you did make the point on volatility, especially in the equity markets. At what point do you think it starts to bottom and we start to see a more secular growth?

I think the insurance -- I think we continue to see good fee income from the insurers. If you look at our numbers because the insurance is sort of we equitize that. So that's the total earnings. We're getting hit on the insurance because of their mark-to-market on their securities portfolio. But when you look at the premium income, values in new business, that continues to be very strong. I don't have Theresa on here, but Sy is on. And maybe I'll ask her to talk a little about what we're seeing on the asset management side. Obviously, we're being hit a little because the AUM has come down because of market valuations.

Karthik, so on the asset management side, we're actually seeing a decline in AUM as a result of declining market valuations. And obviously, this is because of higher interest rates on bonds and also lower prices on equity assets. If we look at our past year performance, I would say, around 60% of the decline in AUM is coming from market value drop. And around 40% is coming from net flows or net outflows precisely because clients have been starting to de-risk their portfolios and move into safer assets. Our average fee for the entire business is around 45 to 50 basis points. We think that as we see interest rates speaking and as valuations, which drop and therefore, asset prices improve, then we will see a consequent improvement in our AUMs, and that's the time we'll see significant improvement in fee income coming from asset management. We see that this may be happening around the second -- around the middle of next year, and that's if projections hold as forecasted.

Got it. So in the first quarter, the AUM was still growing by 7-odd percent. So the decline is probably a recent phenomenon, right, possibly just this quarter?

Yes. There was a big drop in September, as you would see across all markets…

Okay. Okay. Okay. That's it from my side. Thank you all for the detailed response. I wish you all the very best.