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

Okay. Good afternoon, ladies and gentlemen, and thank you for joining us today. Welcome to BPI's earnings call as we go through the results of our performance for the second quarter and first half of 2026. I'm Haj Narvaez. I'll be your moderator for today's session. We are conducting this briefing in a hybrid format with our BPI speakers and panelists joining us from our headquarters at Ayala Triangle Gardens Tower 2 in Makati City, while many of our participants are also joining us remotely. I am pleased to introduce you to our speakers and panelists for this afternoon. TG Limcaoco, President and CEO; Eric Luchangco, CFO and CSO. They will be joined in the panel for the Q&A session by Tere Marcial, Head of BPI Wealth; Gin Go, Head of Consumer Banking; Louis Cruz, Head of Institutional Banking; Dino Gasmen, Treasurer and Head of Global Markets. We are also joined 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 second quarter and first half performance highlights as well as updates on our digital platforms and strategic initiatives. The floor will then be open to questions from the audience. Please note that this call is being recorded and that 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 here in person or online. Again, today, as usual, we will present our detailed results of our second quarter and our first half. Our CFO, Eric Luchangco, will do that. But allow me to make a couple of points about our performance. Our performance for the first half was basically flat versus last year. Personally, a bit surprising for me given the severity of the additional provisions we had to take due to new economic variables. As Eric will point out, really NPL did not trend up, but really, this is a factor of our model of predicting additional -- requiring additional credit losses, something that I think that as the economy recovers should be reversed. Our revenues continue to be strong. We have record pre-operating profits, pre-provisions, whatever. Pre-provisions, operating profit is record. Our revenues are strong, which, again, for us, our NIMs continue to rise. Our loan growth was at 12%, basically demonstrating some of the credit tightening that we told you about and the fact that our NPL on the consumer book, you'll see we took a rising in some of the products. That's basically a function for some of some pressures on the smaller portfolios. But on the larger portfolios, it's less inflow of new loans coming in. With that, I think also Eric will go through some of the things that we are doing, our new initiatives, particularly our agency banking and the fact that -- we now have over 1,000 stores or agency partners who can take deposits and withdrawals, and that is gaining real traction and showing us that these agency doors are actually doing the transactions that are equivalent to quite a number of branches just in the first month alone, and we're looking forward to that. So with that, I'm sure we'll take a lot of questions later on, particularly on asset quality, the trajectory of our loan book and what we continue to believe is our strategy going forward. With that, I'll turn you over to Eric. Eric?

Okay, TG, thank you for that. So good afternoon, and thank you to everybody joining us here today for those that are here in person despite the rain. We're here to present our results for the second quarter and the first half of the year, which we believe reflect actually strong ongoing performance and continue to validate our strategy moving forward. For the first half, the bank generated record pre-provision operating income, up 11% from last year with robust revenue growth across all businesses, supported by loan expansion and continued NIM improvement versus lower NIM versus lower NIMs that are seen across most industry players. While earnings were moderated by higher provisions, these were driven by forward-looking preemptive measures amid a softer economic environment rather than a crystallization of credit stress. This approach enabled us to deliver net income of PHP 32.8 billion and ROE of 13.8% and a 24% increase in our cash dividend to PHP 2.58 per share for the first half of the year. The bank maintained strong balance sheet growth with loans increasing by 12.4% year-on-year and deposits rising 9.2%. Capitalization remained strong despite the higher dividend with CET1 ratio at 14% and CAR at 14.8%. Asset quality remained stable despite challenging conditions. While provisions increased, these included adjustments following updates to macroeconomic variables in our ECL model, reflecting a more conservative outlook to be shown in greater detail in the coming slides. It's also important to note that the additional provisions taken due to the MEB changes will not recur in succeeding quarters unless conditions deteriorate further from where they are today. On the flip side, if conditions improve, we could potentially see a reversal in the ECL requirements. NPL ratio remained stable at 2.42% quarter-on-quarter, while the NPL coverage ratio improved to 93%, with collateral providing additional buffer. The bank also further strengthened its customer franchise, expanding its customer base to 19.2 million. Agency Banking continued to support scalable growth and financial inclusion, while BPI Wealth strengthened its leadership as the country's largest trusted institution by assets under management based on the latest data provided by the BSP. Looking at our first half performance, we ended the first semester with net income of PHP 32.83 billion, broadly stable year-on-year. These results included net interest income increasing to PHP 80 billion or 12.5%, supported by 12.5% or 12.5% supported by robust loan growth and a continued improvement in NIM. Trading income moderated against the high base recorded last year, but fee income rose by 18% due to increases in the customer base volume and deal activity, driving total noninterest income up 12% and the total revenue and total revenues up 12.4% to reach PHP 104 billion. Operating expenses rose 13.8% to PHP 48.6 billion, driven by manpower, technology and business volume-related costs. Pre-provision income was at PHP 55.4 billion, up 11.2%. Provisions rose 84% to PHP 13.3 billion on higher ECL reserves requirement, including the impact of the updated economic outlook. Our quarter-on-quarter performance mirrored the year-to-date trend with revenue-driven growth and strong PPOP offset by macroeconomic overlays. For the quarter, revenue was at 4.3% to -- was up 4.3% to PHP 53.1 billion, Net interest income was up 4.4% to PHP 40.9 billion, driven by continued loan growth of 2.1% and a 13 basis point expansion in NIM. Strong revenue was partly moderated by higher operating expenses, up by 6.9% to PHP 25.1 billion and provisioning up 42.5% to PHP 7.84 billion. All these resulted in second quarter net income of PHP 15.9 billion, lower by 6% from the previous quarter. Profitability remained robust with annualized return on assets of 1.8% and return on equity of 13.8% in the first half despite a more challenging operating environment. Earnings per share stood at PHP 6.2 per share. Moving to dividends. Strong earnings supported a sharp increase in capital returns since the bank adopted a variable dividend payout policy in 2022. In June, the bank paid dividends of PHP 2.58 per share, up 24% year-on-year and almost 3x the fixed amount of dividend paid until 2021. Turning to the balance sheet. The bank continued to deliver healthy growth. Total assets reached PHP 3.73 trillion, up 0.6% quarter-on-quarter and 9.6% year-on-year, driven by sustained loan growth alongside increases in investment securities and liquidity assets. Gross loans stood at PHP 2.67 trillion, up 2.1% quarter-on-quarter and 12.4% year-on-year, with expansion recorded across all segments. Deposits increased to PHP 2.85 trillion, up 0.3% quarter-on-quarter and 9.2% year-on-year, driven by continued customer flows and a stable funding base. As loan growth continued to outpace deposit growth, loan-to-deposit ratio improved to 93.6%, while the CASA ratio stood at 60.5%. On loans, quarterly loan growth rebounded to PHP 2.67 trillion, up 2.1%, reversing the contraction recorded in the previous quarter. Gross loans grew 12.4% year-on-year with continued strength across all segments. The deceleration in loan growth is primarily a product of tighter credit underwriting in the personal, microfinance and SME space. Institutional loans increased by -- increased to PHP 1.81 trillion, up 8.7% year-on-year on growth in Capex-related loans and robust demand from the utilities, storage, transportation and communication space. Non-institutional loans increased to PHP 855 billion, up 21.2% year-on-year. The year-on-year increase in non-institutional loans was led by SME loans, up 74.5% credit card loans up 28.9% personal loans up 21.4%, which includes the PHP 19.5 billion in teachers loans that grew by 59%. Auto loans was up 12.9%, and this includes the PHP 6 billion in motorcycle loans, which increased by 23% year-on-year. Microfinance loans was up 16.9% and mortgage loans up 11.5% -- the continued shift in the loan mix towards higher-yielding non-institutional loans remains a key driver of NIM expansion. Non-institutional loans now account for 32% of total loans from 29.7% a year ago, a gain of 232 basis points, which is supportive of NIM. In the second quarter, NIM reached 4.7%, up 13 basis points quarter-on-quarter and 3 basis points year-on-year, supported by improved asset yields and lower funding costs. NIM, netting out NPL formation improved by 75 basis points to 4.14%, driven by significantly lower NPL formation this quarter versus the previous quarter. As we discussed last quarter, there were a couple of large institutional accounts that moved into that moved into NPL status last quarter that drove the growth in NPL. Meanwhile, this quarter, we saw the expected transition back into current status of two different accounts that were previously in NPL status, but have now completed their seasoning period to turn current. NIMs, net of provisions declined to 3.8% due to elevated provisioning. On funding, total funding reached IDP 3.31 trillion, up 10.7% year-on-year and 0.6% quarter-on-quarter. Deposits remain the primary source of funding, complemented by faster growth in borrowings, particularly sustainability-linked issuances, which provide a cost-efficient source of funding. Our funding profile remains strong with loan-to-deposit ratio of 93.6% and loans to deposit and borrowed funds at 88.1% Deposit growth was broad-based across customer segments with institutional deposits rising 18% as a key growth driver. Mass market delivered the strongest CASA growth at 72.5% year-on-year and maintained a 96% CASA ratio, supporting the stable and low-cost funding base. Non-institutional clients continue to anchor our deposit base, representing 77% of total CASA deposits. Fee income stood at PHP 11.3 billion, up 22% year-on-year and 7.6% quarter-on-quarter. In the first half of 2026, fee income grew 18% year-on-year on strong contributions from our key fee-generating businesses, cards, wealth and insurance, supplemented by growth across our other fee-based businesses. The Card segment saw a 13.8% increase from higher retail billings and fees collected. Wealth management fees were up 12.3%, supported by higher AUM. Notably, we emerged as the country's largest trust institution by AUM in the first quarter of this year. Transaction Banking was up 18.2% due to stronger supplier finance activity, supported by higher transaction volumes and larger invoice values from key clients. Fees from corporate and SME increased 53% on business growth, driven by late payment charges, one-off collections of prior year service fees, higher loan bookings and stronger miscellaneous income. Securities brokerage and investment banking increased 83.1%, supported by stronger transaction volumes, including some large project finance deals. These were partially offset by a decline in asset sales due to a large one-off sale last year. Rental income also declined slightly. Starting in July, we waived fees on -- for P2P transaction transfer fees via PESONet and InstaPay in line with BSP Circular 1238, which mandates parity between on us and off us fees for P2P electronic fund transfers. While BPI ranked fourth with a 9% market share in terms of outgoing P2P transactions by account and second with a 13% market share in terms of outgoing P2P transactions by amount for the first half of 2026. The impact of this on revenue is partly mitigated by the fact that P2P transfers for select BPI account holders representing about 13% of the transaction count was already done on a free-of-charge basis. Our outgoing P2P transaction count totaled PHP 144 million in the first half of 2026, and we charged PHP 10 per InstaPay transfer during that period up to the start of July 2026 and this generated PHP 1.1 billion in fee income this year from P2P transfers. This accounts for 5% of our total fee income and 1% of our total revenue in the first half of 2026. We believe that the waiver for fees for outgoing P2P transfers will yield benefits for the bank moving forward. We believe that it will increase digital usage, thereby decreasing the velocity of lower-value cash transactions in the branches and ATMs to deliver OpEx savings. It will also allow us to deepen our relationships with clients and increase usage of our digital platforms. The free transfers should also spur client acquisition, which is now made easier for national ID holders through quick selfie verifications in our mobile app, pulling details straight from your national ID records. And finally, the free P2P transfers complement our agency banking partner stores where clients can do deposits and withdrawals for free. Moving on to our operating expenses. Total operating expenses for the second quarter amounted to PHP 25.1 billion, up PHP 2.68 billion or 12% higher year-on-year, with increases recorded across all expense categories. Manpower costs reached PHP 8.8 billion, up 11% or PHP 873 million, primarily from salary adjustments and the higher headcount. Technology expenses are at PHP 5 billion, up PHP 640 million or 14.5% year-on-year due to higher repairs, software maintenance and software subscription costs supporting the bank's digitalization initiatives. Other operating expenses increased to PHP 9 billion, up PHP 1.1 billion or 14.2% with volume-related marketing and product-related expenses accounting for a significant portion of the increase. This continued investment in our business, supported by key strategic growth initiatives resulted in customer count more than doubling to 19.2 million since 2022 and strong business volumes through digital platforms and tech-enabled channels, including agency banking stores. Our cost-to-income ratio for the first half is 46.8%. Capital level remained solid with CET1 capital at PHP 407 billion, up 0.9% from last quarter and 6.2% from last year, supported by earnings accretion. The CET1 ratio stood at 13.97% and CAR at 14.78%, well above internal and regulatory thresholds. Turning to asset quality. While NPL level increased modestly by 2% quarter-on-quarter to PHP 64.2 billion, the NPL ratio remained stable at 2.42%. The quarter-on-quarter increase in NPL was primarily driven by the SME, credit card and mortgage portfolios, which was partly offset by a decline in the institutional portfolio, which is consistent with what I mentioned earlier about the curing of 2 key accounts. Total credit write-off for the year was PHP 3.3 billion, driven by -- mainly by cards, corporate and microfinance. While the NPL level remained stable, provisions for the quarter rose to PHP 7.84 billion to account for the higher ECL. Total ECL increased by PHP 6.5 billion, 97% of which is from loan ECL and attributed primarily to the refresh of the macroeconomic variables and by the portfolio staging changes. The increase in provisions quarter-on-quarter includes adjustments for a more conservative economic outlook rather than a deterioration in underlying credit performance. These were partially offset by the impact of PHP 3.3 billion in write-offs recognized during the quarter. Given the higher provisioning requirements, year-to-date credit costs increased to 104 basis points, slightly above the 90 to 100 basis points adjusted credit cost guidance, although we don't expect the MEV adjustments to be recurring. NPL reserves stood at PHP 59.65 billion, lifting the NPL coverage ratio to 92.98% from 87.15% in March. Including surplus reserves allocated for GLP -- sorry, GLPP and interbank exposures under BSP Circular 941, NPL coverage stood at 115.85%. On this slide, we're highlighting the impact of the updated macroeconomic variable forecast on our ECL requirement. The upper left table compares the forecast used in the first quarter with the updated forecast used in the second quarter in the lower left table. The second quarter outlook was formed shortly before the cease fire before the U.S. and Iran was announced. It reflects significantly weaker economic conditions across key indicators, including slower GDP, higher inflation and the weaker peso. These changes increased our ECL requirement by approximately $2.7 billion, driven primarily by institutional banking and credit cards. It's important to note that ECL is a forward-looking measure that reflects the bank's estimate of future economic conditions as of June 2026. Should conditions improve, it could prompt an unwind of some or even all of the additional ECL in the coming quarters. Overall, asset quality remained manageable despite pockets of stress in select segments. NPL ratio for institutional loans improved by 32 basis points quarter-on-quarter to 0.88%, driven by the curing of 2 client exposures, which we were expecting as we shared during our last earnings call. Within the non-institutional portfolio, SME delinquencies increased by 420 basis points quarter-on-quarter, largely driven by recent vintages. The increase was also influenced by the deliberate tightening of credit parameters, which moderated SME loan growth to 3.5% quarter-on-quarter, well below the 18.6% average growth recorded over the prior 4 quarters. It's worth noting though that SME loans account for only 2.8% of the total loan book, limiting the overall impact to asset quality. On personal loans, it increased 85 basis points quarter-on-quarter with delinquencies observed primarily from the first-time loan availers and core mass clients. Microfinance was up 40 basis points quarter-on-quarter, mainly driven by the Mindanao region following a recent calamity that hit the area. Although credit cards rose to 62 basis points quarter-on-quarter, recent NPL and PDL ratios show that the portfolio is stabilizing. ECL coverage stood at 100.57%, while NPL coverage, including collateral, stood at 143.16%. Across all major portfolios, coverage ratios remained above 100% with microfinance and personal loans where coverage levels were lower due to unsecured nature of these products and their higher loss absorption capacity being factored into the pricing. Notwithstanding this, these portfolios represent only a small share of the loan book. Beyond NPLs, loan staging provides a more forward-looking view of credit quality. From a staging perspective, credit quality improved during the quarter with loans migrating from Stage 2 to Stage 1. Stage 1 loans increased to 87.9% of the book from 86.9%, while Stage 2 loans declined to 9.9% from 10.8% during the quarter. Stage 3 loans remained stable at 2.3%, indicating that the reduction in Stage 2 accounts was not accompanied by higher defaults. While overall portfolio quality improved, we observed pockets of migration in certain segments, offset by continued strength in the larger portfolios. Overall, portfolio risk remained well contained despite the continued growth in our loan book. This slide highlights the strength of our reserve position. NPL coverage stands at 93%. However, when general loan loss reserves from surplus are included, coverage increases to 116%. Collateral provides an additional layer of protection, further increasing NPL coverage to 143%. On ECL coverage, reserves and overlay sufficiently covers ECL. Unlike NPL coverage, ECL captures both performing and underperforming loans, allowing earlier recognition of potential losses, including GMLP further strengthens the coverage to 125% of ECL. Our strategic shift towards the Non-institutional loans continues to enhance overall portfolio returns. Non-institutional loan gross yield remained stable at 12.7% in the first half, more than double the 5.8% yield of the institutional portfolio. Even after accounting for higher NPL formation, the noninstitutional loans delivered a net yield of 8.7% compared with the 5.7% for the institutional loans. This wide margin differential provides a strong buffer against NPL formation while supporting growth with the noninstitutional loans expanding 1.5x since 2024 versus the 1.2x expansion for institutional loans. In line with our commitment to digital leadership, the bank continued to enhance our 7 client engagement platforms. Starting from the left, we have the BPI app, our main operating app for retail clients. The apps core functionalities are fully are in place with ongoing enhancements focused on improving user experience. We recently added a feature to hide account balances and account numbers, real-time electric bill payments and deposits to partner stores. The app has 9.8 million enrolled users, of which 6.2 million are considered active users. For our VYBE e-wallet, sign-ups have reached 2.8 million, 20% of which are new to bank. The BPI BizLink facility for corporate clients introduced key upgrades such as Interbank A, account maintenance notifications and pop-up notifications for applicable third-party sites to provide ease of transaction approval. BizBank has 79,500 enrolled clients, up 32% year-on-year. BPI BizCo app for SME clients maintains over 30,000 SME users with transaction volume rising 43% to 39,000, supported by the continued platform enhancements. The Banco app remains central to financial inclusion as it continues to empower our everyday Mass and Filipino by making financial services more accessible, convenient and secure, which enabled the growing trust and engagement of our clients. BPI Wealth Online serving high net worth individuals maintained its active users at 2,800, up 82% year-on-year through sustained activation initiatives. BPI Trade is migrating to a non-setup facility, which simplifies account opening, accelerates processing and supports future real-time funding. Platform volumes continue to grow over last year despite the performance of the market at times. Across all platforms, we continue to expand capabilities in open banking and improve the UI/UX for a more seamless experience. As of June 2026, we have 135 API partners supporting over 10,000 brands. Our agency banking partnerships enable us to broaden our franchise in a scalable and cost-efficient manner. Building on our strong momentum established in 2024, we expanded our agency banking network to 34 partners and over 7,000 partner stores nationwide. Of these, about 1,350 stores offer cash-in, cash-out transaction capabilities, significantly extending our banking network reach. Product sales reached 310,000 in the second quarter, up 1.5% year-on-year and more than 25x from 2 years ago, with deposits and insurance as primary products sold. Our network includes 19 partners with 1,350 transaction-enabled stores, which serviced nearly 124,000 cash-in, cash-out transactions during the quarter, equivalent to the activity of 25 branches. Notably, the average cash in ticket size remains 1.5x larger than the cash out, highlighting Agency Banking's growing role in deposit generation and funding growth. Beyond driving growth, Agency Banking enhances operating efficiency. Deposit and withdrawal transactions of the branch that are below 50,000 can be redirected to partner stores, enabling branches to focus on higher-value sales and advisory. BPI Wealth further strengthened its leadership position, becoming the largest trust institution in the country with over 2.05 trillion in AUM as of June 2026. Since the inception of BPI Wealth in July 2022, the group has consistently expanded its market share across key segments, including the unit investment trust funds mutual funds, employer benefit funds and the broader trust industry. Its client base has grown to 1.5 million as of May this year with 92% digitally serviced, including customers onboarded through partner ecosystems such as Maya and GCash. To further democratize investing, BPI Wealth recently launched peso-denominated share class for 2 of its global investment funds. As one of the first major Philippine wealth institutions to offer PESO class shares for global funds, BPI Wealth provides investors access to international markets without the need for foreign currency conversion or offshore accounts, reinforcing BPI Wealth's leadership in product innovation. BPI further boosted its sustainability efforts in the second quarter of 2026, we were the first bank to waive the InstaPay and Ton net transfer fees on a permanent basis for person-to-person interbank fund transfers through the BPI app, online banking, VYBE, Banco and DISCO. In addition, the bank is providing free cash deposits and withdrawals through its partner stores nationwide. We also expanded the number of bank branches powered by 100% renewable energy to reach 100 branches. Our annual Sustainability Awareness month engaged over 117 participants across 52 events, including financial wellness lectures, technical capability building, ESG forums and a fitness run and environmental stewardship activities. The bank also financed 2 sustainability-focused deals, a $6.2 billion financing for a 166-megawatt Peak solar farm integrated with an 80-megawatt hour battery energy storage system and a $2.3 billion financing for a 60-megawatt Peak ground-mounted solar power project. Lastly, we're the first bank to launch a battery-powered EV bus, allowing the bank to reach underserved and unbanked Filipinos. Beyond ESG, we compiled a list of institutional awards and recognitions received by BPI, both globally and domestically. We're honored to receive these recognitions, which reflect BPI's commitment to excellence and further details on these awards can be seen on our website. In summary, let me close with a few takeaways. On profitability, revenue momentum remains strong, driven not just by scale, but by our strategic execution. Our first half earnings were tempered by forward-looking provisions. On the balance sheet, our robust capitalization provides capacity for growth and increasing shareholder returns. Asset quality was stable, supported by higher NPL coverage. Finally, our franchise expansion accelerated through Agency Banking and Wealth Management. Thank you, and we'll shortly open the floor to questions after we get set up.

[Operator Instructions] So joining us here in front with TG and Eric are our senior leaders, Tere Marcial, Head of BTI Wealth; Gin D Go, Head of Consumer Banking; Louis Cruz, Head of Institutional Banking; and finally, Dino Gasmen, Treasurer and Head of Global Markets. So I guess for our first question, we want to check if anyone from the audience had questions. Okay. We can start off first with questions from our attendees. Actually, let's kick it off with DA Tan of JPMorgan.

Just a couple of questions from me. First, can we understand the PHP 7.8 billion provisions in the quarter? Just to confirm, I saw that PHP 2.7 billion is ECL. Is that correct? And in the slide, there's also a PHP 2.2 billion. Can you explain what that is? So I just want to understand the composition first.

Yes. So you're correct that it's PHP 2.7 billion for the quarter. I'm just looking at the slide that you're referring to... which is the slide that you're referring to?

Where you talk about the MEV adjustment impact to credit costs directly.

Yes. So it says the PHP 2.7 billion, right? Yes. sorry. So I see. The PHP 2.02 billion that you're referring to is just for large corporate and credit card ECL impact. PHP 2.7 billion is for the entire portfolio, but the bulk of it is coming from the corporate and credit card segments, which was PHP 2.02 billion.

Okay. So PHP 2.7 billion is MEB, I guess the rest is from the book. And of that, around PHP 2 billion is large corp and credit card.

Yes. So 2.02 billion is a subset of the PHP 2.7 billion. Everything except 2.02 billion is every other book, except corporate and credit card.

Okay. That's clear. So does it mean that going forward, you're looking at the run rate of closer to 5 billion to 6 billion, assuming this PHP 2.7 billion does not recur, PHP 5 billion to PHP 6 billion provisions per quarter?

So assuming there's no change in the economic conditions, then roughly around that area is a reasonable expectation.

Okay. Then just a second question on asset quality. I just want to get a better picture of the whole asset quality picture effectively because I see a few things happening. One, there are some segments where NPL is moving up like SME and credit cards. Two, you did mention though that Stage 2 is coming down. And how do I reconcile this with the economy that we're seeing, high oil prices, how that is flowing through? Maybe you can put that together for us.

Yes. So SME -- on the SME side, we are seeing the delinquencies move up, and we are engaging in measures to manage that growth. In credit cards, we did see a spike. But as you see on the slide, you'll also see that it's actually leveling off, right? It's actually starting to come down a bit. So I think largely what you saw was you're seeing some dislocation from the recent events, the recent developments in terms of the economy. But overall, we are seeing across a number of the books some degree of stability, right? So I'm not sure.

Maybe, Dan, the way to look at this is we look at it per product. And maybe what I'll do now is ask Onko to talk a little about the SME book because that's the one that shows a very clear spike in NPL. And while it is a very small portion of our portfolio at PHP 70 billion versus a total portfolio of 2 point whatever, trillion something. It is something that bears watching because it is an area that we continue to want to grow. So I'll let Eric talk a little about that, so will come up here. The other thing to note is when you talk about cards and Stage 2, we were very deliberate that we showed you on the slide where we are Stage 1, Stage 2 and Stage 3. By definition, Stage 3 by BSP definition is NPL. Stage 2 is where there is a significant credit event that makes us that it's not -- that there is a significant credit event that makes it a little riskier than Stage 1. And what we're seeing in June is that our total Stage 2 is actually less than our total Stage 2 in March, right? But when you look at the NPL, for example, NPL is also rising for some products because the flow of new loans into that product is slower than it used to be. So while NPL might be the same amount or slightly higher, you have less as a denominator. The denominator is smaller than the normal growth rate, and therefore, NPL will go up. I'll talk a little about what we're doing on the -- what you're seeing on the SME book. And then maybe Ginbee can talk a little about what we're doing on the consumer book in terms of tightening credit and the collection effort.

Yes. Thanks, TG. So clearly, we saw more pressure on asset quality in the business banking book in the last 12 months. By June, our NPL outstanding reached PHP 8.4 billion or that's a 12.5% NPL ratio. Now this compares to PHP 3.02 billion in NPL outstanding and 7.52% in ratio in June of last year. So year-on-year, NPL outstanding increased by about PHP 5.3 billion. Since March, we introduced tightening measures on origination and underwriting. And so the book growth has slowed significantly. Month-on-month portfolio growth slowed from customary 5% per month down to about 1.8%, 1.6% in April and May and then flattish in June. In that sense, the rise in the NPL ratio was amplified by both higher NPL balances and a flatter loan book after the risk control actions. What else do we see in the book, we also saw some changes over the last 12 months in the mix of where the stress is coming from. Construction and related industries are now the largest NPL contributors of PHP 1.66 billion or 3.5x bigger than in June last year and now comprises almost 1/5 of total NPL outstanding as of June. This segment alone accounted for 22% of the year-on-year increase in NPL amounts. And within this segment, civil engineering projects had the largest NPL increase, growing 4.7x from benign PHP 240 million last year to PHP 1.1 billion as of June this year. The second largest contributor is sale of nonessential goods with NPL outstanding of PHP 1.5 billion. This is close to 3x bigger than last year, and this comprises 18% of the NPL outstanding as of June. Our root cause attribution review helped us better understand the timing of the NPL buildup. Net flows to NPL did not rise in a straight line. In fact, they accelerated in waves from about PHP 550 million in Feb to April 2025 to PHP 1.06 billion in August to October 2025 and then up to PHP 3.95 billion in Feb to June this year. Those waves broadly line up with the external shocks that we saw during the period, trade disruption, flood control controversy, weaker GDP momentum and then the 2026 oil price and inflation shock. So more importantly, what the borrowers are telling our collections teams corroborate our reading, poor customer collections, sales declines and receivables delays. So this basically speaks to what I would characterize as borrower resilience in these segments.

On consumer loans, I believe we have gotten it under control. And we have seen that the NPLs and the delinquencies are really coming from a few sectors. And you will -- and I think Eric mentioned this earlier. It came from vintages of 2024 and 2025. When we talk about vintages, these are originations. But just like any credit cycle, normally, the first 2 years of a vintage is where we see rising NPLs because it needs some seasoning. However, because of our recovery and collection efforts, we're able to manage it over time. And you'll see that gradually plateauing in the next 18 to 24 months for a vintage. Having said that, we continue to look at our portfolios and tighten certain credit parameters where we see segments that require more -- either higher down payments or longer tenure or higher longer tenure. And so we see that for new-to-bank and new to credit. And these 2 segments are where we have been able to expand in the last 2 years, but that's part of our financial inclusion. But nevertheless, we continue to believe in the consumer portfolio as a way to expand our NIMs and our returns for as long as we are able to manage and control our asset recoveries. We see that across all loan products on the consumer side. Credit cards, of course, has been much talk about, but we like the fact that in the recent months, we have been able to manage our collections, particularly on early delinquencies. On personal loans, we have, in fact, tightened parameters -- even more. And so we will see our growth moderating on personal loans. On housing and auto, these are the secured loans. You can see that our NPLs have actually been quite tepid in terms of growth and really reflective more of the reduced demand, particularly for real estate and for ICE vehicles. Our growth now is really propped up in terms of auto loans by EVs and the EV market is primarily affluent. Our loan growth on the housing loans is driven by internal channels, and these are the branch-generated accounts. So across both auto and housing, we have a good source of prequalified depositors, which will allow us to continue to grow those 2 loan books. So overall, consumer book loan growth will moderate primarily because of tightening. And as we do that, we will continue to recover and put all the necessary interventions to manage not just the NPLs, but really the early delinquencies and the pre-delinquencies because we don't want them to flow into NPLs.

I think the best evidence of that is, obviously, when you are running consumer book, during good times, you try to expand that with acquisitions and increasing lines. But as the economy turns, what you have to do is have to tighten credit and then beef up your collection efforts. And beefing up collection efforts does not only mean that you call them when they're delinquent. You need to call them before they become delinquent by sending them reminders. And that's the way you prevent things from flowing into past due and prevents loans from flowing into Stage 2. And so if you look at what we've been able to do on the cards business and even the SME business is we have really ramped up the collections effort there. And you'll see that our Stage 2 loans there have actually dropped in terms of amount. Once it goes obviously to Stage 2 and it goes into Stage 3, you just have to try to collect, but it won't flow back. But what you need to do is to prevent things moving from Stage 1 into Stage 2. And I think that's what we've been able to do in the second quarter.

Our second question comes from Danielo Picache of AB Capital Securities.

So I have a few questions here, but let me start with sort of a follow-up question to DA. So on the slide regarding higher NAV impact credit cost. I just want to clarify that the PHP 2.7 billion of your PHP 7.8 billion 2026 macro lay. It's the remaining PHP 5.1 billion essentially driven by Stage 2 and Stage 3 migration?

And behavioral score changes. So the way we look at it is our ECL model, right? The inputs to that are the economic variables, which we change once a quarter. And then you obviously have to take a look at where your loans are moving in terms of past due. So that's moving from Stage 1 to Stage 2 to Stage 3. But also, we have behavioral scores which will score a borrower or a loan depending on what the client is doing, whether he's drawing more on the line or whether he's paying 2 days earlier or on time, those are behavioral scores, which don't necessarily move you from Stage 1 to Stage 2 to Stage 3. So those are the 3 effects. And what we're saying is that for the second quarter, PHP 2.7 billion was a result of the updated economic variables. The rest is due to movement from Stage 1 to Stage 2, Stage 2 to Stage 3, new loans coming on and of course, behavioral scores changing either being upgraded or downgraded.

All right. That's clear. Just a quick follow-up to that. How often did you have to update your MEBs?

Yes, the MEBs are updated quarterly.

Got it. Okay. That's clear. Second question is essentially on NIMs. The 13 bps sequential improvement appears to mainly come from lower funding costs and asset mix more than loan repricing. So I'm just curious how you see NIMs progressing or evolving for the remainder of the year, especially with the rate hikes?

So the rate hike should have a positive impact on NIM over time, right? And so we've started to see the rate hikes come in, but the immediate impact of a rate hike is to first increase the cost of funds followed by increasing the yield on the assets. That's overall. And so there's a bit of a delay in terms of the positive impact to the NIM. But what we expect to continue to see having immediate positive impact on the NIM is the -- is the asset mix shift that you're referring to, right? The continued -- the fact that the non-institutional book continues to grow at a pace that is faster than the institutional book. And because of that, we'll continue to shift the portfolio yields towards this higher-yielding portfolio. As I showed earlier, the average NIM on -- or the average yield on the non-institutional side is 12.7% versus 5.7% on the institutional book.

Got it. My last question would essentially be on circular and since you waived some of these fees. I'm just curious and might be a bit gray, but have you seen any changes in terms of transfer volumes or active users or account balances?

Hard to tell immediately on the active users or the balances, but the volumes have picked up, I think, 20%.

Got it. And just a follow-up to that. And if I'm not mistaken, you have shared this in the past. But can you give us an update on the unit economics for digital versus nondigital, specifically in terms of your acquisition cost or cost to serve or I think before you provide some revenue per customer, especially in light of.

Yes. The update is still that from an acquisition standpoint in terms of number of customers that we onboard, more or less, we have about 50-50. So 50% of our new customers, new-to-bank customers come from the branches, 50% come from digital. And that includes BPI app, through GCash, agency banking, which uses digital. So that's about 50-50. But the value in terms of balances is really more coming from the branches because the product for our branches require a maintaining balance, whereas for our digital, it's a 0 opening account balance. So the ability to upgrade our digital customers into really higher savings customers is one of our major initiatives. And from a transaction count standpoint, about 4% of our transaction count remains in the branches. So 96% would be digital or electronic. But from a transaction value, we're really looking at 89% of the transaction value still at the branches and the balance in digital, which really tells you that we have been able to migrate more and more transactions servicing transactions in the digital space as we upgrade our digital capabilities. And then we unlock the ability of our branches to do more advisory. So that is where all our cross-selling is happening. And that's why you also see improvement in investments and loan balances.

I think it's easy to talk about what the unit economics for acquisition is, right? Because as we pursue our strategy on our app, we're finding that we're able to bring down our acquisition cost by changing the technology. Today, we -- our KYC is already direct to the PSA, which is actually free today already, whereas before we had to pay for the services of technology providers. That said, also, as Ginbee pointed out, more transactions are being done digitally. And let's not forget also a lot of the transactions may not be -- are still done digitally, not necessarily in the app, but on the partner stores. As Eric pointed out, our partner stores today are already doing this, the volume that 25 branches would be doing. And that, to Ginbee's point, frees up our branch to do other services. So that kind of revenue lift is not coming from the new digital, but coming from the fact that we have more time in the branches to advise and to sell to existing customers. So I think you need to look at it holistically. It's -- it would be so unfair to the strategy to look at and say, what are we doing with each digital user when actually that acquiring a digital user and allowing him to do his transactions online -- sorry, digitally frees up the branch to drive revenues to a nondigital user. So you need to look at it holistically, which is the way we've always thought about the strategy.

Thank you, Daniello. Before we proceed with more questions from our online participants, I just wanted to check if our participants here had any questions. If none, we can actually continue. We have some questions in the Q&A box. So I'll go ahead and ask them. The first question is from Tunde of Hardingoner. Tunde's question is actually in relation to our outlook for 2026, specifically in relation to loan growth, credit costs as well as OpEx growth.

Yes. So in terms of loan growth, I think previous guidance that we've given is probably still consistent. I mean, kind of at the lower end of that. Now looking at something along the lines of about 10%-ish for full year loan growth, which is a little slower than the loan growth -- year-on-year loan growth that we're seeing so far this year. But obviously, conditions have changed since then, but still something in about that range. NIMs, I think, as mentioned, we think NIMs will be fairly well supported. So at or around this level, maybe a little up from where we are today. And then credit cost, if you take out the MEB changes as we don't have it in our minds that conditions are going to deteriorate further. Therefore, we're probably not going to see any additional ECL driven by deterioration in market conditions. If you take that out, it's probably representative of what we expect the remainder of the year to be. And then in terms of OpEx growth, I think we'll try to tighten this up a bit, but it's probably not far off from where we are today.

Thank you, Eric. We have another question this time from Misha Nang of Papa Securities. She's asking with our LDR now at 93%, what would we consider a comfortable level going forward?

So no issues really with this 93% -- from our perspective, we don't really see it as any issues. I think our ability to tap the bond market remains to be very present. And therefore, what we're really looking at in a sense is how much ability do we have to access funding. And this LDR of 93% doesn't really -- I think at one time, LDR and in some senses, LDR is a bit of a carryover from a time when banks funded themselves primarily through deposits, right? And even though that continues to be the case, we're no longer limited to that, right? We're very much able to tap not only the capital markets, but also bilateral loan markets as well as syndicated loan markets and even other sources, right? So there's a lot of opportunity for us to do funding. And so I don't think this LDR of 93% constrains our ability to continue to grow the loan book.

Thank you, Eric. Okay. Our next question is from Elizabeth Santiago. Elizabeth is of Abacus Securities. Her question is, she wants to give more color on our AR strategy, specifically what workflows are you using AI in? And how much we are spending in terms of -- do we have a sense of how much it could potentially impact our OpEx moving forward?

I think everyone's got to admit that AI will play a large and a larger and larger part in everyone's operations. So today, we clearly have Copilot where we have OpenAI and Anthropic as 2 LLMs that's available to certain a large group of people who can use it for productivity and for analytical tools. We've always said a year -- 2 years ago, we did launch our own internal app for our service staff where we put all our policies, procedures and products on an LLM so that they can have consistent answers. We are piloting some workflows, particularly on the lending side where it's more app for agentic AI to work. We are piloting some on the customer service side, particularly on the operations and the call center and chatbots. We are looking -- we are experimenting with credit decisioning even on the corporate side, where we're helping our sub Cracom and our Crakom run through figures and data much quicker, allowing us to make -- to digest the information much faster. So there's everything we're doing -- we're experimenting with a lot. And as these AI tools become more reliable, we will put them into production. I suspect that we will soon be putting into production a tool that allows us to process auto loans quite almost instantaneously.