Bank of the Philippine Islands ($BPI)

Okay. Good afternoon, ladies and gentlemen. Welcome to our earnings call to discuss BPI's results for the first quarter of 2026. I'm Haj Narvaez. I'll be your moderator for this session. We're conducting this briefing in a hybrid manner with our BPI speakers and panelists here in our headquarters at Tower 2 of Ayala Triangle Gardens, Makati City, while the rest of our participants are dialing in remotely. I'm pleased to introduce you to our speakers and panelists this afternoon. TG Limcaoco, our President and CEO; Eric Luchangco, our CFO and CSO. They will be joined in the panel for the Q&A by Tere Marcial, Head of BPI Wealth; Ginbee Go, Head of Consumer Banking; Louie Cruz, Head of Institutional Banking; Jenny Lacerna, Head of Mass Retail Products; Dino Gasmen, Treasurer and Head of Global Markets. We're also joined today by the rest of the BPI leadership team in this call. This afternoon's agenda will begin with opening remarks from our President and CEO, TG Limcaoco, followed by our CFO and CSO, Eric Luchangco, who will walk you through the first quarter performance highlights, and likewise provide updates on our digital platforms and strategic initiatives. The floor will then be open to questions from the audience. Please note, the call is being recorded and legal disclaimers apply. Now let me turn you over to TG for his opening remarks.

Thank you very much, Haj, and a nice afternoon to everyone joining us today. I see a lot of familiar faces here, and I'm sure there are a lot of familiar faces on the call. I look forward to a very engaging conversation after Eric's report. But let me start off by making a couple of points despite the challenging conditions brought about by the Middle East crisis, the bank managed to report net income for the first quarter. That's 1.7% higher than last year and 4.9% higher than last quarter. This was really driven by our continued strong revenues that were up 13.9% despite and hindered by operating expenses that were up 15.8% versus last year. We can go into some of the details why the operating expenses were higher than expected but we continue to expect that they will be back to normal levels by year-end. All this led to pre-operating provisions that are up 12.4%. Due to the Middle East crisis, we increased provisioning to comfort increased risk in the consumer book arising, obviously, from the Middle East crisis, where we saw relatively larger jumps in the NPL in both the SME and the micro finance books. But despite increasing provisioning in our NPL, we saw a decrease -- sorry, despite the increased provisioning in our NPL coverage [indiscernible] fell due to really the NPL increase in our corporate loan book, where the increases came from a number of corporate accounts that were substantially covered by collateral. Finally, I will talk a little about how this Middle East crisis is affecting our outlook on loan growth and the way we are provisioning. We are trying to provision ahead of that. But without really spending all of this conversation all this time in the Middle East crisis, allow me also to talk a little about the progress we're seeing in our other businesses. Eric will go through some of those points. We're very happy to report that our agency banking initiative continues to grow. As of today, we have 1,320 stores where our customers can actually do deposit and withdrawal transactions outside of our branches and outside of our ATM and cash acceptance machines. Ginbee can talk a little about our digital branches and how we continue to roll this out to give a better selling and advisory experience to our customers. And then we'll also make a short presentation about the progress of our digital offerings, where we continue to believe that we have the leading mobile app, we have the leading business platform in [indiscernible] and how we have updated that, and Louie can talk about that and how we've also updated our BPI trade where we continue to make headways into equity trading for our customers. So with that, I'll turn this over to Eric and then looking forward to a wonderful engaged conversation later.

Thank you, TG, and welcome to everyone joining us on this call, both in person and virtually as well. So good afternoon to all, and we'll be presenting our first quarter results. These results showed more moderate growth compared to previous quarters. but still reflects strong levels of operational performance that we believe will show continued outperformance versus our peers. The highlights are as follows: On profitability for the quarter, the bank generated net income of PHP 16.92 billion, a 1.7% increase year-on-year, supported by revenue growth despite higher operating expenses and provisions. Return on equity stood at 14.3% and return on assets at 1.9%. The balance sheet continued to expand with loans increasing 13.5% year-on-year and deposits rising 10.4%. The bank's capital position remained strong, supported by earnings generation with the CET1 ratio of 13.9% and CAGR of 14.8%. NPL ratio stood at 2.42% with the year-on-year increase mainly driven by the shift in the loan mix and the quarter-on-quarter increase mainly driven by the institutional loan segment. NPL coverage declined to 87.15%, though this remains supported by underlying collateral. Meanwhile, ECL cover expanded to 103.5%. Bank further strengthened its customer franchise, expanding its customer base to 18.7 million. Agency Banking continued to drive scalable growth, extending its reach and deepening market penetration. At the same time, the integration of AI into the digitalization strategy is enhancing the bank's efficiencies and supporting long-term growth. First quarter net income reached PHP 6.92 billion, up 1.7% year-on-year. with strong revenue growth moderated by higher operating costs and provisions. Net interest income stood at PHP 39.15 billion, up 13.7% year-on-year on loan growth of 13.5%, coupled with 7 basis points of NIM expansion. Trading and ForEx income rose 19.5%, anchored by a robust 32.6% jump in ForEx income. These combined to drive revenues 13.9% higher to a total of PHP 50.92 billion. Operating expenses rose 15.8% to PHP 23.5 billion, owing to higher business volume related technology and manpower costs. As we'll share shortly, much of the increase can be traced to timing issues related to booking of expenses as well as changes in the regulatory environment in the second half of 2025. Pre-provision income was at PHP 27.42 billion, up 12.4%. Provisions rose 83.3% to PHP 5.5 billion, reflecting normalization of credit costs and base effects as the first quarter of 2025 saw the continued drawdown of prior reserves. Compared to the prior quarter, net income increased 4.9%, driven by higher net interest income and lower operating expenses and provisions. OpEx declined 11.7% as costs normalized following the typical year-end expense build up in the fourth quarter. Provision operating profit expanded by 4.1% to PHP 27.4 billion. Earnings per share stood at PHP 3.2 per share at the end of the first quarter, up 1.5% year-on-year. Profitability remained healthy with an ROE of 14.3% and an ROA of 1.9%. Turning to the balance sheet. Total assets continued to expand, reaching PHP 3.7 trillion, up 13% year-on-year, driven by the expansion of the loan and securities book. Gross loans stood at PHP 2.61 trillion. It was slightly lower quarter-on-quarter, reflecting softer demand and our prudent origination of loans. On a year-on-year basis, however, loans grew 13.5%, with expansion recorded across all segments. Deposits increased to PHP 2.84 trillion, up slightly quarter-on-quarter and 10.4% year-on-year, driven by continued customer flows and a stable funding base. The CASA ratio is marginally to 41 basis points quarter-on-quarter to 60.29% while the loan-to-deposit ratio climbed year-on-year to 91.95%. Versus last year, gross loans expanded 13.5% year-on-year to PHP 2.61 trillion, noninstitutional loans increased to PHP 829 billion, up 24.9% year-on-year. The increase in noninstitutional loans was led by SME loans, up 96.3% year-on-year. Credit card loans up 33.3%, personal loans up 26.9%. These personal loans include PHP 18 billion of teachers loans, which accounted for -- which increased by 72% year-on-year. Auto loans were up 19.3%. And these auto loans include PHP 5 billion in motorcycle loans, which increased 22% year-on-year. Mortgage loans was up 12.1% and microfinance loans up 16%. The loan mix continues to shift towards the higher-yielding segment with noninstitutional loans rising to 31.7% from 28.8% last year. This shift supported total loans growth of 13.5% year-on-year despite broadly flat quarter-on-quarter loan balances. In the first quarter of this year, NIM stood at 4.7%, remaining broadly stable quarter-on-quarter and improving 7 basis points year-on-year, mainly driven by lower funding costs. We'll delve into our perspective on asset quality in the later slides. But I wanted to show you here that even after accounting for the cost of credit, NIMs are still providing strong profitability to the bank. Adjusting NIMs for risk-based for risk based on provisions, NIM is widened by 4 basis points to 3.92% quarter-on-quarter. If we look at risk-adjusted NIM based on the net NPL formation, we do see a sharper decline in margins by 42 basis points to 3.39% due to an outsized net NPL formation last quarter, and we'll discuss that a little further -- we'll discuss that further a little later. On the funding side, total funding stood at PHP 3.11 trillion, up 14.4% year-on-year and 1.7% quarter-on-quarter. Year-on-year, total deposits increased 10.4% and continues to be the primary source of funds, even though borrowings rose by 84.6%. CASA meanwhile is up 6.5%, which is faster than last year's pace. Key funding ratios remained stable with a loan-to-deposit ratio of 91.9% and loans to total funding at 84%. We continue to strengthen our deposit franchise, led by the mass market customer segment, which grew 60% year-on-year and continues to deliver the best CASA ratio across our customer segments. Institutional deposits also posted sustained momentum recording growth over the past 3 months in the high teens year-on-year. Fee income stood at PHP 10.54 billion, down 3.1% on the sequential quarter following a seasonally strong fourth quarter and fewer number of days in the current period. Year-on-year, fee income grew 13.9% on strong contributions from cards, wealth management, insurance, transaction banking, retail loans, business banking, corporate loans and investment banking. The Card segment saw a 13.7% increase, driven by higher billings, increased service charges from stronger cross-border fees improved collections recovery and higher SIP-related transaction volumes. Wealth management fees were up 11%, driven by a higher volume of assets under management, which rose 18.4% year-on-year and surpassed the PHP 2 trillion milestone to reach PHP 2.03 trillion. Income from insurance up 10%, was mainly driven by higher contributions from BPI AIA and BPI MS. Royalty fees and branch commissions further contributed to the overall increase. Transaction Banking was up 26.9% and mainly from higher supply chain fees supported by increased invoice volumes and larger transaction values from our key clients. Securities brokerage and investment banking increased 80.2% attributable to higher deal activity, including the projects in the project finance space. These were partially offset by declines in asset sales, down 61.9% due to last year's one-off sale of a large bank property rental, which declined 27.7% at several buying premises and equipment were no longer leased. ATM and digital channels decreased 2.6% as higher fees led to lower transaction volumes and reduced usage. Total operating expenses amounted to PHP 23.5 billion, up PHP 3.2 billion or 15.8% higher year-on-year with increases recorded across all expense categories. Manpower costs reached PHP 8.1 billion, up 8.2% or PHP 621 million, driven mainly by salary adjustments and a higher headcount. Technology expenses reached PHP 4.7 billion, up PHP 660 million or 16.5% year-on-year due to higher spending on IT outsourced services software subscriptions and maintenance in line with the bank's digitalization initiatives. Other operating expenses increased to PHP 8.4 billion, up PHP 1.69 billion or 25.2% with volume-related expenses accounting for 41% of the increase. Overall, the key drivers of the year-on-year increase in OpEx were volume-related expenses followed by technology and manpower. As referenced earlier, booking delays relating to tech and other expenses as well as changes in the regulatory environment, particularly with that on digital services. led to the sharp increase in cost this year versus last. Adjusting for these factors, operating expense growth would have been more moderate at 13.4% year-on-year. Notwithstanding that, the bank continues to demonstrate strong operating performance with efficiency gains translating to a cost-to-income ratio of 46.2% despite the customer count doubling to 18.7 million since 2022. The cost base has grown to add a considerably more measured pace supported by active headcount management and a pivot towards digital platforms and tech-enabled channels, including agency banking partner stores. CET1 capital stood at PHP 404 billion, up 0.4% from last quarter and 5.9% from last year. While the OCI volatility weighed on the capital in the first quarter, the bank's overall capital position remains solid. The CET1 ratio stood at 13.9% and CAGR at 14.8%, both well above internal and regulatory thresholds despite the increase in risk-weighted assets and capital distribution as well as the lower overall other comprehensive income. Turning to asset quality. Nonperforming loans increased quarter-on-quarter to PHP 62.9 billion, with the NPL ratio rising by 24 basis points to 2.42%. Provisions which continue to be guided by ECL declined quarter-on-quarter to PHP 5.5 billion, equivalent to a credit cost of 87 basis points for the first quarter. This brings point-in-time NPL coverage of 87.15% under PFRS 9 and 112.4% when including the surplus reserves for performing loans in accordance with BSP Circular 941. This lower NPL cover is supported by collateral strength, expectations for recovery and risk absorption buffers. Asset quality pressure was mainly driven by institutional loans whose NPL ratio climbed 21 basis points quarter-on-quarter to 1.19%. While the increase in the NPL ratio was relatively small, it had an outsized effect on the overall NPL level and NPL ratio given the segment's high share of the overall book. This new NPL formation centered on a few institutional accounts, one of which we had anticipated to turn NPL and thus had provisioned for we had already provisioned for. The combined loss reserves and collateral coverage for this specific loan amount to 1.8x the value of the NPL, mitigating our downside risk. Other significant contributors to the higher NPL ratio or accounts with company-specific issues born out of operational disruptions and collection challenges. On the flip side, we also have visibility on certain accounts hardly classified as NPL that we expect to revert back into current status within the second quarter, which should offset much of the hits that we're taking from this current quarter. SME loans also saw a 98 basis point uptick on a quarter-on-quarter basis in the NPL ratio, driven by higher delinquencies in the 2025 and 2024 vintages. Delinquencies were most pronounced in companies in the wholesale and retail sectors, followed by construction and rental. Microfinance loans warrant some close to our attention as well as the NPL ratio increased 74 basis points with delinquencies observed across products and regions. In context, microfinance remains a relatively small portion of the total loan portfolio. For credit cards, the NPL formation is largely from the same group we had previously identified, which is clients aged 40 years and below, lower income borrowers earning less than PHP 40,000 per month and post-pandemic acquisitions booked between 2022 and 2024. Meanwhile, mortgage, auto and personal loans reported relatively stable or declining NPL ratios. We continue to maintain ECL coverage of at least 100% across all loan segments. This quarter's provisions, coupled with moderate ECL formation, widened the ECL cover quarter-on-quarter to 103.5% from 100.9% to end last year. The corresponding point-in-time NPL coverage levels are shown on the slide as well as the total cover compromising reserves and collateral. NPL remains well covered by a combination of these reserves and collateral with a total collateral coverage of 138%. Institutional banking, marketing, auto, credit cards, and credit card loans all post coverage ratios above 100%. Even the least covered segments, which are personal loans and microfinance, maintain a solid coverage of at around 93% even while representing just a small share of the total portfolio. Like in previous quarters, we will walk you through the performance of our lending businesses from the perspective of risk-adjusted revenues and margins. This table summarizes loan-related revenues for the first quarter of 2024, '25 and '26 alongside their corresponding net NPL formation by loan segment over the same period. From the first quarter of '24 to first quarter of 2026, revenues across the loan book increased by PHP 8.67 billion, approximately 6.4x the PHP 1.35 billion increase in net NPL formation. Looking at noninstitutional loans. We delivered strong growth in revenues at PHP 8.3 billion, which comfortably offset the PHP 390 million increase in net NPL formation. Overall, growth in the noninstitutional loans drove a sizable net revenue uplift even after factoring in the asset quality impact. The same dynamics can be observed in the last 2 columns comparing the first quarter of 2025 and first quarter of 2026. This highlights the thinking behind our commitment to growing the contribution of the noninstitutional loans and the benefits of a diversified portfolio in driving better performance. Looking at it from a margin perspective, loan yields for the noninstitutional segment have largely held firm at around 12.74%, providing a comfortable buffer against net NPL formation of 3.35%. Yields for the institutional business have seen a sharper drop versus last year's average as institutional borrower rates adjust in step with the lower BSP policy rates. The uptick in the institutional businesses' net NPL formation to 0.78% in the first quarter of this year due to select NPL accounts as discussed earlier. Aside from delivering wider risk-adjusted margins, the noninstitutional segment has fueled revenue growth given its robust expansion since in 2022. This segment has delivered a CAGR in gross loan ADB of 30.7% from 2022 to the first quarter of 2026. Moving on to our strategic initiatives update. In line with our commitment to digital leadership, the bank continued to enhance our 7 client engagement platforms. Starting from the left, the BPI app, which is our main operating app for retail clients now includes a new pay bills experience, InstaPay, P2B, non QR billers, real-time payments, [indiscernible] credit line ESA and partner store deposits, which broadened the app's role in facilitating everyday financial transactions. We continue to enhance payments efficiencies through refinements of user interface to improve the overall ease of usage. Next, for our VYBE e-wallet, sign-ups have reached 2.7 million with 78% being VYBE Pro users. The BPI buzzing facility for corporate clients introduced key upgrades such as transfer to own, pay bills, pay BPI and payroll to seamlessly migrate clients to the mobile app and provide ease of transaction approval. The BPI BISCO app for SMEs now serves more than 30,000 users, supported by continued enhancement of financial services, which strengthen client retention and drive platform usage. The Banco app remains central to financial inclusion as it continues to empower our everyday MAS and [indiscernible] C2D earners and semi entrepreneurs through accessible, reliable and digital-first financial solutions. For BPI Wealth Online, which serves high net worth client individuals maintained its active user base at 2,800, up 82% year-on-year through sustained activation initiatives. Finally, BPI Trade continues to strengthen engagement among equity investors with a higher transaction count in 2026 as it brings a new funding process with upcoming features on e-deposit and e-reserves, which will widen accessibility. Across all platforms, we continue to expand capabilities in open banking and improve the UI/UX for a more seamless experience. As of March, we have 129 API partners, up from 74 in 2019, supporting over 10,000 brands, up from only 749 in 2019. Contributing to the strong momentum from 2025, we now have 34 agency banking partners, more than 7,000 partner stores, which further strengthened our foothold in Visayas and Mindanao. Total products sold per quarter reached nearly 177,000, up 87% from last year and more than 20 times from 2 years ago with deposits and insurance as the primary products sold. 20 agency partners equivalent to 1,320 partner stores are currently capable of deposit and withdrawal transactions, volume of which increased to 88,400 in the first quarter, up 5.2x compared to last year. Transactions are fast and convenient using a barcode-enabled feature on the BPI mobile app. Customers can initiate deposit transactions to a BPI account seamlessly, which are then fulfilled at participating partner stores. This completes a critical piece of the agency banking model, enabling both cash-in and cash-out transactions within retail environments without the need to visit a traditional branch. Moving on to reengineering and process automation initiatives. In the past 3 years, we implemented 149 projects, 82 in 2025 alone. These fall into 3 main types of projects, namely desktop automation tools, approved workflow automation and RPA bots. Moving forward, the projects already implemented will deliver an annual savings of PHP 139 million and reduced the headcount requirement by 181 headcount, helping our business units reallocate resources and reassign people to higher value-added rules. Highlighting some RPA achievements from some of our key business segments, in remittances, we implemented e-mail sending bots for InstaPay, PesoNet and even foreign remittances to improve our customer experience, reducing complaints through this more proactive approach and avoiding the hiring of 25 additional manpower. In Agency Banking and BPI Wealth, we've implemented encoding bots to address system booking requirements and investment subscription upon opening for wealth builder, avoiding the hiring of 10 outsourced personnel. Moving forward, we will continue to introduce new RPA initiatives for running the bank, streamlining workflows and reducing operational inefficiencies bridging the gap between our legacy processes and the demands of a modern digital-first economy. In the case of AI adoption, we take a disciplined use case-driven approach for fraud, research and marketing. We're looking at AI machine learning-driven systems that will detect potentially fraudulent transactions and assist credit analysts in the review of loan applications to detect risks and malicious intent. We use AI to supplement knowledge gaps for clients with AI scanning for data and references to help craft targeted marketing strategies at various stages of our clients' life journey. AI also assists our marketing teams in developing competitive, relevant and hyperpersonalization campaigns. In operations, we're using intelligent document processing to automate manual repetitive low-risk works such as data capture and document review so our teams can focus on higher-value activities and scale capacity without proportional increase in cost. For BPI customers, we have rolled out VAI in our branches to simplify access to policies and guidance, enabling more consistent high-quality service. Our data science team also builds advanced machine learning models to better understand individual customer needs and behaviors, helping us personalize products and offers in ways that can improve satisfaction and support revenue growth. Finally, beyond mainstream adoption, within IT, we are also evaluating additional AI use cases to further strengthen risk management and governance, enhancing real-time monitoring, improving decision support and helping us respond earlier to emerging risks. In its sustainability efforts, BPI remained busy. In the first quarter of 2026, we issued PHP 50 billion worth of social bonds, funding projects with clear social impact under our 2025 sustainable funding framework. We also expanded BPI's branches, offering EV charging stations to 10 branches nationwide. Our fraud awareness program completed 2 engagements in the first quarter of this year, reaching 155 participants. Following BPI's credit cards, which use 100% recycled PVC, BPI debit cards adopted the same innovation. Lastly, in line with our targeted interval of 5 to 6 years, BPI engaged an internal -- an external consultant for the bank's double materiality assessment, which shows the impact of ESG topics on stakeholders and on BPI's financial performance. The endeavor engaged over 7,000 stakeholders to assess and refine BPI's ESG priorities. We remain well recognized for these efforts and as of March this year, BPI has received 9 ESG-focused awards. Beyond just ESG, however, BPI has also been well recognized for its various initiatives and we list here various awards and recognitions received in the first quarter of 2026. In particular, we would like to highlight that in March, BPI led all Philippine companies on time and statistics Asia Pacific Best Companies of 2026 list, ranking tenth out of 500 companies in the region. BPI also placed seventh and was the only bank included in the top 20 companies recognized as a great place to work in the Philippines. Let me close with a summary. On profitability, our revenue-led net income growth was tempered by higher OpEx and provisions, but we remain to have a strong operational metrics. We continue to maintain a healthy balance sheet with ample liquidity and capital. Overall, asset quality remains within our risk appetite, supported by adequate buffers. And finally, we further strengthened our leadership in digitalization by scaling AI and data science. Thank you, and we will open the floor to questions in a couple of minutes after we get set up.

Thank you, Eric. Before we open the floor to your questions, please allow us a minute or 2 to set up at the venue. [Operator Instructions] Okay. So just a reminder, joining us here in front with TG and Eric, our senior leaders Tere Marcial, Head of BPI Wealth; Ginbee Go, Head of Consumer Banking; Louie Cruz, Head of Institutional Banking; Jenny Lacerna, Head of Mass Retail Products; and Dino Gasmen, Treasurer and Head of Global Markets. So before we take questions from the Zoom link, we wanted to check first if anyone in the audience had questions. Go ahead, Gilbert.

I want to ask if you could discuss in greater detail what happened to the institutional book, why there was some asset quality issues.

You have to remember that NPL is 90 days. So we knew this was coming. The increase in the NPL in the institutional book versus the fourth quarter first quarter versus fourth quarter was really a net increase of about PHP 3.4 billion, driven by several accounts -- several meanings 6 or 7, if I can remember right, but one of which was more than half of that. All of them with the exception of 2 were fully secured. The 2 have an NPL amount of about PHP 600 million or PHP 700 million, the rest are fully secured. The one big one is, as Eric said, was 1.8x secured. So -- we think those will be resolved. In fact, we are -- the big one, we know, will be resolved because we think we should be able to take the property and we're in discussions for someone to take over the property. And that means that there is no reason to fully provide for that fully provisioned because you know the collateral. And that's one reason also why the coverage fell, right? So when we look at the coverage of 2.4 -- sorry, 94% versus 87%. We think if we didn't have that NPL growth and the lower coverage for those NPLs in the book, that cost fall of 11. So we would have fallen from 94% to 83%. I would have bet have been there. So that's the effect of the NPL of the institutional bank is about 11 points. And the effect on the NPL rate is about 13 basis points. And then as Eric said, when we look at going forward, we have 2 accounts that will resolve themselves in the second quarter, totaling about PHP 3.3 billion. And we know because they've already been performing and just need 6 months [indiscernible].

Accounts of this sort that could -- for the balance of 2026.

Well, obviously, there will be accounts, but none as big as the large one. And this was unrelated to the economic gas. Louie, maybe you want to give some color what you think.

Are you at liberty to talk about the industry there and whether or not they're connected politically.

No, they're not -- they're not connected politically.

[indiscernible], it's not. But for institutional accounts or accounts that we have, as TG mentioned, it will follow base in a restructuring. So if it falls 90 days, then it's within 90 days. And if they miss an amortization, then it was naturally and it becomes NPL. So all this housetrained we monitor this specific account that's quite large in terms of amount. Every time there is an amortization they miss, so we kind test. We can actually extend it. But the thing is if there's no clear path of doing a proper restructuring. We just don't do it, right? So that's a difference in terms of institutional accounts in terms of restructuring. And it's not political. It has nothing to do with the issues that you're seeing. It's really an account that's quite unfortunate that they -- their cash flow was affected. But at the end of the day, you were fully covered. It's more of a timing of when we want to trigger it. Right? So in fact, many are looking at it because -- this might -- it's perfect for a solar play there.

Thanks for your question, Gilbert. Thank you, TG and Louie. If there's anyone else from the audience who had a question. Rafa, go ahead.

I guess more moving forward with all the obviously, beyond the 1Q scope nor -- are you seeing any stress in SMEs consumers over the last 2 months since the Iran extrusion?

Rafa, you'll have to expect it. I think you'll have to expect it. And that's why we have provisioned a little more aggressively in the first quarter with our ECL covers higher. And when really, a lot of the provision we did was not for the corporate because we didn't need because of the collateral but really for the consumer side. It's about natural with this crisis with higher fuel costs, people are predicting the food costs may go up, we will see some stress. And even when you look at their ECL models, payment behaviors are beginning to show themselves. A couple -- 1 or 2 basis point slide in PDO numbers are indicative that something is coming down the road. So you need to provision that.

Are you seeing it more in the consumer or in the SME.

I think you'll see them both.

But you're talking about provisioning, right? So generally, provisioning would definitely require a lot more simply because of the model. The model has macroeconomic variables as part of [indiscernible]. And so with deterioration in the macroeconomic variables, it's simply math. But certainly, we will remain to be very will closely monitor our recoveries. We are stepping up our collections and being very proactive about that, not to mention with the BSP regulations on the memo. It also helps that the BSP is being very proactive.

Thanks for that question, Rafa. We have a few questions on the Zoom chat. So I'll start off with that. The question is from Katrine Dolatre of Security Bank. She wanted to ask what do we consider our optimal LDR and she wanted to ask as well for our loan and deposit growth target?

I saw the question, Katrine, right. I think we have said it before, LDR is loan to deposit ratio in Modern Banking Day, given the ability of banks to access BSP borrowing, interbank borrowings and particularly the bond market where there is a substantial cost advantage going to the bond market. The real thing that we should be looking at is our loan to funding mix. And our loan-to-funding mix is about 84% at the end of the quarter. that's very comfortable. The other thing that you need to watch out for, I guess, is your CASA ratio. Our CASA ratio is about 60%. Now that I'll admit we'd like to get it higher because that's something that delivers cheap funding. But the reason we are able to run our loan to total funding at very aggressive levels, it's because BPI is fortunate to be one of the big 3 banks where we have a distinct advantage at being able to raise deposits when we need to. And the reason we don't want to -- sorry, the reason we are able to run high is because when we need to compete for deposits, we're able to price, and we don't really want to price very high in the market and cause our funding rates to be high just so that we are loan-to-deposit or loan-to-funding mix will go down. I think that's the way we should look at it. I don't know, Eric, you might want to give guidance on our loan growth and deposit growth.

So what we're looking at for this year is -- on the loan growth side is we're looking at some moderation from what we had planned on at the beginning of this year, which should come as no surprise given the weaker economic outlook that we have for this year. But we're still looking at something along the lines of kind of the low double-digit range for growth, maybe somewhere in the 10% to 12% range. But obviously, this will be subject to updating in the context of how the current situation evolves, right? I think at this point, nobody really has a crystal ball into how this thing is going to evolve every day, every week, the expectations are changing. So it's hard to really crystallize a new target at this point, but we are looking at some moderation because obviously, what you've seen so far is already putting a dampener on the economy, and we're -- the oil -- higher oil prices should stick around for quite a bit longer, which is going to plays a constraint on the growth of the economy. On the deposit side, what we've seen in past situations similar to this, whenever you crisis, we tend to see deposits coming back to BPI. So our expectation is that we should -- the availability of deposits should be there. We don't think funding is going to be an issue for us. But of course, we are taking all possibilities under consideration.

Thank you, TG and Eric. [indiscernible] did you have a question? Go ahead.

Sorry. Just going back to asset quality. In light of the current development and stresses, have you guys run, I guess, scenarios or stress test on what part of the book is more exposed? And anything you can share with us along those lines?

Yes, every quarter, we run new economic variables. So we're doing that now for the we just finished a quarter. So our -- I guess our April numbers will show it to the Board. You won't see it till end of June. We do stress testing as part of our [indiscernible] and as I told Rafa -- as I mentioned to Rafa's question, I guess we'll see a lot of stress on the consumer. Because obviously, we have a substantial growth in our consumer book. And we have people, I guess, we have -- if you want to put it, we've basically gone a little down market relative to what we've always had. So we expect to see some higher ECL there which should eventually translate into NPL going forward, but the margins justify. One of the things that I ran was I was starting with a team that if you look back at the last 4 years and look at our net interest income growth, our net interest income growth has surpassed our was about 9 to 10 percentage points faster than that of our competitor for the last 4 years. And that translated to approximately about PHP 36 billion in additional revenues over the last 4 years. So if you want us to get back to our provisioning to 100%, I just need PHP 8 billion more. So I think the trade-off has worked out. And I believe that the trade-off continues to work out [indiscernible].

Any guidance on provisions this year given this outlook that you shared?

Well, our original projection for the year was somewhere in the 80s, right? So far for this quarter, we are looking at an annualized rate of 87 basis points. I think there is certainly the potential for this to grow, right? I mean, we don't really have a good grasp of how bad the situation gets moving forward. I'm sure if anybody asked you, you would say, can the situation get worse? I'm sure you would all agree that this situation has the potential to get worse. It has the potential also to stay where it is now. I don't think it quickly rebounds. But if it stays where it is, it probably our provisioning levels will probably be similar to where they are now, maybe a little higher. Obviously, if the situation deteriorates, well, we'd have to see how much worse it gets, right?

Okay. We have a question in the Zoom chat as well. It's actually from Eric Chan of Buena Vista, and it's probably going to be directed to Louie perhaps. I noticed the institutional loans NPL is at 1.19%, which is quite similar to the historical average. And given the backdrop with the war and inflation, how are your delinquency buckets in the institutional loan portfolio.

Thank you for that. Thank you, Eric. Okay. How we monitor in the institutional banking side. We also followed a at the start of the year. We look at the industry weather join. We identify clients, high media in terms of risk. And with that, with the Middle East crisis now, we try to overlay that and see which clients will have a direct impact will be affected directly and indirectly, right? So versus -- just have to mention versus the COVID situation, where you look at the industry or the sector as a whole, now where we're looking at it on a per account basis reviewed based on how we monitor the risk in the industry. So having said that, the good thing with the portfolio is quite healthy and very focused on projects. And when you say freely project, it's really more cash flow is quite steady and the sponsors are quite reputable. Where we're monitoring is really on how it was structured originally in terms of interest rate. So already asking if we can do a little flex on doing a floater versus a fix. That's something that's where we will help given the -- where the crisis is and the others are some flexibility in terms of prepayment if they have cash. So we will also try to support that. So overall, that's how we manage the portfolio to keep the NPL in the institutional banking within the range of where we are now.

Thank you, Louie. Thank you, Eric, for that question. Actually, Eric Chan likewise had another question in relation to the risk -- what we showed earlier, which is the risk-adjusted NIM net of provisions versus the risk-adjusted NIM, net of NPL formation. He's wondering if there's -- are we seeing any, I guess, divergence between the net NPL formation and the overall credit costs.

I think the only reason you're seeing that big difference in the last -- in the current -- I'm sorry, in the first quarter is because of the institutional book where -- because the NPL jumped up on the institutional book, and we did not necessarily need to provide for that because of the collateral. And therefore, when we deduct NPL formation, which was the institutional book, it didn't count into the provisioning. So that's the difference. I expect that to come back when the $3.5 billion of the 2 loans in the second quarter that Louie promise may will come back in the second quarter comes back. Yes. Yes, the last point I wanted to make was, I think you also have to remember that when Eric shows provisioning as a cost or a deduction to the net interest margin or NPL formation, we're not adding back also the recoveries from ROPA sales. right? So that's something else that we're not considering into that factor. Obviously, when we make provisioning and provision gets eaten up by movements into ROPA, we're not counting the sale of the ROPA when it eventually material.

Thank you, TG. I wanted to check if anyone from the audience had any questions. Okay. If not, we'll continue. We have a question from Melissa Kuang. The questions are actually about OpEx. We mentioned that on OpEx, some of the sharper year-on-year growth was -- part of it was related to timing, but also some regulatory changes. Can you share a guidance in terms of what we expect for OpEx year-on-year for the full year of 2026?

Our original projection at the start of the year was that we would see OpEx growth of kind of around the 10%-ish level, right. This year, as the year has developed, we're obviously going to have to update that as we get greater certainty. But -- in some ways, there will be a need to maybe spend a little more in some areas, but there are also areas in which we can dial back in particular, we can dial back on some of the promotions or some of the marketing that we're doing in order to compensate for any increases that we're seeing in other areas as, for example, obviously, transportation costs, the logistics and logistics costs we incur, we're also subject to the same oil price increases that everybody else is, and so we could potentially see increases there. But again, we would look to manage that with potentially cutting back in certain areas as needed depending on how the year pans out.

Thank you, Eric. Actually, we have another question in relation to cost this time on the tech side. It's actually from [indiscernible] of Consilium. She wanted to ask about what she saw as high digital spend how soon do we expect cost to return to, I guess, normal growth levels? Or are we seeing a prolonged period of higher costs?

So maybe I can address that by saying, when you talk about the high spend, including our technology, our mindset is that actually, the investments that we've made in technology have allowed us to continue to become more cost efficient over time. And so if you look at where our cost-to-income ratio was in, for example, in 2022 versus where it is today, where we ended last year, where it is today. I think what you'll see is a continuing trend of improvements in the cost-to-income ratio. So when you say, "Hey, when is it going to come back down to a normalized level? Actually, we've been seeing improvements in this level. And we will continue to invest in areas that we believe will continue to pay dividends for us, not necessarily within the year, but down the road, and that's what we've been doing. And we believe that the investments that we've made in the past years have been critical to helping bring down that cost-to-income ratio over the last few years.

Thank you, Eric. I have another question actually from Eric Chan of Buenavista. This time, it relates to the personal loan segment I think you noticed that if you exclude the teachers' loans, the overall growth of the personal loan portfolio appears slower than the teachers' loans. And given our success with the test portfolios and the drop in the NPL ratio, what explains the slower growth of the personal loans portfolio ex teachers loads?

Yes. So for Teachers loans, it's really growing at about 71% rate. And for personal loan, it's about 10% year-on-year. So still a decent increase over last year. So in issuing loans, personal loans is really classified as a multipurpose loan. But as of late, we have really looked at the portfolio and determine which are really personal loans and which are used for capital. And you would see that the pros section between business banking in personal loans. Actually, there are overlaps in customer. And therefore, that's now booked in business banking, which has grown by about close to 90%. -- and now with teachers loans in the personal loan books, which is really more of a personal loan. It actually is combined. It has a healthy growth. Given that -- sorry, teacher loan is really a lot of potential, now growing at 71% year-on-year. So it's really an alignment of the customer value proposition at this point.

Thank you, Jenny. We actually have, I think, some questions from those who dialed in. I think from Danielo Picache of AB Capital.

I have three questions, if you don't mind. So I know we are barely 2 months into this oil crisis. But are you seeing any changes in early bucket delinquencies say, 30 dpd in both insti and non-insti book. That would be my first question.

Let me turn the insti to Louie. And then I think the best one for -- if there's any significant change would be on the cards portfolio in the personal loan because that would be very, I guess, reactive. So maybe Jenny first and then.

So the answer is there are actually deterioration, yes, we see deterioration on the ex base days delinquency buckets. And the score downgrade really is a movement from one stage to another. Having said that, we have titled risk acceptance criteria, looking at income, looking at age, looking at profile, looking at industry where they come from. So we've tightened that on the acquisition front. And on the collections front, we have intensified collections already. pre-delinquency 30 days, be more aggressive in contacting customers prior to moving them to a later bucket. So yes, and I think that is quite expected given given the Middle East crisis. So we see that both in personal loans and in credit cards. But we already have placed measures to be able to control those.

Okay. On the institutional side, it's not really a deterioration, but we've seen clients, especially in the middle market, are requesting for extension prior to the aqua amortization itself. So we're seeing some of those. So before we actually do accept the request, also have to monitor, is it really directly affected by the Middle East conflict? Or is it really a cash flow issue outside of the normal situation. So we look at those situations also. So at 30 days, we get those requests. So definitely, it will not reach the 60, 90 anymore because that's how we monitor to avoid cross because for institutional if you read 60, that means there's really a missed an interest payment rate in the 30 days. So it's quite early detection of the institutional side.

Okay. Got it. Just my second question and sort of a follow-up to that. So with the targeted relief measure offered under MB Resolution 296, so we all know that's different from [indiscernible] can you give us a sense of how this will influence your NPL recognition, write-off policy and provisioning the requirement?

Well, we're just going to follow the MB. But really what it is, it's discretion to the bank. So we are working on programs now looking at potential borrowers who might request it and seeing whether it is applicable to them. I don't think it will significantly change the way -- obviously, if the MB allows us to defer a payment without making it NPL, that will affect, but I don't think it will be a significant portion of our portfolio.

Got it. And just my last question. So essentially, how should I think about the steady state credit cost of your non-instant book? And sort of at what point does incremental yield get offset by higher loss rates.

I think the guidance that Eric has given is sufficient. It's hard to predict where this wire goes. If you can tell me when this wire ends, I can tell you what the NPL will be. If you can tell me where oil ends up, we can give you a result gas, but we don't know. And therefore, I believe the margins are still sufficient. The margins are pretty wide. I mean Eric has shown that against NPL formation, which to me is the most aggressive way of measuring it because there you're assuming all NPL is lost, no recovery, right? We're still very healthy. So to be honest, it will be take a dramatic end of the world. for us to start losing money on this business. Now granted, it might not be as optimistic as it was when we said it was 2 years ago, but it's still worth the effort that we have done.

We now move on to someone who also wants to ask a question. It's Aakash Rawat of UBS. Aakash, go ahead.

Great. So TG and Eric, I think you shared some color on the NPL formation earlier. That was very useful. But apart from the big account, you said there were 5 or 6 other smaller accounts as well, which turn into NPLs. Can you share some more color on what industry is there from? What is the nature of those problems? And is it in any way related to the Middle East contract or completely independent of that?

I think it is independent from the Middle East conflict, Aakash. I think the big one is just completely failed business, if you will, a failed business or the proponents thought they had something things just didn't work out over the past couple of years. And I think they're throwing in the towel. We've tried to work with them. It isn't working out. So we're looking at taking the property and then just there are potential buyers for the property. So we will be good on that. The rest are, I mean, small businesses -- I mean, not small because they're their consumer businesses.

I see. And then you said that based on your current expectations, you're expecting recoveries and the NPL cover to go back up in the second quarter. Is it all the way back up to 95%, which it was pre Q1? Or do you see any risk that it might not happen in Q2 might get further delayed?

Sorry, the question is, if the recoveries come back that we expect to come back in the second quarter, if they come back, then I didn't get the rest of the question. So...

Do you see the NPL coverage rising back all the way back to 95%? Or do you see there's a risk that this gets delayed to Q3 or Q4.

I think there's a very reasonable expectation for it to come back to about that 95%.

Yes. Actually, Aakash, if you take a look at the -- if you take a look -- as I mentioned, if you take a look at the several accounts, corporate accounts that went bad, they went NPL in the first quarter and remove them and remove the provisioning we did on them in the quarter, our cover would be up 11 percentage points from where it is today. So that's 87% should be at 98%.

Okay. Understood. And TG, you mention that you're doing this exercise to calculate ECL provisioning because of macroeconomic variables again, things are very uncertain, but you also said higher oil prices might persist and you're starting to see some stress on the consumer book already. Based on your best guess, what is that level of provisioning that you might need to make for the macroeconomic variables that might change on the back of this? Is it in the tune of 5 to 10 basis points? Or is it a higher number that we're looking at?

At this point, it's more of a guess than anything else, right? But I would see -- again, we would expect it to go up versus our initial projections at the beginning of the year. As I previously mentioned, our expectation for this year was somewhere in the range of the 80s, it could head up into the range of 90s, approaching 100. But the reality is that depending on the situation, it could go beyond that. that's certainly within the realm of possibility. But based on what we see for now something along the lines of in the 90s up to 100, I think, would not -- would be within the range of reasonable expectations.

Okay. Last question. Given the slight level of stress that you're seeing in the consumer book and given the uncertainty, are you scaling back this business? Should we expect slower growth in the consumer business in the coming quarters? And what about -- sorry, the same question for institutional business as well.

I think what I did mention is that we are scaling back loan growth expectations. Before the Middle East conflict happened, we were expecting loan growth in kind of the call it, 13% range around that level. And as it stands right now, we certainly think it's going to scale back somewhat. And our current outlook is somewhere in the 10% to 12% range. But again, it remains subject to update as we get more visibility on how things are going to evolve through the course of the year.

If I may, Aakash and lend some color to that, right? Obviously, with the crisis ongoing, we've got to realize that there will be stress on the consumer. And therefore, as Ginbee and Jenny have mentioned, we have tightened credit standards that should cause a little slower growth than what we had expected at the start of the year, as Eric has mentioned. The other thing that we need to do is step up the collection efforts, which we've done to make sure that we're proactive. We're calling them before their due dates and working with them to make sure that if anyone's got stress that we manage and work on solutions that allow them to promise to pay and keep those promises. But I think you need to look forward. The consumer business is always cyclical, right? And therefore, -- and that's why you price the high margins into the consumer business because there will be times when there will be consumer stress where your margins will compress, right? And there are real times when the consumer will be good and your margins will expand. We cannot disappear from the consumer market because when the cycle turns, and it will, we need to be there. We need to be there in front of the consumer, we need to be facing consumer, we need our distribution and our products still front and center with the consumer. Otherwise, it will just always be feast and famine. We just need consistent earnings. We need consistent growth, and we need consistent interaction with the customer.

The other one that I think you need to consider a cash is not just that the bank is tightening credit standards. And I guess that's something that all banks will need to do from a proactive or prudent risk management standpoint, but also demand during crisis for high-ticket items is usually going to be more tepid. We see this in vehicle sales in the industry other than EV, ICE vehicle sales are down. We are still realizing strong growth simply because of EV on home or housing loans market, we also have seen a softening of real estate sales. And on the financing side, you can expect this because during the COVID years, which is now when most of these projects will be completed. There was highly any project during that time. And so we'll see really a softening in demand for mortgage financing at this time. But do we see opportunities Yes. our branch channel sourced counts remain to be very strong because of existing to bank clients who look for bargains. So the secondary market is still an existing market. There is still market for that. And most of the EV financing are branch-led sourced accounts. Overall, though these opportunities will not be adequate to compensate for the overall decline in the bigger dealer market or in the bigger broker real estate tie-up market?

Thank you, Aakash. We actually have a request. We actually have [indiscernible] of Fidelity. Gaurav, go ahead with your question, please.

My question was on the number you mentioned on credit costs, so 90 to 100 bps. Can you quantify the underlying assumptions or, say, the GDP growth and oil price based on which say you arrive at 90 to 100. And if the GDP growth is lower than what you're assuming, oil price is higher than what you're assuming, at what level of those downgrades, then the COC goes above 100 bps. So just numbers on the underlying assumptions.

Sure. That was roughly based on an initial projection done by our Chief Economist, saying that we could see GDP growth fall down to the range of about 4%, just 3.9%, I think was a specific number. I realize that there have been projections there that are lower than that. But you have to base it off something and that was the projection that we got from our Chief Economist and the basis of which I gave that projection.

Okay. So do you have like any direction in terms at what level your credit cost goes above 100 bps. How bad it has to get.

I'm sorry, I can't really give you good guidance on that, unfortunately. The worse it gets the worse the economy gets the higher it goes, and I don't have a strict I guess, line that follows a if GDP goes here, then this is where the credit cost goes. Unfortunately, I don't have that. We don't have that at this time.

Thank you, Gaurav. We have a question actually that was typed in from [indiscernible] MUFG. He asks if we have any projection on NPL ratio by the end of the year? And what is the impact of expected write-offs, if any, on our capital position?

I would expect the NPL to be actually at about this level or even lower. If you look at where the bump has come from, from the fourth quarter, it's really come from the institutional book where we believe that will come down significantly. We are also looking at doing remedial action on our SME book, which is -- and the personal -- sorry, the micro finance book, which both have seen substantial jumps. And therefore, I would suspect that the NPL ratio should be at this level, if not lower by year-end. As to whether it affects the capital, I don't think it does. What happens is that we provision and that goes straight into earnings already. So if we're at the same level, then the capital really shouldn't be a should just be a flow-through from our earnings.

Thank you, TG. And thank you, [indiscernible], for your questions. I wanted to check if anyone for the other questions. Rafa [indiscernible] go ahead.

Yes, sorry. Speaking of capital, how are you thinking about capital management at this stage? If loan growth slows and is less capital consumption, but do you want to keep building up capital in case of protect for risk, et cetera, et cetera.

So our initial expectation at the beginning of this year or early in this year before Middle East conflict broke out was that we really had the potential to return a little more capital to shareholders. At this point, it is kind of a balance, right? Like you mentioned, from a safety perspective, you would think that we want to maintain a little more capital. But at the same time, if loan growth is going to be weak, then we can afford to return more capital back. I think on balance, there continues to be the belief that this level of 13.9% in terms of our CET1 ratio is still a very comfortable level. We can continue to see it move down from here. If conditions, I think, would have to deteriorate significantly for us to say 1 point, we have to retain all of that 13.9%. And so if we see slight deterioration in economic conditions, I think we can still afford to have a lower than 13.9% capital, but significant deterioration means that we would probably look to conserve a little more of that capital.

Thank you, Rafa. I think we have time probably for one more question. Anyone from the audience? I don't see anything else in terms of the Zoom chat box. So -- that actually concludes the Q&A session. We can -- I wanted to thank everyone, all the participants for your questions. Of course, we at BPI always welcome your feedback and take them into careful consideration. Before we end the call, I'd like to maybe call on TG for some final thoughts.

So again, thank you to everyone for joining us today. And I think we spent too much time talking about NPLs and credit costs. And none of you asked any questions about all our other initiatives that we're trying to do, to show, to ensure that the bank continues to grow and continue to serve more customers. I just want to end with the story. Over the weekend, we launched our deposit and our partnership on a Island with Robinson Supermarket on Baraka Island, and we introduced the ability to open an account, make deposits and do withdrawals at the Robinson Supermarket in [indiscernible]. And in over those 3 days, we opened 15 new accounts each day at the supermarket in contrast to our branch there, which opens less than 8 a day. So it shows you the power of our ability to show that BPI is everywhere. So our agency banking initiative will complement what we're building in the branches, where we're trying to build the branches to be more service and sales -- sorry, more sales and advisory-oriented and then complementing that with all the digital initiatives that we're doing -- moving from wealth, all the way to our mass market and Banco. So again, I want to stress that while we are going through some tough times as an economy, thanks to the Middle East crisis or no thanks to the Middle East crises, the banker continued to be focused on promoting financial inclusion, continue to focus on our strategy, continuing to build our consumer book because the consumer is still a very untapped market in this country. It is a market that has strong potential. And we believe at BPI that we need to be there for the Philippines. We need to be there to ensure that they can continue to improve their lives. And as the economy turns -- as it will, BPI will be there to continue to help them with their journey. So thank you, everyone, for joining us today and see you next quarter.

So thank you, TG, Eric and the rest of the BPI senior leadership. Ladies and gentlemen, that ends today's earnings call. Thank you again for your participation. To those joining us online, you may now disconnect. But for those on site, please do join us for some refreshments. Thank you. Have a great one.