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

Welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, DBVIC. I'm Zafar Aziz from the Deutsche Bank team. I'm pleased to announce that our next presentation will be from BDO Unibank. Before I introduce our speaker, a few points to note. [Operator Instructions]. Also, all of today's presentations will be recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome BDO Unibank that trade in the Philippines using the symbol BDO and on the OC (sic) [ OTC ] markets using the symbol BDOUY.

Good day, everyone. Thank you very much for joining us today and giving us the opportunity to share with you the BDO story. We'd like to thank Deutsche Bank also for making this possible to reach out to you people. So in terms of our presentation this morning, so this is our outline. We will focus first on the bank's financial performance followed by a macro and business outlook. And the last portion will be our investment merits. So in terms of our financial highlights of the first quarter, we recorded a net income of PHP 19.7 billion. This is up 7% compared to last year and translates to a return on equity of 13.8%. Our loan book was up 12% as we still saw broad-based growth across all market segments. Our fee-based income surged 26% year-on-year with double-digit increases in our services and wealth management-related fees with no one-offs from the treasury side or from acquired asset disposition. Our asset quality continues to improve with our NPL ratio trending lower to 1.77%, while our NPL coverage remains stable above 140%. Lastly, our capital position continues to improve. Our book value per share is up 12%, and our common equity Tier 1 ratio is at 14.4%. This in turn has allowed us to raise our quarterly cash dividends from PHP 1 per share to PHP 1.10 per share starting the second quarter. So in terms of our income statement, the major contributor is net interest income, which is up 6%. And again, that's on the back of a 12% loan growth. Net interest margins have been steady at 4.31%. The next contributor would be our insurance operations -- I'm sorry, the next contributor would be our fee income. As mentioned earlier, we have seen strong growth in our fee-based service income. Income from our insurance operations, BDO has, I guess, the distinction of being the only bank in the Philippines that owns a life insurance business. So we manufacture the products and we distribute it through our branches under a bancassurance arrangement. The insurance operations registered a 3% decline in terms of revenue contribution, but this is primarily due to the mark-to-market impact on its securities portfolio. If we were to look at business-as-usual premiums, new business volumes are actually up mid-teens, around 15%, similar to last year. Provisions, because of our improving asset quality, that in turn has allowed us to gradually scale back on our provisioning. And we hope that this is something we can continue with, see a gradual decline in our cost of credit. So again, in terms of our net income results, 7% compared to last year, translating to a return on equity of 13.8%. Looking at the balance sheet. Loans constitute our biggest earning asset. It was up 12%. And our loan-to-deposit ratio is currently at 85%. On the funding side, CASA deposits rose 6% in tandem with the overall rise in total deposits, while our CASA ratio has been steady at 70%. Lastly, our shareholders' equity, almost at PHP 600 billion. And again, that's up 12%. This has been a steady performance for the bank. We have seen our book value growing around 11%, 12% over the last few years. Looking at our loan book. We have seen an acceleration in the growth of our consumer and middle-market segments compared to 2024, while in the case of the large corporate segment, we have seen a more tempered pace of growth. And we attribute this primarily to the uncertainty brought about by the tariffs of the U.S. and its impact in terms of global growth. However, we remain optimistic that the -- as things settle down, we will gradually see a return of growth in the large corporate segment back to the double-digit levels. On the funding side, as mentioned earlier, 6% growth in CASA. And we have seen a steady level in terms of our CASA deposits despite the market volatility. And we still have one of the lowest cost of deposits in the industry. In terms of our footprint, we now have over 1,800 branches nationwide, composed of 1,200 BDO commercial bank branches and 578 BDO Network Bank branches. So BDO Network is our rural bank subsidiary, and this is our main platform for going into what we call the underserved or underpenetrated areas. And as you can see, the bulk of our branch expansion in recent years has been in the BDO Network side. For net interest margins, it has been stable, as shown in the lower chart, stable at 4.31% since the fourth quarter. And we hope that this is something that we can maintain even in a declining interest rate environment. On noninterest income, so we have a diversified income stream for fees. The major contributors would be our investment/wealth management; payments and electronic banking, which includes credit card fees, merchant acquiring fees; and also from the capital markets side, the contribution basically comes from our investment banking activities. As highlighted earlier, the growth in our fees has been getting stronger at 20% -- at 20-plus percent compared to the last 2 years. And that, again, is an encouraging sign for us in terms of our ability to cover more markets and to cross-sell our service businesses in a bigger manner. In terms of our insurance operations, again, tempered results over the last 2 reporting periods. But again, this has been affected more by the mark-to-market volatility on the securities portfolio. In terms of recurring new business volumes, we have been registering mid-teens growth since 2024, and that continues to this year. Again, this is an indication of the effectiveness of the bancassurance distribution channel using the branch network of BDO. For operating expenses, slight uptick in the cost-income ratio. Our first quarter costs are typically elevated and front-loaded because of some tax-related costs and also investments in new branches and information technology. But what we hope to see is that we will be able to see a more tempered increase if -- or stable cost-income ratio on a full year basis. For asset quality, since 2022, we've seen a gradual steady decline in our NPL ratio, as shown in the upper chart. And the lower chart shows the quarterly sequential trends in terms of NPL. Again, this is something that we are happy about, where we've been able to manage the asset quality indicators despite the faster growth in our consumer portfolio. And in turn, as you can see here in the upper chart, the cost of credit has steadily come down from 65 basis points in 2022 down to under 40 basis points already as of this year. So in terms of overall profitability, we've seen mid-teens return on equity in -- over the last 2 years. And that is something that we still aspire to achieve in 2025. For us, the medium- to long-term growth drivers would be: one, sustained growth in our core businesses; secondly, a normalized level of provisioning; third, the Central Bank has been gradually reducing the reserve requirement ratio in an effort to align to regional peers and also to help provide more funding for growth in the Philippine industry. The benefits from our strategic initiatives, specifically wealth management, life insurance and micro SME, are also seen to contribute more over the long term as we are able to gradually scale up these businesses. Lastly, we expect productivity efficiency gains from our investments in information technology. So in terms of our capital position, what we would like to highlight here is the blue bar. On the parent level, our common equity Tier 1 ratio is now at 14%, and that has steadily increased over time. This indicates, again, a strong internal capital generation capability and allows us to support our growth -- our balance sheet growth internally without having to go to our shareholders for capital. This has also allowed us to see a more progressive dividend policy. As can be seen here, our total cash dividends from 2022 have almost doubled to where it is today. And as mentioned earlier, we have just announced a recent increase in our quarterly cash dividends from PHP 1 to PHP 1.10 starting the second quarter of this year. That translates to a payout ratio around close to 30% for us. So in terms of our macro and business outlook, when we look at economic activity, while GDP growth in the Philippines is still below the prepandemic average, it is still one of the fastest-growing economies in the ASEAN. And we -- while we are seeing good growth, it's still not totally back to prepandemic levels. What we believe will get us back there to the 6% to 7% GDP growth range will be catch-up CapEx, which is something that we have not seen in a major way since the pandemic. This has also been affected in a way by limited government capability to support consumption given its fiscal position. From the monetary policy side, we believe that the BSP will still be capable of implementing reductions in the policy rates given the well-anchored inflation trends. What remains uncertain, however, will be the longer-term impact on inflation of what is happening in the U.S. and in the global economies. So what we need to watch out for, one is interest rate and foreign exchange volatility, which will affect domestic growth. Commodity price increases are also a potential threat to us if we see wide swings in commodity prices given that the Philippines is a major importer of fuel and food products. And lastly, we need to watch out -- closely monitor the fiscal and the current account deficits. So in terms of our business outlook, we remain cautiously optimistic. We believe that we can sustain loan growth in the low double digits despite the volatility that's happening in the financial markets today. Again, on a base case, we think fundamentally, the Philippines can support -- can see sustained loan growth in the low to mid-teens growth. Asset quality -- sorry, fee income continues to improve given our fee-based businesses. And we believe that our strategic initiatives, specifically wealth management, life insurance and financial inclusion through the rural bank subsidiary, will continue to have positive momentum and be bigger contributors to our profitability going forward. Lastly, our asset quality indicators remain benign despite faster growth in consumer lending. And again, this is something that we hope we will be able to continue with. And our provisions and earnings capacity will actually be more than adequate to cover for any unforeseen losses. So in terms of investment merits, we continue to leverage our strong position for sustained growth. So in the case of the branch network, we believe that physical branches and along with digital channels are still the way to go in terms of improving our market coverage. There is still roughly about a 30% proportion of the population that still do not have bank accounts. And we believe that, again, physical as well as digital channels are the best means to get them financially included. In the case of BDO Network Bank, from the time that we acquired it in 2015, we have seen its branch network increase from 103, historically, based in Mindanao in the Southern Philippines, into a nationwide presence today with 569 branches. This in turn has allowed us to not only improve financial inclusion. It has given us the ability to grow our CASA deposits and our loan portfolio in the less-served segments. And looking at the first quarter performance of BDO Network Bank, as can be seen here, 30% growth in CASA, 20% growth in unsecured loans. Net income is up 121% compared to the same period last year. For wealth management, we have 3 different platforms to cover the main segments in wealth. We have a -- for the high net worth and ultra-high net worth segment, we have our private banking subsidiary, and that has seen a 6% growth. For the mass affluent and emerging affluent segments, this is where we are more optimistic in terms of the growth opportunities. We believe that there is still substantial underpenetration for these 2 segments. And this is where we plan to deploy our open architecture in terms of getting our clients to diversify their portfolios and appreciate the benefits of diversification, especially in a declining interest rate environment. For corporate finance and cash servicing, so our investment banking subsidiary has been very active in capital markets, both in terms of equities and debt syndication and underwriting. Our cash management business is also a beneficiary of our branch expansion, seeing an almost 40% CAGR in terms of growth in its customer base. For our life insurance business, we are now the top-ranked local firm in a market dominated by foreign insurers. In terms of traditional premium income, we are second in the industry next only to Sun Life, even if we are #6 in terms of total premiums as of the same period. The Philippine life insurance industry is primarily focused on unit-linked premiums. In our case, our business model is focused more on traditional protection as we believe that this is what our clients will need more as compared to investment-linked products. Now in terms of our IT infrastructure and future-proofing the bank, we have implemented a new foundation since 2018, which now allows us a plug-and-play environment. This is something that we embarked on to allow us to be more agile in terms of adapting to changes in customer behavior or changes in technology. This will also allow us to be more secure and resilient in terms of our systems. And 5 key benefits of this are shown in the screen. It's given us more reliability, reusability, our time to market, big data capabilities and cybersecurity. If I may briefly highlight some of the benefits of these. So in terms of reliability, our core systems have now been up consistently. We have seen a major decrease in P1 incidents. In terms of reusability, platforms -- reusable platforms have unlocked efficiency gains for us, generating about PHP 1.7 billion in savings in terms of enterprise scale. Our time to market has improved. We are now able to bring new products to market in a faster manner. And we have seen continuous releases of new features every month in terms of our digital applications. Our big data has been upgraded to the third generation, and we now have the -- one of the largest data repositories in the country. This is where we are leveraging on our data analytics to help our various businesses cross-sell more products to our customers. For cybersecurity, from the time that we started in 2018, we are now in a more mature stage where we are at Level 5, which is primarily optimizing the cybersecurity capabilities. And in the following slide, just to show how robust the performance has been in 2024, we have been rated A by Cyberint, which is a leading cybersecurity agency. Our supply chain has been rated 97% by Panorays. And we have not seen any security breaches in 2024. And just an indication of what we have been able to prevent over the last 2 years. Now in terms of boosting productivity through targeted initiatives, so we now have 90% of our branch transactions that are done through straight-through processing. So what this has provided is 35% faster transaction time and reducing significantly the waiting times of our clients. We now have unified client information across the bank. So we have a common database, which all the business units can access. And this has given us about PHP 600 million in annual savings given data storage optimization. We are also using robotic process automation, or RPAs, extensively in our backroom operations. And again, some of the benefits are shown in the slide. For data mining and big data, we have used it extensively for life insurance prospecting, consumer lending in terms of credit analysis and scoring and also as a way of improving our risk prediction and fraud detection. For GenAI, we have successfully rolled out uses in wealth management, branches and information technology with more uses coming soon. Now in terms of delivering customer value through product innovation, we have upgraded our online website and mobile app to provide a more seamless and consistent customer experience. We have seen significant growth in terms of digital users and usage, as shown by these numbers as of the first quarter. And for our electronic wallet called BDO Pay, the distinction here is that it is linked to a client's deposit up or credit card. And therefore, there is no need to top up or to cash in every so often. So long as you have money in your account or in your credit limit, you can use BDO Pay at will. We are also deploying more self-service machines, which would effectively allow for 24/7 banking. The new Universal Teller Machines will have product features such as cash deposit, check deposit, passbook updates and cardless withdrawals using biometrics. We now have almost 500, and we're looking to roll out -- or to bring the number of Universal Machines to about 1,000 by the end of this year. The majority of our products are also available online now using the website or using our ATM network. Our Wealth Portal now allows for a consolidated view of the client's portfolio. So regardless of where a client books his investments, the Wealth Portal is now able to capture it and gives the client the convenience of viewing his total portfolio regardless of currency, regardless of booking unit. We now also offer a push notification for online login. So this is our way of trying to move away from a telecom over -- onetime PIN structure. So we believe that this is more efficient. And so long as there is WiFi, then a push notification is a much faster way to log in. We are also introducing what we call account groupings, which will make it easier for clients to group together accounts with common transactions. And for the corporate side, we have seen a 30% increase in the number of our corporate customers that are using check scanners. The main benefit of this is that they do not have to physically deposit the check anymore in the branch. The check scanners allow them to likewise save on costs. And in our case, this allows us to generate more CASA deposits from our corporate customers given the convenience that this facility provides them. So lastly, so in terms of our performance summary, our strong growth continues, and this is reflective of our -- the strength of our business franchise and our implementation of our strategies. We have multiple drivers in place to support sustainable profits and return on equity. We have investments in technology, resiliency, processes and business enablers that, while creating a short-term impact on costs, will provide us long-term benefits in terms of profitability and market coverage. Our capital position is sufficient to support growth and absorb operating losses from unexpected events. And lastly, our earnings are adequate to support a progressive dividend policy. So that summarizes the investment merits for BDO. Should there be any questions, please do not hesitate to reach out to us. You can e-mail your questions to [email protected], and we'll be more than happy to get back to you as soon as we can. Again, thank you very much to Deutsche Bank for making this possible, and again, thank you for giving us the opportunity to share with you the BDO story.