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

Hello, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference. My name is Zafar Aziz from the Deutsche Bank team. 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. Please submit your questions in the questions box to the right for slides. Also, all of today's presentations are recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Richard Tan, First Vice President for Investor Relations and Corporate Planning of BDO Unibank, which trades on the Philippine Stock Exchange and the symbol BDO. And in the U.S., on the OTC markets as BDOUY. Over to you Richard.

Good morning. This is Richard Tan from BDO Investor Relations and Corporate Planning. Thank you for your time and interest in joining this conference. In this session, I would like to introduce BDO and let you know how BDO is well positioned to capitalize on the structural growth opportunities in the Philippine economy. My presentation will follow the sequence in this agenda slide. Hopefully, this will not take too much of your time. But let me go on now to an overview of BDO. BDO is the Philippines' largest bank in terms of total assets with USD 81 billion as of the 2Q, 2024. We are the largest bank and the market leader in most of the business lines we work in. We offer a broad range of products and services. We have the widest distribution network more than 1,700 branches and over 5,600 teller machines. We also have 16 overseas branches and representative offices located in Hong Kong and Singapore and 14 other offices elsewhere in Asia, Middle East and North America. We are part of the SM Group, the Philippines' largest conglomerate with interest in financial services, retailing and property development. We also have 1 of the strongest Board of Directors and senior management team with extensive banking experience. We are listed in the Philippines Stock Exchange with a market capitalization of USD 12.4 billion, 4th largest overall and part of the Philippines Stock Exchange Index. We also have a sponsored Level 1 program with Deutsche Bank, and that is the reason why we are joining this conference today. Now why BDO, why invest in BDO. We have a strong business franchise. We are the market leader in most of the business clients we're in. We have posted robust operating and financial performance. We are 1 of the largest -- we have the largest profit in terms of absolute amount and ROE among Philippine banks, and we posted the highest net income over the past 15 years. We backed that with a strong balance sheet and conservative provisioning and credit policies. We have also embarked on certain initiatives to support our medium-term growth. All of these lead to sustainable long-term growth, superior profitability, book value compounding and ultimately, shareholder value. Let me now expand a little on our franchise and market leadership. We have grown over the past [ 13 ] years -- 30 years that this from a small bank to the largest bank in the Philippines today. The transformational merger in -- with Equitable PCI bank in 2007 was the catalyst to create a [indiscernible] nationwide bank and from there, we leveraged the momentum and synergies from both banks to be the #1 bank since 2008. We have held on to that position ever since and we have grown through a series of mergers and acquisitions as well as organic growth, as you can see from this slide. We offer a broad range of banking products and services as a universal bank. So aside from banking services, we also have a life insurance firm, the property and casualty nonlife institute or entity. We have an investment bank, a private bank, and we are securities firm also that offers both traditional and online securities services. This is our network. We are predominantly focused on the Philippines, but we have 16 offices offshore, including 2 full-service branches in Singapore and Hong Kong. If you look at this, our #1 in terms of balance sheet measures, in terms of assets, loans, deposits and assets under management by a wide margin over the competitor or peer banks. And aside from balance sheet measures, we are #1 also in other business products or services like remittance, where we handle more than 45% of incoming remittance flows. Credit cards, we have the largest cardholder base, which acquired in business and cardholder revolver level. We have the largest or #1 investment banking firm. The largest private bank, local private bank here. We're the largest local life insurance company, and we have the largest nonlife insurance brokerage company here under our wing. We're part with the SM Group, the largest conglomerate in the Philippines. And under Financial Services, BDO is there, along with the smaller bank, called China bank. The SM Group is very big in retailing and property development. And from there, we harness the synergies among the SM Group companies. Now let me now discuss the operating financial performance of the bank. Our core strategy is anchored on 3 main items or action items, drive market share growth through financial inclusion and market coverage, create operating leverage and scale through technology and analytics and ensure we have a strong balance sheet and be able to withstand shocks from business cycle and risks and bubbles, especially like the recent COVID epidemic or pandemic. So first half results, our income was PHP 39.4 billion, up 12%, and this translated to a return on common equity of 15.1%, one of the highest among Philippines banks and the highest also for us over the past 15 years. The main drivers were 13% loan growth and steady NIMs that translated to 11% growth in net interest income. We also posted double-digit growth in noninterest income backed by fee income, insurance premium and trading and ForEx gains. Our operating expense was mainly driven by volume-related expenses plus branch expansion and continued investments in IT, that resulted in a pre-provision operating profit growth of 7%. Despite stable asset quality, we continue to prudently set aside provisions. Our NPL ratio is at 2.06%, NPL coverage is 169%, both better than the industry average here in the Philippines. So all of this translated to growth among core business lines that resulted in record profitability. If you look now at the quarterly trends over the past 6 quarters, we have seen sequential growth in our net income, and we have posted a high ROE of 15.8% in 2Q alone. Let me skip through this. On the balance sheet, I mentioned about the loan growth of 13%. This was backed by broad-based growth across top corporate, middle market in the consumer segment. We built up our investment portfolio, locking in the high rates and to protect us against future interest rate costs. On the funding side, we grew our CASA. This is the low-cost deposits by 5%, and we have one of the highest CASA ratio and lowest cost of funds, which I'll show in a later slide. So book value was up 12%. So this is sustained book value accretion over time. We have also the largest capital base among Philippine banks. If you look at the loan trends -- loan growth trends, we have been posting faster growth versus the industry over the past 2 years, and we see better mix of CapEx versus working capital-type loans going forward. In terms of loan segments, it's double-digit growth in consumer and middle market and corporate. And if you look at the loan mix on the upper right pie chart, consumer accounts for 24% of the portfolio from less than 20% 5 years ago. So we're rebalancing the loan portfolio towards high yielding segments like consumer and middle market. Large corporate loan still account for around 50% of the loan book. In terms of the funding base, CASA grew 5%. So CASA ratio is 69%. So there has been some deceleration in CASA growth over the past 3 years, mainly because of the high interest rate environment. And what has happened to those with excess deposits and invested in time deposits or fixed income with higher yields. Having said that, though, we're 1 of the few banks that have protected our CASA base. Some of our peer banks have actually reported negative growth in CASA. And if you look at the CASA level of PHP 2.6 trillion, that's actually 40% larger than prepandemic CASA levels. So being able to grow the CASA over time, even with the opportunities of funding pressure present now in the Philippines. In terms of the branch network, we continue to focus on the low-cost platform called BDO Network Bank. They are our Rural Bank subsidiary focused in the underserved areas. So our strategy on branches is still physical plus digital. In the Philippine context, it's still very important to have a physical branch network, but we complement that with digital capabilities, particularly for those that are tech-savvy, for those that prefer to transact over mobile or PC. So here, we have one of the highest CASA ratios on the left chart. On the right chart, we have the lowest cost -- one of the lowest cost of deposits, and that gives us a sustainable competitive advantage over our peers that translates to higher NIMs for us. So over the past 5 years, we've seen NIM expansion, partly helped by the high interest rate environment when the, Central Bank started [indiscernible] in 2023 to combat high inflation. At the same time, we have been balancing the loan portfolio. So it's a higher-yielding segment. So despite higher funding costs with pressure on time deposit rates, we've been able to keep our CASA and keep our NIMs. If you look also at the lower chart on a quarterly basis, NIMs have been stable over the past 6 quarters or so. In the noninterest income side, if you look at the left pie chart, fee-based service income account for 60%, insurance premiums account for [ 23% ] and trading and ForEx account for only 9%. So we're less susceptible to volatile trading gains. The fee income side is mainly driven by investment wealth management, payments and electronic banking or what we call transaction banking fees, capital markets from our investment bank and insurance brokerage and non-life insurance brokerage contribution. Insurance premium here, we have seen a recovery in the first half from the contraction last year. So we are focusing on traditional protection, and I will be discussing this in a later slide. This is one of our strategic initiatives. The investment portfolio, we have built it up to 22% on balance sheet. The strategy there is to lock in the rates, while interest rates are high. This will mitigate NIM pressures later on particularly, as we set the bank and started cutting rates already, the first cut this month. And so this will help protect the margins for us. In terms of OpEx and cost efficiency, we continue to manage our OpEx base and try to extract operating leverage, trying to grow the revenue side while maintaining our OpEx base. That means we have been able to -- or aim to gradually improve our cost to income ratio over time. So in terms of profitability, income and ROE, we have posted record income 2023 and so far this year and record ROEs. This is among the highest in the Philippines and the highest for us in the past 15 years. This is a testament to the business franchise we build up and the adroit execution for business strategies. Let me now go to the balance sheet. So asset quality has been stable, although there has been a slight uptick, mainly due to higher proportion of consumer loans. We've been growing consumer loans at mid-teens level over the past 2 or 3 years. So higher risk, but higher reward, but we're well covered with NPL coverage of 169%. So if you look at the Philippine context, corporate leverage is still very manageable at 40% of GDP. Household leverage is still very low at 10% of GDP. So there's no systemic risk for Philippines in terms of asset quality. In terms of capital, we are well capitalized. We are 3 percentage points above the minimum common equity Tier 1 level of 10.375% that gives us good growth or good opportunity to support loan growth as well as cover for higher dividend payouts. So starting second quarter this year, we've raised our dividends to PHP 1 per share per quarter from PHP 0.75 per quarter last year. So in terms of payout, we are now [ 27% ] of prior year's income. And what we aim to do is if there is excess capital, then we may look at special dividends like what we did in 2022. Now on the strategic initiatives, we've embarked on to support our medium-term growth. These are actually the 4 ones we have pursued, financial inclusion, life insurance, wealth management and IT. So briefly, if you look at the macro back drop, Philippines is still an underbanked, underserved market. Only 56% is banked, and there's opportunity to go down market and bring people to the banking sector as the first point of opportunity for banks for them to set up a banking account. Growth has been dispersed in the Philippines. Outside of Metro Manila, which is national capital region at the bottom, the other regions are actually growing faster. This gives us opportunity to penetrate this market, set up additional branches, particularly in the rural areas and capture the first deposit or our first bank in the local community where people can do their banking services. In terms of demographics, we are blessed with having 1 of the youngest population in the world at 25 years. We're growing our population by around 2% per year, and the young others comprise around 20% of the pool that gives us a 40-year window, what we call demographic dividend. And that will potentially give us opportunities to sell consumer loans, give them -- tap them into banking services and other banking products and services. If you look also at the right chart here, GDP per capita in terms of U.S. dollar term is still growing after the dip in the pandemic during 2020. So we're now close to $4,000 per capita, and as GDP per capita grows, as disposable income grows, that means we can offer them wealth management services to complement their basic banking products. So what we do here is that since there are a large chunk of the population that don't yet have a banking account, and there's some [ cultural ] preference to do banking transaction physically, we want to have the branch there, very critical component of our strategy, bring them in first to the branch, then try to [ beat them ] just determining data analytics to cross-sell and try to then upgrade them to digital if they are ready already. In terms of financial inclusion, this is our vehicle BDO Network Bank. Their main product is salary loans to government teacher. And then 5 years ago, we introduced the product called micro-SME loans for micro entrepreneurs, this is usually a good way for them to enter the banking system and win them away from informal lenders that charge very high rates. So from their roots in Milano, this is Southern -- in Southern Philippines, we have embarked on a nationwide expansion and Luzon, Northern Philippines and were bulk of the economic activities aside from, Metro Manila, Luzon now has more branches than [indiscernible]. So particularly in the rural areas, digital or mobile coverage will not be present, and having mobile plan would be expensive. So around 95% of subscribers are on prepaid. They don't normally go online for the banking services and they prefer their banking services physically. What we do to complement the branch network, we have sales teams that go out and reach them, particularly say the local wet market and the dry market around the main community. We go there and use POS machines. These are machines so that they don't have to waste time to go to the branch and so they can do their banking services actually in the pace of business. If you look at the life insurance. BDO Life, is ranked second in terms of traditional protection that's on the left chart. On the right, there is -- in terms of total premium, we do life insurance [ sales ], but in the field dominated by multinational firms we're the only major Philippine or life insurance company here, and we do this through our bancassurance model with the branches having financial advisers, and we use data analytics to identify those that may be eligible for life insurance. So our market for life insurance is targeted in the middle class right now. And that's where they needed to have peace of mind in case of untoward incidents to protect their family. So if you look at this chart, insurance penetration is still very low in the Philippines at 1.5% of GDP. So there's a lot of scope to improve that particularly [indiscernible] disposable income increases. So from protection, when people have more income, more wealth, we segmented the market to offer them our wealth management services. We have 3 vehicles to reach out to them. The emerging affluent is served by our branches. The mass affluent is served by BDO securities, which offer fixed income and equity securities brokerage services and the high network and ultra-high network is covered by BDO Private Bank, which also offers an open architecture model, so we don't only sell our products, but also third-party products. So the way we look at it, we have covered from protection life insurance to wealth management for the [indiscernible] mobile and for those who are getting successful in their businesses. Now going now to the IT initiatives. If you look at this chart as an analogy as an iceberg, we have initially focused on the foundational IT for those that you cannot see to start below the waterline. We have already transformed and moved to our next-generation IT platform. We are now ready to move our applications, and this is where the public can now see them. So we are looking at -- we are using application programming interface and cloud, we are moving our apps to the cloud to ensure we provide secure, agile and resilient IT services to our clients and depositors. This is an example of what we also did to our branches as a way to improve operational efficiency and short-term turnaround time for depositors. So we have a digital queuing system and it's not paper base anymore. So they input their transactions get a number when they get to the [ teller ], the service is quite quick already. So this also provides us savings in terms of full-time employees. We can save around 5% by having this cash in, cash out service. Our ATMs, we said from the traditional ATM, we have the QR Code and biometric-enabled ATM and we have a universal teller machine that also can update the passbook. So in the Philippine context, passbooks are very important. It gives the depositor or the business owner proof of the transaction and they really value the benefit of having a passbook rather than just purely digital or electronic statements. This is just a snapshot of the applications we offer to both our individual and corporate clients. We have several apps covering both basic banking services and software affiliates. Now most importantly, cybersecurity, we have invested a lot to make sure the infrastructure is protected and resilient against cyber risk. So we are compliant with the Central Bank's cyber risk requirements, and we have 1 of the most comprehensive sophisticated secure and resilient systems in the country. Now on the corporate governance side, the Board of Directors, we have 6 out of the 10 member Board as independent directors. They are composed of experienced bankers, successful entrepreneurs and those that have done public service for our lawyers. So that gives a broad and diversified perspective in tackling very complex transactions or matters that are brought up to the Board level. This is just a profile of the Board of Directors headed by Teresita T. Sy, the Chairperson and who is the only person among the Sy family of the SM Group, the rest are not related to the family or to SM Group. This is top management team headed by Nestor B. Tan who has over 40 years of banking experience offshore and locally. He's also 1 of the longest-serving presidents in the Philippines. He assumed the presidency of BDO in 1997. And he's still President Tan. He has [indiscernible] BDO's growth over the past 30 years to where it is now. And also going forward, there is still scope for that to increase. This is the corporate segment business unit teams to support our business units. In terms of sustainability, our strategy or philosophy, so we embed sustainability in the way we do business. We have already reported our 6 sustainability report, and our operations encompass or cover most of the new and sustainable development goals. For example, in this slide, product sustainability, human capital, disaster response and governance base. And if you look at it, we are also very active in lending to sustainable or sustainable finance. Now on the flip side, our call exposure on the upper right chart, we have a mandate to lower to 2% or 50% of the poll exposure over 10 years as part of our energy transition statement, which we released in 2023. To back up and get funding for our lending to eligible partners, we have been active the ensuing green bonds, blue bonds and sustainability bonds. So this year alone, we raised 2 issues of ASEAN sustainability bonds. In January, we raised PHP 63.3 billion, the largest issuance for any Philippine company. And just this July we had the second issue of PHP 55.7 billion. All of these are meant for relending eligible borrowers in the ESG or related fields. So in summary, we continue to expect sustained loan growth with potential upside from CapEx led group loans, especially since [ company ] growth has been quite stable. First half, GDP grew 6%. The 2Q GDP loan grew 6.3%, one of the highest in the ASEAN region, and we're well positioned to capitalize on that growth. So NIMs, we expect to be stable, supported by asset rebalancing towards high-yielding segment, locking in the rates in the investment portfolio and what we call repricing the time deposit rates down when interest rates start coming down. On fee income, we continue to grow service-based businesses to cross-selling and through business development and the recent strategic initiatives I mentioned earlier should continue also and contribute to positive momentum going forward. Asset quality remains stable. We have ample provisions to protect against the next economic down cycle for [indiscernible]. So in summary, our performance reflects the continuing strength of our franchise and the execution of our business strategy, creating sustainable businesses, expanding into new markets, providing unparallel point access. We have multiple drivers in place to support profits and return on equity. We have market leadership. We have a strong balance sheet. We have a diversified business franchise with the widest market coverage and an extensive distribution network. And lastly, we have continued to invest in technology to improve operational efficiency and add to data analytics and data mining for cross-selling. All of these should eventually translate to shareholder value. That ends my presentation. If you have any questions, please feel free to e-mail me or my colleague, Katherine Tan in the slide here on the middle chart. Thank you for your time, and thank you to Deutsche Bank for hosting this conference. Good day to everyone. Bye, bye.