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

Good afternoon, ladies and gentlemen. Welcome to BPI's Second Quarter and First Half 2023 Earnings Call. This is Chinky Lukban, your moderator for this session. I am pleased to introduce our speakers and panelists this afternoon. First off, TG Limcaoco, our President and CEO; Eric Luchangco, our CFO and Chief Sustainability Officer; Ginbee Go, Head of Consumer Banking; Tere Marcial, Head of Wealth Management; Jojo Ocampo, Head of Mass Retail Products; and John-C Syquia, Head of Institutional Banking. We also acknowledge the presence of the rest of the BPI leadership team joining this call. This afternoon's agenda, we'll begin with opening remarks from our President, TG Limcaoco, followed by our CFO, Eric Luchangco, who will walk through this quarter's performance highlights and strategic updates. The floor will then be open to questions from the audience. Just some housekeeping reminders before we proceed, identify yourself by your name and company so we can address you accordingly. Keep your lines on mute to minimize background noise. And finally, this call is being recorded and legal disclaimers apply. Now let me turn you over to TG for his opening remarks. TG, go ahead.

Thank you very much, Chinky, and good afternoon to everyone joining on this call. Today, we're very pleased to explain our second quarter and first half results. The team of Eric Luchangco and his IR team have put together what I think is a very comprehensive presentation to provide even more transparency to our numbers and through the actions that we are taking to achieve our 5-year goals. I think the results of the first half show very much that we are making good progress towards our 5-year goals in that our success and our aggressive actions towards acquiring market share in the loan space, both in the institutional banking and the consumer space, are paying off as well as our actions on the digital front are beginning to bear fruit. We will also have a small section at the end where we will talk about our actions on the agency banking initiatives that we have taken that will move us further into our goal of 50 million customers by 2026. So as usual, Eric will run through the numbers as well as some of our actions. We will open for Q&A at the end. And at that point, I think let's have a great discussion of where the bank is moving towards to. So without further ado, Eric, I'll turn it over to you.

Thank you, TG, and good afternoon to everyone joining us here today. We're pleased to report that the bank delivered a record PHP 25.15 billion in after-tax earnings for the first 6 months of the year. This was driven by strong net interest income and lower provisions. Excluding the impact of the sale of a property last year, which generated PHP 5 billion in gain, net income would have been up 51% year-on-year. Profitability further improved, with an annualized ROE of 15.5% and an ROA of 1.92%, the highest level since 2016. Funding and liquidity ratios remained well above regulatory requirements, with an indicative LCR of 204% and NSFR at 153%. The capital position slightly moderated, reflecting a strong pace of loan growth and capital distribution. Indicative CET1 was at 15.55%, and CAR was at 16.43%, well above both internal and regulatory thresholds. Asset quality. On asset quality, it remains sound, with a small uptick in the NPL ratio to 1.88%. We continue to book provisions, although at a slower pace than last year, bringing our credit cost to 23 basis points and NPL cover to 167%. As usual, our asset quality remains more favorable than industry averages. Lastly, our strong income generation is sustaining shareholder returns. For the first half, the bank paid cash dividends at PHP 1.68 per share and distributed common shares as property dividends at an entitlement ratio of approximately 0.089 shares for every share held. Looking at the second quarter performance, we delivered a record net income at PHP 13.02 billion, notwithstanding an increasing operating expense. Compared to the same period last year, net income was at 4.5%. The impact of lower fee income and higher expenses were more than offset by the strong growth in net interest income, up 27.5%; trading income, up 43%; and lower provisions, down 60%. Excluding the gain from the asset sale last year, fee income would have been up 11% and revenue up 24%, outpacing the growth in expenses. Net income would have been up 49%. Looking at our first semester performance. We delivered a net income of PHP 25.15 billion, up 23% year-on-year, driven by stronger revenues and lower provisions, which offset the increase in operating expenses. Sustained expansion of loans and NIM offset the decline in fee income from an elevated base last year due to the gains from the asset sale. Also reflected in our results are the following: net interest income at PHP 50.11 billion is up 27.4% year-on-year, attributed to strong loan growth and higher NIM; trading income at PHP 2.29 billion, up 41.5% year-on-year on favorable market conditions; fee income at PHP 13.19 billion, down 20.9% year-on-year from an elevated base last year. Total revenues came in at PHP 65.6 billion, up 13.8% year-on-year while operating expenses at PHP 31.39 billion were up 24.4%, driven by growth in volume, technology, manpower and marketing expenses. Provisions at PHP 2 billion were 60% lower compared to the previous year, which brought net income to PHP 25.15 billion, up 23%. Excluding the asset sale, fee income would have been up 13%; revenue, up 24.6%, outpacing the growth in operating expenses; and net income would have been up 50.6%. Strong earnings last year allowed for a sharp increase in capital distribution following the bank's shift from a fixed dividend amount per share to a variable dividend amount based on a 35% to 50% payout ratio on previous year's income. The bank declared, for the first half of this year, a PHP 1.68 dividend per share, up 58% from last year and 87% from the previous years. This is equivalent to a payout of 19% for the first semester. Also in June, the bank distributed common shares as property dividends, an entitlement ratio of 0.089634 shares for every common share held. We further improved profitability in the past quarter, resulting in an ROE of 15.53% and an ROA of 1.92%. That's the highest level since 2016. Earnings per share for the first semester was at PHP 5.09 per share, which is 58% of full year EPS last year despite the additional outstanding shares from the distribution of common shares through the property dividend in June. Looking at the revenue overall. Increases in assets and interest rates drove revenue growth. The bank reached a new high in quarterly revenue at PHP 33.9 billion, up 6.8% on the sequential quarter and 4.9% from the last year despite lacking the one-off gain that we had last year. Net interest income is up 27.5% from last year on strong volume growth and continued NIM expansion from increases in interest rates. Trading income is up 43.4% on a more favorable trading environment. Fee income is down 38.5% from last year but would have been up 11% net of the one-off gain. We continue to see positive trends with loans, which stood at PHP 1.78 trillion, up 10.2% year-on-year despite the high base last year from the booking of the tower loans in June. The loan book is up 3.5% quarter-on-quarter after a contraction in the previous quarter due to seasonality. NIM also improved following the trend of previous quarters. Second quarter NIM reached 4.11%, up 17 basis points from the previous quarter and 60 basis points from last year, driven by a recovery in asset yields. Total loans stood at PHP 1.78 trillion, up 3.5% quarter-on-quarter and 10.2% year-on-year, benefiting from the use of alternative channels, improved online applications, innovative credit score models and increased marketing efforts. Growth was broad-based with consistently strong growth in personal loans, credit cards and micro finance. Personal loans are up 16% quarter-on-quarter and 108% year-on-year, as monthly loan releases reached PHP 1 billion and new bookings were exceeding run-offs by 2.2x. Credit cards are up 11% quarter-on-quarter and 43% year-on-year on a 39% increase in installment loans and a 61% increase in revolving balances. As of May this year, 25% of all clients were revolvers versus 30% in May last -- 25% of all clients were revolvers for May 2022 versus 30% for May of this year, but delinquency among new clients remains low at about 2%. Microfinance loans are up 6% quarter-on-quarter and 26% year-on-year on a 31% increase in loan releases, driven by higher loan releases per branch, which were up 21% compared to last year, aided by the additional 10 branches we opened this year under BanKo. Mortgage loans had its best quarter since the pandemic began following the -- following multiple quarters of middling growth, this time posting a 2.7% quarter-on-quarter growth driven by bookings in CTS loans in June. On an absolute basis, corporate still grew the most, up PHP 100 billion or 7.8% year-on-year. All told, combined consumer loans increased 19% year-on-year, consistent with our direction to increase our presence in this area, resulting in an improvement in the loan mix, with consumer cornering 23 -- 21.3% of the total loan book, up from 19.7% last year. Fee income at PHP 6.89 billion was up 11% year-on-year, excluding the one-off gain last year, with our biggest businesses posting fee income growth. Card fees, which account for 29% of total fee income, were up 42%, largely on increased customer base and client engagement. Wealth management fees are up 1% year-on-year on an 8% increase in AUM, driven by flows and market performance. Branch service charges are up 9% on higher transaction count, including loan releases. ATM and digital channels were up 21%, attributable to the onboarding of additional partners this year, which contributed to the 53% increase in partner transactions and 22% increase in fund transfer usage. Above increases were partly offset by fees -- with -- by lower fees from securities and investment banking, which were down 14% on fewer notable transactions so far this year, although the pipeline remains robust. Insurance was down 2% due to lower equity income from investments in BPI MS and AIA while asset sales and rental income were both down year-on-year due to the high base last year from the property sale and the loss of rental income as the property was being leased out prior to the sale. Just looking into our card business in a little more detail. We can see the exceptionally strong performance of our card business, which demonstrates how embracing change and digital transformation has driven growth. Over the course of a year, we expanded and diversified our channels to include digital partnerships with GCash and Agency Banking, including third-party aggregators. The partnership with Agency Banking brought with it indirect access to underpenetrated customer markets through 6 merchants and their over 1,000 physical stores, where clients can access applications for card products. And we'll talk a little more -- in a little more detail on the Agency Banking later. We adopted alternative credit scoring models developed by our data and analytics team using data across different products to expand the prequalified client base and improve approval rates while also streamlining the application process and reducing application requirements. We transformed our marketing campaigns through hyper personalization, leveraging on the use of data to ensure that clients receive the right offers that address their needs. This is a [ path ] in both targeting BPI depositors and the market at large as we intensify acquisition via the Internet channel. This approach helped the bank achieve better results while saving on marketing costs. Finally, we implemented a fall-off-your-seat campaign, which is an aggressive card switch campaign, employing discounts, rebates and points, in the BPI rewards program. Awarded points can be viewed and redeemed via the VYBE app. This resulted in a 29% increase in card base and a 55% increase in billings year-on-year versus industry growth of 14% and 40%, respectively. Card banking demonstrated how fresh ideas, supported by technology and a highly engaged team, can transform the experience of the client and the employee. We are excited to roll out these initiatives in other products like personal, auto and mortgage loans and even investments, anticipating that they will yield similar results and accelerate the growth in customer acquisition and customer engagement. On the expenses side, operating expenses for Q2 stood at PHP 16.3 billion, up 23% year-on-year on tech, marketing and manpower expenses as well as the low base effect as OpEx in the first half of -- in the first half of 2022 was up only 5% over the same period of the prior year due mainly to payment schedules for IT projects. Manpower expenses are up 17% year-on-year due to structural salary increases and a slightly higher headcount, although headcount remains lower than its peak in 2019 and even the level in 2021. And that the manpower efficiency has continued to climb, showing consistent annual growth in customer count for employee headcount. Technology costs at PHP 3.1 billion are up 26% on continued investments in digitalization, noting that some of this year's spend is delayed spend from last year but that we are seeing that spend result in new offerings to customers, and we'll also give more details on that in the following slide. Our expenses are up -- other expenses are up 37%, driven mainly by increases in marketing expenses and card transaction charges. The higher operating costs were partially offset by the impact of efficiency initiatives. We serve more clients now at 9.65 million, with a reduced number of branches and branch employees. Digital clients, which generate more revenue and cost less to serve than nondigital clients are now nearly 1/3 of total client count from 6% in 2019. Cost-to-income ratio was at 47.9%, lower than the full year 2022. We recognize that there have been questions on our rising tech costs. Here, we show a breakdown of the fixed versus variable costs on the tech side. And you will see that taking half of the tech cost from last year -- basically semi-annualizing our tech costs from last year, you will see that the fixed costs remain fairly fixed, but the variable component, which rises in relation to business volumes, such as transactions or a number of customer accounts, has grown with the increase in business volumes. That component currently accounts for approximately 12% of total tech cost. We're constantly reviewing our tech architecture to determine that this remains the best way for us to manage our growth moving forward, and we will adjust as we see fit moving forward. Our balance sheet expanded, with both loans and deposits increasing by 10.2% and 7% growth, respectively. Our liquidity remained healthy, supported by a stable and reliable franchise. CASA ratio remained stable at 70%. Our asset quality remained resilient. There was a slight uptick in the NPL ratio to 1.88%, which was due to new NPL formation from credit cards and personal loans which were within expectations, and we kept provisioning at PHP 1 billion for the quarter. Consistent with the guidance in previous meetings and to address concerns of our auditors in overprovisioning, we are on track to gradually lowering the NPL cover, which reached a size 180% in December 2022 from 88% in December 2018. During this period, we accumulated huge provisions by keeping credit costs elevated to as much as 2% in 2020. We continue to book provisions this year though at a lower rate of [ 23 ] basis points to partly cover new NPL formation, while allowing the total cover to gradually decline. For now, we do not see the need to book higher provisions than planned as new NPL formation has remained muted and asset quality outlook has remained -- has become favorable in line with our view on GDP, employment and inflation. In addition, our Stage 1 and Stage 2 ECL are lower compared to the start of the year, though total ECL increased slightly driven by new loan bookings. Currently, total provision is more than sufficient to cover our base case scenario. We are comfortable with the range of 150% to 160% NPL cover. And it's worth noting that although the cover is declining, we are confident that the provisioning is more than adequate, especially since we have very strong collateral cover on these accounts. Looking at the collateral cover for the NPL and restructured loans independent of the rest of the loan book, we note that the coverage for these accounts by a hard collateral, such as real estate mortgages or deposits, government securities, et cetera, is at 220%. And then beyond that, we also hold additional enforceable collateral, such as chattel mortgage or similar, on these accounts. Lastly, on capital, our capital position has remained robust while supporting strong growth for the semester. CET1 capital stood at PHP 303 billion, up PHP 3 billion for the quarter on net income accretion, additional paid in capital from distribution of common shares as property dividends and other comprehensive income gains, partially offset by the cash dividend distribution. CET1 ratio was at 15.5% and CAR at 16.4%, both lower by 12 basis points from last quarter, reflecting growth in risk-weighted assets, slightly outpacing the capital accretion. Now I would like to show you some updates on what we've been doing with the bank. And so to show that we continue to execute on 3 key aspects of our strategic focus: financial inclusion, digitalization and sustainability, all underpinned by our nice core values. By 2026, we target to bank 50 million Filipinos from the 9.5 million customers that we have today, actually just over that, 9.65 million. This afternoon, we will talk about our Agency Banking and BanKo and the progress we have made on financial inclusion. Our digital transformation also largely plays into our customer acquisition and customer engagement strategy. We will give you an overview of the latest drops in our client engagement platforms. Finally, we'll also have an update on our sustainability initiatives, which is core to how we do business. Agency Banking will change the way BPI engages with Filipinos by integrating banking with their daily lives through new channels that will extend our capability to reach, acquire and serve more customers in more communities. With customer convenience at the forefront, our ongoing marketing caravans create awareness about the presence of BPI in partner agency stores to drive customers to their stores already in their community. From a come-to-us attitude, BPI will now go to you. We match the right technology enablers such as APIs, digital linkages and our own Agency Banking platform to our partners' business requirements. At the bottom of the screen, we show a sample BPI [ tenant ] card that our agency partners will display with the unique QR codes of available BPI products. A customer only needs to scan that QR code to apply for the product, and he will then be directed to a BPI product landing page where he will complete his application. The entire application process will be done in the BPI environment. By becoming another channel for simple banking transactions, our Agency Banking partner outlets can help BPI branches operate more efficiently by reducing the transactional processing load at the branches, dovetailing nicely with our branch optimization strategy. Agency Banking instantly expands the BPI network. As shown in the map on the right, as of June 30, our physical presence has expanded from 752 branches, from the red dots that you see on the left, to the total -- to a total of 2,200, with an additional 1,480 new partner outlets, which you see on the map to the right with the green dots. Many of these new outlets are located in municipalities and towns where BPI does not have a presence, and many of them are open on weekends and holidays, 24/7. Clients may avail of deposit, loan and insurance products with any of these partner outlets. By the end of the year, we expect to onboard 8 more partners to bring our network of physical stores to almost 6,000, including branches. By then, clients may also be able to do bills payment to merchants and government agencies and cash in/cash out transaction, making these outlets operate more like a branch. The strategy is to be the most [indiscernible] anywhere, anytime, [Foreign Language]. In June, we launched the e'Nay app, linking sari-sari stores to a major distributor client of -- major FMCG distributor client of ours. The app is a marketplace that enables sari-sari store owners to order directly from the distributor and get the delivery same day at their locations, greatly improving the logistics of replenishing their inventory. We expect to increase both the number of sari-sari stores using the app as well as the number of distributors offering product via the app. Recognizing the contribution this makes to financial inclusion, BSP Governor Medalla himself joined us during the app's launch. From BPI's perspective, this increases the BPI ecosystem, increasing the propensity of customers to keep their money within the BPI ecosystem and making BPI their operating bank of choice. Our continuous deployment of the 7 client engagement platforms is full steam ahead. On top, we have highlighted the available new and coming soon functionalities for each of them, and we are excited for each new drop, which enhances the UI/UX experience of our customers. The images in the middle show how each of our apps currently look on mobile devices. We encourage you to download, navigate and explore the platform best suited to your financial journey. Please feel free to reach out to the IR team if you need help with the links to the most updated apps. At the bottom, we provide some key metrics which we use to constantly monitor our performance to ensure that we are on target to meet our platform milestones. In the second quarter of 2023, BPI continued to be an inclusive, innovative and trusted pioneer in responsible banking. We continued enhancing our digital platforms in the spirit of financial inclusion to cater to the underserved and the underbanked and to drastically reduce the carbon footprint of banking. We launched an enhanced BPI app with AI-powered insights available to our 6.2 million enrolled customers, with -- 68% of which are active users. We continue expanding our touch point infrastructures with BPI Agency Banking, making our suite of financial products available to 6 brick-and-mortar partners with a total of 1,480 stores, plus an additional 3 digital partners. We held the 2023 Sustainability Awareness Month with the theme of Green and Beyond, attended by over 14,000 people through 17 events. We continued using energy-efficient technologies, with 100% of the BPI branches using LED lights and 90% of BPI branches using inverter air conditioning units, with the rest to follow over time. As a result of our various initiatives, by July 2023, we have garnered a total of 8 recognitions in the ESG space from reputable award-giving bodies, such as FinanceAsia and Global Finance, among others. We're looking to surpass the 10 sustainability-related [indiscernible] in these awards that we received last year, which, by itself, is already more than the number of sustainability-related awards received by most of our peers in the region. Lastly, I would also like to share with you some of the notable awards and recognitions received by the bank this year, including Best Bank in the Philippines and Asia's Best Bank for Corporate Responsibility from the prestigious Euromoney Awards for Excellence as well as multiple awards from the Institutional Investor survey. These awards mark our achievements, and they motivate us to do more and serve our customer better, reinforcing the vision of BPI to build a better Philippines, one family, one community at a time. As I close, let me summarize some key takeaways. Overall, the bank delivered a solid quarter performance. On profitability, we further improved profitability and shareholder returns. Our balance sheet remained robust with healthy liquidity and capital position. Asset quality remained resilient with ample allowance for losses. And lastly, we further strengthened our leadership in digitalization and sustainability. Thank you. And I now open the floor for 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 Samin Reza of Maple-Brown Abbott. He asks, "How sustainable do you think ROE is in terms of how much is being driven by NIM versus fee income growth? And additionally, any sort of concerns with NPL ratio rising in the last 2 quarters?"

Maybe I can start off, and then TG, you can add if you have any additional comments. On those 2 questions, first, sustainability of ROE, we believe that this level of ROE is really quite sustainable for us. Looking at -- we do realize that much of it was driven by NIM growth. Moving forward, we expect that our digitalization initiatives will continue to help drive profitability for the bank. Some of it may come via additional fee income. But the reality is some of what we're doing on the digitalization side will also help to increase -- we believe will also help to increase our CASA deposits, which will also augment our NIMs. And therefore, that will also contribute to, I guess, continuing NIM growth. Additionally, you also -- there was also the question on NPL. We don't really see any real concerns for us based on what we've seen on the NPL movement over the last couple of quarters. We have been seeing some upward movement in the NPL over the last couple of quarters. But in our minds, this was really to be expected given the rate at which we saw interest rate rises over the course -- especially over the course of this second half of last year. And there's always some kind of lag effect for that to filter into, I guess, our borrowers. But that being said, we don't believe that NPLs are going to come out of hand. And in any event, we are very well positioned from an NPL cover standpoint and, as I mentioned earlier, from a collateral coverage standpoint as well.

Thanks. Let me add to that, Eric, and thanks for your question, Samin. Yes, that's one of the things that the management team keeps, first and foremost, in our minds because our objective has always been to deliver the first goal of 15% ROE. The sustainability of that number is something that we work at. I grant you that much of it was driven in the past couple of quarters by the expansion of the NIM. And we do realize that eventually this cycle may turn, although we do not expect it to turn in the very near future as the Central Bank governor and now the secretary of finance have both messaged that they do not believe that rate cuts will be imminent in the near future. To mitigate the potential turn sometime in the future, we are being very aggressive with the growth of our loan book. And you see that our projections for our own loan growth is that we will take more market share. We are growing our consumer book quite aggressively. You've seen the number from cards. If we drill down into our mortgage and our auto loan business, you will see that those 2 are also growing very well. We are also making progress on our fee income. For example, when you look at the results that Eric pointed out, digital fees are growing close to 25% per annum. We expect that to continue. We see transaction back and growing as we improve our platforms for our corporates. And then finally, related to your question about NPL, when you really look at what drove the NPL growth in the first quarter and the second quarter, the first quarter was driven really by the fall in the loan book due to seasonality, and the slight pickup in the second quarter was driven much by higher NPL on both the cards business and the personal loans business, which is something that doesn't really concern me because it's something that I do want to push. I've told Jojo Ocampo and Ginbee Go, who both run -- Jojo runs our unsecured lending business, our mass market, and Ginbee runs the consumer business, that NPL ratios, which they have today are too low for the kinds of margins we are getting. So we would like to gain more market share there in those 2 segments, even at the expense of having a slightly higher NPL ratio for those businesses, which, of course, because they are higher than the 1.8 that we have today for the overall book, will cause the overall book as NPL to rise. But in the end, it will still be accretive to the bank, and that's the strategy we're moving going forward. And as Eric said, coverage is quite good, particularly on the consumer book where everything is either secured by a chattel mortgage or a real estate mortgage.

Thanks, TG. Our next question comes from Nat of APG. "How much do we attribute strong growth in retail portfolio from digital channels?"

I would say, I think, most of it really still is coming from our traditional channels, except for cards. I think, Jojo, maybe you can talk a little about how digital channels has improved, has increased our acquisition. And then maybe Ginbee can say something a little about what we are doing on the digital space for the consumer loans. Jo?

Yes. On credit cards, digital channels now account for 40% of our credit card acquisition. This is driven primarily by improved applications coming from market at large as well as partnerships of Agency Banking in Lazada and foodpanda as well as with GCash. This 40% growth in credit card acquisitions from digital channels has come from about 13% last year. So it's a significant increase for 2023.

On the consumer side, the acquisition is really where we're seeing a big jump in terms of contribution by the digital channels. Right now, as of this year, we are already 50% contributing. The digital channels is already contributing 50% of new-to-bank client acquisition. So out of the 1 million that we have acquired, 50% of that is already digital. While branch channel continues to contribute 50% as well, their growth in new-to-bank acquisition continues. So that's why you see a significant growth in client base acquisition.

I think just to be clear, when Ginbee talked about that, she's talking about the deposit acquisition, right, Ginbee?

That's right. That's right, TG. That's our main product for acquisition of new-to-bank at the digital channel.

Thank you, Jo and Ginbee, TG. Our next question comes from Haesu Lee of Robeco. "Can you please talk about earnings outlook for the second half -- second semester of 2023?"

Go ahead, Eric.

Yes. I mean we don't provide specific outlook numbers, but I can say that we generally expect our performance in the first half of this year to continue moving forward. So I would say it's fairly representative of what we expect to see moving forward for the rest of the year.

Thanks, Eric. Our next set of questions come from Joahnna Soriano of Bank of America and PEP. "When do you expect credit card growth to slow? Is there a target in terms of percentage share of total consumer book? And may we get the NPL ratio at cover for consumer, particularly for cards, also for corporates?"

Okay. With regard to credit cards -- credit card loan growth of 43%, this is driven not only by the activities that we've had to gain share from the market but also the opening up of the economy, particularly travel and entertainment as a result of the end of the pandemic. We expect to continue that growth but end the year at 35% growth year-on-year. So the 43% could slow down to 35%. But nonetheless, we expect this to be still faster than the growth of the market. With regard to NPL covers, while it has gone up, there was a slight uptick. As TG earlier mentioned, this actually is still far from prepandemic levels and far from his -- the target given our -- the NIMs that we are getting from this business, which has actually improved with the lifting of the interest rate cap. Our NPL cover on card is currently at 1.6% and for personal loans at 1.2%. So we have sufficient cover.

Thanks, Jo. Our next question is from...

I think Ginbee will -- Ginbee, do you want to say something about your NPL ratios on the auto and mortgage book?

Yes, TG. Our NPL ratios on auto is at 4.53%. This is significantly lower than the industry by around 200 basis points. Our NPL ratio on housing is likewise significantly lower than industry, currently at 4.46%.

Thanks.

Thank you.

Thanks, Jo and Ginbee. Our next question comes from Gilbert Lopez of Macquarie. "Can you give us your latest loan growth outlook for 2023? Monthly loan data from the BSP suggests a slowdown by the sector. Will that apply to BPI as well?"

Eric?

Yes. So generally, our loan growth that we've seen through the course of the first half of the year, I think that generally is, again, representative of how we think things are going to play out through the course of the rest of the year. Yes, so we expect somewhere in the range of kind of low double digits as a loan growth target.

Thanks, Eric. We'll take a question from DA, who has his hands raised. DA from JPMorgan. DA, go ahead.

Just a few questions from me. First, on the underwriting side because you guys have been growing the consumer book quite fast. Just want to understand anything different we're doing on the underwriting to make sure we don't run to issues down the line. Especially, we have lots of new-to-bank customers coming in.

Maybe I'll ask Ginbee to go ahead first because they have developed several models on the consumer book, and then Jojo also has a lot of programs on the cards also.

Yes, TG, thank you. DA, thank you for the question. Yes, we have been continuously enhancing our ability to underwrite for better asset quality. Our credit programs continue to move most of the needle for us in terms of loan releases. These are prequalified programs. And recently, we have credit programs that we have finally been able to roll out, not just on a test basis but also on a normal BAU basis. So we've been really underwriting our depositors, winning them over with faster turnaround time because of these credit programs. We've also enhanced our credit models. We have recalibrated our auto loans model and housing loans model coming out of the pandemic, having learned some of the nuances as a result of the COVID pandemic. And so we continue to do that. And quarterly, we look at our models to be able to make sure that we are underwriting quality and, at the same time, able to speed up our approval processes. So that's continuing. And we are also, on the systems side, enhancing our capability to process transactions faster because really, winning over our customers also require fast turnaround time. So on the systems side, we now have improved our ability to do straight-through processing because of the integration of our credit models into our loan origination system. Thank you.

Yes. On the credit cards and personal loans side, we're also doing the same. Our focus though is primarily on our depositor base. So that gives us the confidence to actually be a little bit more aggressive because they are our depositors in the first place. For our nondepositor base, we've also been testing the use of alternative scorecards like telco scores as well as the GScore from GCash. However, we do have risk mitigants and gates because before rolling this out, we have a test size or a test limit that we do the test on. And only upon the positive performance of the portfolio against which this test is placed, only then do we roll this out.

I guess just on an overall basis, should we then expect credit cost [ like ] normalized? Previously, it was like 30 to 40 basis points. Should we expect that to remain in that range? Or do you see this moving up as consumer continues to grow?

I think, DA, just because of the expansion in the denominator base, we should expect our credit cost to remain, if not further improve. TG's mandate to Jojo and myself is very clear, to really aggressively grow our loan book just because from a risk standpoint, we have -- we're able to better spread our risks on the consumer side, and risks are actually smaller on a per loan account basis. So at any point in time, when we see that we're no longer comfortable with the risks that we are taking, it's also quite easy for us to just step on the brakes a bit. And that's actually what we've done during the pandemic. When we see that the NPLs are going to rise with [ ease ], we've stepped on the brake a bit and improved and enhanced our ability to underwrite to manage our risks.

And the other side of it also is the digitalization on the collection side. We have also employed better collection scorecards to help us mitigate the risk with -- in line with our universe expansion initiatives.

All right. So I guess just putting it together, on an overall basis, are you saying you don't expect credit costs to move above your former normalized range? Is that a fair statement?

Yes. That's a fair statement.

That's correct. That's a fair statement.

All right. And just last question for me on the NIM outlook, it has been increasing -- rate hikes were towards the end. Do you expect further expansion second half of this year? Are there parts of the book that has not repriced and so on?

Yes. I think every time the BSP raises rates, you'll see that there will be a lag effect on a significant part of our book, only because 80% of our book is institutional. And maybe of that 80%, maybe 75% is floating rate but reprices anywhere between 30 days to a year. That said, we expect the BSP to probably be very reluctant to raise rates going forward. But what I see now is that there's been a challenge on the deposit side. The funding has been very competitive. And I think most banks have seen a slowdown in the expansion of the NIM only because funding costs have risen. I believe funding costs will begin to normalize, and you'll see the competition for TD rates slack off, and that should allow us to continue to increase our NIMs going forward.

Okay. So there's still part of the book that has not yet fully repriced on the asset side?

Yes.

Thanks, DA. We have a question in the chat box from [ Shane Matthews ]. "If we look at the loan mix today versus 5 years, our Go retail segment was broadly constituting 20% of the overall book. However, ROEs were never close to 15%. What is different this time?"

Well, obviously, I think what's happened, one, is the NIMs have expanded. I remember maybe 5 years ago, there was very extreme competition to grow the loan books, and many of the major commercial banks were slashing their margins, and maybe John-C can talk about that going forward. But also, I think, don't forget that, I think, the bank has become extremely efficient in the last 4 years, the last 3 years. When you look at our headcount, we're now down to 18,000. At one point, we were 22,000. At one point, we were over 800 branches. We're now down to 700 and change, going to 600. So our cost-to-income ratio has also fallen significantly as a result of efficiencies we've put in. And I think that's what's really -- one of the things that we're very focused on is to make sure that these investments we're making in digitalization and technology not only allows us to acquire more customers but makes us more efficient on the expense side. People might be concerned about the growth in technology costs, but you'll need to look at that and see what kind of growth we are having or what kind of shrinkage we're having in the other costs, in manpower costs and premises costs and other support costs that are not necessarily technology. For me, for as long as we're bringing our cost-to-income ratio down, we're headed in the right direction. And that's a major portion of the ability for the bank to get this ROE of 15% today.

Thanks, TG. Our next question is from Rachelleen Rodriguez of Maybank. Her question is, "Can you share the reason for the slowdown in growth of corporate loans aside from the tower deals?" John-C?

Thank you for the question, Rachelleen. So yes, the tower deal is, I think, as Eric touched upon earlier, it's really just the base. So they started -- these large deals or monster deals started growing around June last year, and therefore, the base of last year's up. But I think in the last call, I also mentioned that having some reserve liquidity was something that many of the corporates had undertaken during the more uncertain months during the pandemic. So that's off now. The cost of borrowing is obviously higher now, so therefore, there's more discipline as far as the corporates are concerned. But having said that, I think on a year-on-year basis, if we look at working cap, so supply to the markets that Jojo and Ginbee serve, the consumer spend is still high. So we still see a lot of use of the working cap lines. In fact, we see a positive slope versus last year as far as growth is concerned. And while there has been -- you're right to point out, there's probably been a slowdown in the [ recent months ], we're now pushing to the period where they'll need to replenish -- they could potentially need to replenish stock towards the year-end season, Christmas, et cetera. So I think from a working cap standpoint, we expect that. Of course, what hasn't happened are the mega projects that could've been -- the infrastructure that we expected to come sooner rather than later. But those will come. So power, the airport, for instance, those big transactions are expected to come maybe late this year, early next year.

Okay. Thanks, John-C. Our next question comes from Eric Chan of Buena Vista Fund. "To achieve our 2026 customer and IT targets, should we think about OpEx trend and cost-to-income ratio from now to then?"

I'm sorry, what was that, Chinky, the first part? To achieve our...

To achieve our 2026 customer and IT targets, how should we think about OpEx trend and cost-to-income ratio from now to then?

Well, I think what we have done is we're putting the base in place to make the acquisition to allow us to grow to this 50 million customers. Key to that are partnerships such as the e'Nay app. The VYBE app, which is an app that we have developed for BPI to service our payment platform, that should deliver close to half of the new 50 million customers. I think when you look at the OpEx trend going forward, just have to be as mindful of the cost-to-income ratio. And the mission that Eric and myself and the rest of the team have is to keep the cost-to-income ratio falling. In fact, we have messaged that we expect this to be below 45% by 2026.

Thanks, TG. Our next question is from Charlie Ang from COL. "Congrats on a great set of results. Just wondering how has BPI been leveraging on recent trends in AI and data science. How much of tech expense is allocated to this? And have we seen any impact already in current operations? And what kind of benefits are you expecting from this area in the medium term, if any?"

I think it's a bit too early still to talk about a big tech spend in AI. We are looking at it. In fact, we have a couple of projects ongoing that we're testing internally. All of our tech spend today is still under business as usual. Maybe I'll have Ginbee talk a little about what we're doing on the customer service front and how we're using AI for that. But more importantly, we're putting a new technology. We're rolling out Salesforce across all our frontliners to ensure that all frontliners have a 360-degree view of all our customers, that our customers' issues are put so that everyone can access them and these issues can be addressed by the appropriate people. We are also using Salesforce as a way to market and to generate leads and to track performance of our frontliners in terms of sales. But maybe, Ginbee, you probably know more about this than me.

Thank you, TG. We're, of course, cognizant of the fact that AI and data science will contribute in enhancing our ability to service our customers and improve the customer experience and customer journey. So TG has talked about Salesforce as a means of delivering that. On the AI side, we're actually piloting for our internal employees, particularly the branch employees, their ability to service clients by having right-on-hand access to information, whether that's policies, process, guidelines, that they can immediately address customers who are in the branch for any queries or concerns that they may have. So that's how we are currently using it in -- well, it's still in pilot mode, and we hope to be able to make that available to our frontliners by the end of this year. We're also using AI-inspired intelligence soon through our personal financial management tool that will be available in our mobile app in the next 2 weeks. So watch out for that.

Thanks, Ginbee. Our next question comes from [ Monique ] of [ Freemont ]. "Thanks providing us an update on digital initiatives. Along with financial inclusion as a key goal, how do you think about the ROIs for the digital investments?" And a follow-up would be, "How differentiated your strategy versus your close peers?"

Sorry, Chinky, can you say that again, the first part?

Yes. Along with financial inclusion as a key goal, how do you think about the ROIs for the digital investments? And how would this be -- how differentiated is your strategy versus your close peers?

Well, I think, Eric, in many of our briefings before, we have talked about how we believe, one key measurement is looking at how many of our customers are digital customers. And our definition of digital customers are customers who do more than half of their transactions on our digital platforms. And our studies have shown that this is a growing number internally for us and it's significant for us because digital customers generate twice as much revenue as a nondigital customer with the same per capita cost. And therefore, that's really the return on the investment of our digital initiatives. We need to get as many people onto our platforms. We need to get them using our platforms and transacting on these platforms. It builds stickiness. It builds loyalty to us. Many Filipinos will only bank with one bank. And today, maybe only 30% of Filipinos are banked by a formal bank, and we believe that there is much to be gained by getting them on our platform, gaining their loyalty and having them stay with us through their whole lifetime. So it's both great for financial inclusion, but it's also great for the bank going forward. The amount of data we can get from these customers, the amount of transactions that they do, where they do not necessarily are the people making the payments to us as revenues but where, let's say, the biller is paying us for the transaction that this customer does. One of the things that we're very proud of is our 2.5 million retail customers who are payroll clients, who may not keep significant balances with us but certainly do 2 or 3 bill payments a month. It generates enough revenues to justify their existence on our platform. And I think that's the kind of thinking that drives us to make this further investments in our digital platforms.

Thanks, TG. We'll now take some questions live. Rafa Garchitorena from Regis. Rafa, go ahead.

Congrats on your 2Q. Just one quick question. What are you guys seeing from the competitive environment side, both on the lending and deposit-taking side? We're again hearing some anecdotes of banks, which shall remain nameless, pricing loans at or close to policy rate for top-tier corporates. I don't know if John-C can address that as well. But yes, that's the quick question.

John-C can answer and also name them. No, don't name them.

That's true. So it's been very competitive from the standpoint of lending. And it is across the board. But particularly for the quality teams, it's been the same as in the past. But a bit more awkward now because the policy rate is a real rate with -- which banks can really place all of the excess. So I think there will be a period of adjustment there. As we -- others may behave more rationally or logically than others, and so there will be a period of adjustment. I think this may be -- TG, this may only be a first phase in how the BSP wants to use monetary policy. So I think the volumes from the first week, which was 2 Fridays ago, to last week and more recently, have already increased substantially, TG.

Yes. I'm not sure, Rafa, and the industry know what the change in -- what about BSP has done, right?