BDO Unibank, Inc. (BDO) Earnings Call Transcript & Summary

Hello, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, dbVIC. I'm pleased to announce that our next presentation will be from BDO Unibank, from the Philippines. Before I introduce our speaker, a few points to note. Once the presentation session has ended, there will not be any live Q&A. You can e-mail any questions to the company and they will respond to you in due course. On the final note, all of today's presentations will be recorded and can be accessed by the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Luis Reyes, Head of Investor Relations and Corporate Planning at BDO Unibank.

Good morning, everyone. Thank you for joining us today at this Deutsche Bank Virtual Investor Conference. We would like to thank Deutsche Bank also for inviting us here and giving us the opportunity to share with you with the BDO story. At this point, we'd like to start with our presentation. So this is our outline for the presentation, basically provides an overview of the company, where we are in terms of our operating performance, our strategies and an overview also in terms of the governance structure, we'll share an overview of our Board of Directors and management and also our sustainability initiatives. So who is BDO? Well, we are the Philippines' largest bank with total resources of about USD 76 billion, and we are the current market leader in most of the business lines that we are in. We are a full-service universal bank with a broad array of products and services, and we have the widest distribution network with over 1,700 branches and over 4,700 ATMs in the Philippines. We are primarily a domestic bank in the Philippines, and our overseas presence consists primarily of 2 full-service branches, 1 in Hong Kong and 1 in Singapore. And the rest of our remaining 14 overseas offices are primarily remittance or representative offices in other countries. We are a part of the SM Group, which is the Philippines' largest conglomerate and the country's biggest company in terms of market capitalization on the Philippine Stock Exchange. We have the strongest Board of Directors and senior management, and we have extensive banking experience at both ends. And lastly, we are listed on the Philippine Stock Exchange and our current market capitalization is almost $12 billion. So what's the value proposition for BDO? Well, we have a strong business franchise and market leadership. We have a robust operating and financial performance as will be seen later in terms of our operating results. We have been prudent in terms of managing our balance sheet, maintaining sufficient liquidity and capital at all times. We have also undertaken certain strategic initiatives to support our medium-term growth. And lastly, again, we have a strong Board of Directors and professional management team. Next, please. So just an overview of the milestones. We were founded in 1967, and we became a commercial back in 1994. At that time, our assets were only PHP 13 billion. But over time, we have been able to grow our business and our balance sheet through a combination of mergers and acquisitions and organic growth. We were able to acquire the banking businesses of some foreign banks who have exited the country and also some local banks who have decided to exit the business. And we achieved the #1 position in terms of industry ranking in 2008 when -- after our merger with Equitable PCI Bank. Since then, we have held on to that position as the leading bank in the country in terms of size measures from balance sheet to total loans, deposits, assets under management and capital. So it is something that we have held on to until today. We are a full-service bank, and this just indicates the full range of our products and services, which are accessible to our clients through commercial branches to wholly owned or majority-owned subsidiaries. In terms of our presence, we are still primarily in the Philippines with over -- with our 1,700 branches, mostly in the Philippines scattered throughout the country. And as mentioned earlier, our overseas presence consists of a full-service branch each in Hong Kong and Singapore and the rest are remittance or overseas -- representative offices. In terms of industry ranking, this is how we stand compared to the rest of the industry and our market share ranges from 18% in terms of total assets to as high as 38% in terms of assets under management. And as can be seen, we have a distinct lead in terms of size compared to our nearest competitors. And this also indicates where we are in terms of the different businesses that we are in. As can be seen, we are, in most cases, the market leader in most of our business lines. In terms of the SM Group, we are part of their financial services sector. And SM has interests in 2 banks in the Philippines, one is in BDO, where they own 55% and other investment is in China Bank, which is currently the fourth largest private domestic bank in the Philippines. And we have access and synergy in terms of the SM Group in terms of access to the customer network, in terms of new business opportunities, in terms of SM expertise, in terms of middle market knowledge, and lastly, in terms of branch locations. The malls of SM provide attractive branch locations for us given the high level of foot traffic, especially on weekends. And BDO has distinguished itself as the only bank in the Philippines that offer 7-day banking in our mall branches. Now in terms of our operating and financial performance, these are our core strategies for sustainable growth. These have been in place since 20 years ago, and we have not changed our strategy. We think that the Philippines is still an under-banked underserved market. And therefore, there's still an opportunity to improve market share through financial inclusion and consolidation. We also aim to create operating scale through technology and analytics. As we become bigger, we're able to do things in a more efficient way. And that is what we have been -- and that is the reason why we have been investing in terms of our operational scale. And lastly, we also ensure a strong credit process and balance sheet discipline so that we have a strong balance sheet and capital position that will allow us to withstand shocks from business cycle risks. In terms of our 9-month performance, we reported a net income of almost PHP 54 billion, which is a 35% growth compared to our performance last year. And this translates to a return on common equity of above 15%. And the main drivers of our profitability, net interest income was up by 27% compared to the previous year. Noninterest income was driven primarily by fees, which grew by 13%. Operating expenses were higher by 17% compared to last year, but we still maintained positive operating jaws as our revenues continue to grow faster than operating expenses, resulting in an increase in our pre-provision operating profit of 28%. In terms of provisions, given stable asset quality, we have been able to slightly reduce our provisioning levels. And despite that, we have seen a steady increase in our NPL coverage ratios. In terms of the balance sheet, the major earning assets of the bank would be gross customer loans, which accounts for about 2/3 of our balance sheet. Our customer loans were up 7.5% from last year, which more or less tracks the industry growth rate. And the other major earning asset would be our investment securities portfolio, which is higher by 25% compared to last year. We have been steadily building up our securities book in this environment of high interest rates. And the objective is to be able to accumulate a substantial accrual book that will allow us to benefit from high accruals when interest rates start trending down. On the funding side, our main source of funding would be deposits. And the biggest component of our deposits are checking accounts and savings accounts, or CASA, which currently account for about 72% of the total. We have distinguished ourselves in terms of our CASA deposits as having the highest CASA ratio and also the lowest cost of deposits in the industry. In terms of our capital position, because of our profitable operations, we have seen an increase in our book value by 13%, which we believe makes us an attractive investment option for investors. In terms of our loan portfolio, there's a pie chart in the middle. Our loan book is currently comprised of about 50% in large corporates. We have about 25% in middle market, which are basically medium-sized corporations all the way down to SMEs. And the remaining 25% roughly is in consumer loans. Within consumer loans, as seen in the pie chart on the right, the biggest component would be mortgages, which accounts for almost half. The next big component would be credit cards, which accounts for 23%, auto loans and personnel accounting for the rest. And we have been able to grow our total loan book by 7.5%, with consumer loans leading the way with a 14.4% growth rate. On the funding side, as mentioned earlier, CASA deposits comprised the bulk of our total funding with 72% of total. However, we have seen CASA levels more or less flattish compared to year ago levels because of the current high interest rate environment. However, our cost of deposits at 1.28% still remains one of the lowest in the industry. On the right-hand chart, this is just a profile of our branch network. We have 2 types of branches. One would be the commercial branches, as shown by the blue bar. And currently, we have 1,200 commercial branches. The other type of branch would be for our rural bank subsidiary, where we currently have 505 branches. The rural bank platform is the area where we have been focusing on branch expansion, specifically in what we call the underserved or underbanked areas as a way of driving further financial inclusion. The commercial bank branches are typically in the urban areas. And given the increased usage of digital channels, there has been less need for a more robust branch expansion in the commercial bank side. And therefore, any commercial bank branches that we deploy are more targeted at specific areas where we see the potential for further growth. But as can be seen in the table at the bottom, most of our new branches in recent years have been more at the BDONB or the rural bank subsidiary. And in terms of -- again, just to highlight the CASA ratio and cost of deposits. So this is where we stand in terms of CASA at 75% based on the industry comparison as of June. But in terms of cost of deposits, again, as of June, we had the lowest at 1.2%. In terms of our net interest margins, our year-to-date margins are at 4.65% and this is about 51 basis points higher than our full year margin last year. And this reflects the benefits that have been derived from the current high interest rate environment, coupled with the fact that we are growing our consumer loans at a faster pace compared to corporate loans. On the bottom chart, we are just showing here the quarterly sequential trend in terms of our net interest margins. And as can be seen, there has been a steady rise in our margins on a quarterly basis. In terms of noninterest income, the pie chart on the left shows the split of our noninterest income sources and fee income comprises the biggest component at 61%, followed by life insurance premiums with 24%. Now in terms of fee income, the sources of our fee income on the upper right-hand chart would be investment/wealth management, payments/electronic banking, capital markets and non-life insurance brokerage. So these generate more or less the different services where we are able to derive a steady stream of annuity type income. On the life insurance side, we are the only bank with a wholly owned life insurance company. And while total premiums are down 5% year-on-year, the traditional premiums, which is the actual focus of our business has been growing well with a growth rate of 21% year-on-year. And we believe that it's the traditional protection business that will provide the opportunity for longer-term profitability for our life insurance subsidiary. In terms of our investment securities portfolio, there has been a steady buildup as interest rates have been going up. As can be seen, our current portfolio now accounts for 21% of our total assets. And this compares to just low teens about 5 years ago. So again, this reflects a conscious strategy of building up our portfolio at today's high interest rate environment, with the objective of generating better accrual income in the future. Our cost-income ratio has also seen a steady improvement. And as can be seen here, at 58.4%, this has been more or less one of our lowest levels since 3 years ago. And again, we attribute this to the fact that we are starting to see the benefits of operating leverage coming through. In terms of profitability metrics, our pre-provision operating profit, as mentioned earlier, is up 28%. And as can be seen compared to 2022, we are geared to exceed the PPOP numbers for last year. In terms of net income, our net income year-to-date is almost PHP 54 billion compared to the PHP 57 billion in full year income for 2022. So again, we are poised to exceed our 2022 performance given our current result of operations. In terms of prudent balance sheet management, we'd like to share here our asset quality indicators. Our NPL ratio has been on a steady decline since the pandemic, and our coverage ratios have also been increasing since the pandemic and is at the level now which is approximately where we were in 2019 before the pandemic started. The lower chart just shows the quarterly sequential trend in NPLs. And while there has been a slight uptick in NPLs, these are more from consumer loans, and we are lower than industry average across consumer lending. And we believe that this is not an area of concern yet given the minimal uptick in NPLs and the growth in the consumer portfolio. In terms of our capital position, the main metric that we look at very closely is the common equity Tier 1 or the CET1 ratio at the parent level. And as of September, we are now at 14%, which puts us in a very comfortable position. In fact, for this year, we have increased our cash dividends to PHP 3 per annum as compared to PHP 1.20 per annum in prior years. If our capital -- if we continue to accumulate capital in this environment, that actually provides scope for special cash dividends going forward. And it really depends more on our outlook in terms of balance sheet growth. In terms of our strategic initiatives, these are the ongoing investments that we have put in place to help provide a lift to the more or less a maturing commercial business of the bank. And in terms of financial inclusion, we mentioned earlier, we have a rural bank subsidiary called BDO Network Bank, which is our main vehicle in terms of going into the underserved markets and their main focus is on providing salary loans and micro-SME loans. On the life insurance side, we are capitalizing on our extensive branch network to be able to sell life insurance under bancassurance arrangement with BDO. We have also expanded our wealth management business, and we have set up platforms that will allow us to provide access to our clients across all market segments in wealth management from high net worth to mass affluent to emerging affluent. This ensures that regardless of the client's financial situation, there will be a platform that will allow them or help them manage their wealth or their investments. Lastly, in terms of digital investments, we have shifted our IT architecture from a server-based architecture into what we now call a plug-and-play environment, and this allows us to be more nimble in terms of adjusting to changing client preferences and to changes in technology. The major investments in our IT infrastructure are behind us. And what we are working on now is to gradually convert more and more of our backroom operations and our products into a digital -- more efficient digital format. In terms of the bankable population, this is -- just to give you a profile. This is how we see the Philippine banking perspective. Currently, there's about 56% of the population that is banked. So the opportunities would be outside of this current 56%, and that is where we are using -- this is what we call the underserved or unserved areas, and that is what we are targeting through our rural bank subsidiary. We are not after the mass market segment at this point. And in this slide, we would just like to share with you the areas of growth in the Philippines. As can be seen, most of the growth -- the faster-growing areas in the Philippines are outside the national capital region. And therefore, that is where we are putting up more of our physical branches to be able to take advantage of the faster growth opportunities. The demographics is another opportunity in the Philippine market given the very young median age. And especially if you look at the young adults in the pie chart, they comprise almost 20% of the Philippine population. So our goal is to try to target this market, try to get them early on as banking clients and nurture them through time as they eventually become more productive. On the right-hand chart, this just shows also that our per capita GDP has been constantly increasing. And again, that provides us opportunities -- more opportunities, especially in the wealth management side. In terms of client acquisition, so this is our basic strategy. For those who do not have bank accounts yet, we have a physical branch that will hopefully give them confidence to move into the formal financial system. Once they are in, then we try to move them into the digital channels. Next, please. For BDO Network, this is more or less where we are spread throughout the country. And again, the focus here is on getting more people financially included in the less dense areas. For our life insurance business, this is where we stand. Given our focus on traditional protection, we are actually the second largest in the Philippines next only to Sunlife. As can be seen, most of the leading insurance companies in the Philippines are multinational companies. And in terms of total premium income, we are the biggest locally owned company with the #5 ranking. In terms of life insurance penetration, again, why we believe that there is scope to continue growing our life insurance business. Life insurance penetration in the Philippines is one of the lowest in the Asian region at only 1.5%. And given, again, the rising per capita income, that provides opportunities for our life insurance business. In terms of our IT investments, as mentioned earlier, we have been investing more on our -- the foundational side of our IT architecture. And that is basically, what we call, the bottom part of the iceberg, what clients cannot see. And that is behind us now. We have set up the foundations. We have invested in cybersecurity. And now clients are able to see what is above the waterline in terms of digital capabilities starting to come through. Next, please. In the interest of time, we'll just briefly pass through these slides, just to be able to complete the presentation. In terms of digital offerings, this is more or less where we are in terms of what we can provide our clients in the digital space. And as can be seen, it is quite extensive, and we are, in fact, very competitive with our peers, if not ahead of our peers. On the wealth management side, this is what I mentioned about being able to cover all the segments -- all the market segments with different platforms. Now in terms of our Board of Directors, we have 11 Board members. And as can be seen, it's a mix of bankers, entrepreneurs and legal experts. Next, please. This is a profile of our Board of Directors. Our Chairperson is Teresita Sy. She's part of the -- she's also a Co-Chairperson of the SM Group, and she is the only family member in the bank. The rest of the Board and the rest of the management team are all professionals. In terms of the senior management team, so this is -- again, these are the business heads, and this is a combination of local and foreign experienced bankers, and we have on average 20 to 30 years' experience for each of the members of the senior management team. Next, please. Next, please. So in terms of sustainability, we have been producing a Sustainability Report for the last few years, and this is available on our website. If you would have the opportunity to check them out, that will give you an indication of the things that we have been doing on the sustainability side and also an indication of what we have started as our Sustainable Finance Framework. Now in terms of our business outlook, we remain cautiously optimistic about the prospects for the Philippines. We have seen loan growth slowing down because of the high interest rate environment and the uncertainty in the global markets. But we believe that there is -- the fundamentals of the Philippines are intact, consumption spending remains robust, and therefore, we believe that GDP growth could be sustained at least in the 5% levels in the coming periods. Our fee income has been steady and sustainable, asset quality has been under control despite the high interest rate environment and our digital initiatives continue. And hopefully, this will pay off for us in the long run in terms of more efficient backroom operations and better profitability metrics. So in summary, our 9-month performance shows that the bank's strategies continue to be positive and bear fruit. While macroeconomic challenges persist, we remain cautiously optimistic, and we continue to be on the lookout for opportunities in the market, given our strong market coverage and our balance sheet. And lastly, we believe that multiple drivers are in place for sustained higher profit or return on common equity trajectory. So thank you -- this ends our presentation. Thank you very much for joining us today. If there would be any questions, please direct them to our e-mail address, it's [email protected]. We will be more than happy to get back to you as soon as we can. Again, thank you very much for joining us today and thank you very much to Deutsche for giving us this opportunity.