Robinsons Bank Corporation (BPI) Earnings Call Transcript & Summary

Okay, good afternoon, ladies and gentlemen. Welcome to BPI's investor briefing to discuss the announced merger of BPI with Robinsons Bank Corporation. This is Chinky Lukban, Head of Corporate Strategy and Investor Relations and your moderator for this session. I am pleased to introduce our speakers and panelists this afternoon. We have TG Limcaoco, our President and CEO; Eric Luchangco, our Chief Finance Officer and Chief Sustainability Officer; Mon Jocson, our Chief Operating Officer; John-C Syquia, Head of Corporate Banking; Ginbee Go, Head of Consumer Banking; Tere Marcial, Head of Wealth Management; Chiqui Huang and Lester Ong of our BPI Capital Corporation. We also acknowledge the presence of the rest of the BPI senior leadership team joining us on this call. This afternoon's agenda will begin with an overview of the merger by our CFO, Eric Luchangco, which will then be followed by a Q&A session. Just some housekeeping reminders before we proceed [Operator Instructions] and this call is being recorded, and legal disclaimers apply. Now let me turn you over to Eric. Eric, please go ahead.

Yes. Thank you, Chinky, and good afternoon, and thank you to everybody joining us today. This is truly an exciting time for all of us. As you know, we announced last week the merger plans of BPI and Robinsons Bank Corporation. And we are here today to share with you some information about the transaction, how it will add value to our shareholders and the next steps. As announced on September 30, the Board of Directors of BPI, Robinsons Bank Corporation and its shareholders, JG Summit Capital and Robinsons Retail Holdings, approved the execution of an agreement for the merger of BPI and RBC, with BPI as the surviving entity. The proposed merger will require the issuance of BPI shares in exchange for 100% of RBC and its assets. BPI will issue common shares to RBC shareholders, which will result in them collectively holding approximately 6% of the outstanding common shares of BPI. For those who may not be familiar with Robinsons Bank, or RBC, it is a full-service commercial bank and is the financial services arm of the Gokongwei Group, one of the largest conglomerates in the country. RBC is 60% owned by JG Summit Capital Services and 40% owned by Robinsons Retail Holdings. RBC also fully owns Legazpi Savings Bank, which is a thrift bank, and also owns 40% of the UNICON Insurance Brokers Corporation and 20% of GoTyme Bank Corporation, which was one of the 6 digital banking licenses granted by BSP last year. As of June 2022, RBC has PHP 175.9 billion in total assets, PHP 139 billion in deposits and PHP 102 billion in net loans and receivables. For the first 6 months of 2022, it posted PHP 933 million in net income. RBC caters to commercial and retail clients and is particularly strong in the consumer loans and CASA deposits area. The merger will increase shareholder value by growing BPI's asset and deposit and client base. RBC has shown an impressive growth rate as an independent institution, registering impressive growth over the last 5 years, equivalent to a CAGR of 21% for loans and 19% for deposits, which is well above industry growth rates. The merger will also expand the synergies across products and services, allowing RBC to take advantage of the scale that BPI brings to the table and allowing the merged entities to feed off each other's strengths. We also see this strengthening the partnership between the BPI and Gokongwei groups. RBC is expected to expand BPI's key balance sheet metrics to between 6.5% to 7%. As mentioned over the past 5 years, RBC has been steadily growing its deposit and loan books at a much faster pace than industry. Consequently, the merger will immediately improve BPI's industry ranking in deposits to second from third. Over the past 5 years, RBC's consumer loans posted an impressive 30% CAGR, bringing RBC's loan mix to 42% allocation for consumer loans compared to BPI's 20%. This relatively high mix of consumer loans has been a key driver for net income growth and is aligned with BPI's aspirations of increasing its consumer loan book to 30% of its total loan book. RBC is also strong in CASA, with a CASA ratio of 83%, which is higher than BPI's by 4 percentage points. RBC's asset quality, while not as strong as BPI's, is very manageable and will not have a significant negative impact on BPI. Our very strong NPL coverage ratio gives us more than adequate headroom, with the combined entity still having a cover ratio of above 160%. RBC also has a strong capital position, which is comfortably above regulatory thresholds. RBC clients have strong digital adoption, with 35% of retail clients enrolled in RBC's digital app. Enrolled user count is up 3.6x from December of 2020. RBC can potentially add 7% to BPI revenues and 5% to net income. It posted a 35% 5-year CAGR on net income, also exceeding industry average. And over the same period, ROE was consistently above industry average as well. RBC's NIM is high given the sizable share of consumer loans in the portfolio, which is positive for BPI. The closing of the transaction is conditional upon moving -- yes, the closing of the transaction is conditional upon securing the approvals of the respective shareholders of BPI and RBC on the plan of merger and the articles of merger. We will also seek regulatory approvals from the Philippine Competition Commission, PDIC, BSP, BIR and SEC, which we hope to secure before the end of 2023. Given that, we expect the target effectivity date for the merger to be January 1, 2024. From now until the merger becomes effective, we'll continue to conduct our respective operations as normal. We look forward to a smooth transition and integration of RBC's operations, employees and clients into BPI. We're excited for the next steps in paving the way for a stronger BPI and its expanding ecosystem. Thank you, and we now open the floor for questions.

Thank you, Eric. Ladies and gentlemen, the floor is now open for your questions. [Operator Instructions] We have a few questions in the queue already. Karthik, go ahead, from Buena Vista.

Am I audible, no?

Yes, we can hear you, Karthik. Go ahead.

Okay. Great. Just congrats on the transaction. So just a few questions from my side. Firstly, does the transaction also envisage any element of the banking transactions with the ecosystem of the group?

Yes. So we do believe, as mentioned, earlier in the transaction -- or in what I said, we do expect the partnership between BPI and the Gokongwei Group to be strengthened by this. And I think part of that is that we'll really be able to take advantage of -- I guess that stronger relationship will allow us better access to the ecosystem of the JG Group, not only to the companies within the JG Group themselves, which we expect that relationship to kind of -- to become stronger but even to the ecosystem of the corporates -- of the companies within the JG Group. We expect that -- our access to those companies to expand as well. And therefore, we should see an expansion of the business that we're doing, both with the JG Group and with their overall ecosystem to expand as well.

I mean is that just an understanding? Or is it actually in black and white as a part of the transaction?

It's an understanding.

Okay. It's an understanding. Okay. Great. The second question is, I think if I read it right in the presentation, the client base of RBC is about 700,000 or so. Have you done any sort of at least back-of-the-envelope or preliminary due diligence to show what percentage of the customers are not overlapping? And what percentage of the branches are not overlapping?

On that, we haven't gone down to the individual customer level yet. But we -- and -- so for example, we do know that we are already banking, obviously, many of the JG Group companies. And then obviously, there is going to be some overlap in that respect. But just because there's an overlap, I don't think it means that we're not going to be able to expand our relationship with these companies and increase the amount of business that we're doing with them. Even for the non-JG companies, the fact that they were dealing with RBC probably implies that there is some way in which we can expand our relationship with these clients.

My suspicion, Karthik, on the retail side is that there's very little overlap on the depositor side just because of the nature of their client base. On the corporate side, as Eric said, probably in the top corps, there would be some overlap. But when you look at the middle market and the smaller SME, there will be little overlap there. On the branches side, I think my quick eyeball -- we haven't really done a full due diligence, but the quick eyeball would be significant overlap on the urban areas. And -- but in the provincial areas, there is some room where they have presence where we don't. And the significant one is they've got a lot of product offerings that we don't offer.

Excellent. My last question is basically on the price-to-book multiple, which I think works out to somewhere around 1.3x or so. If I were to benchmark some of the midsized banks in the Philippines currently, most of them are creating below book value. And of course, the ratios of RBC are still inferior to that of BPI, whether in terms of ROE or cost-income ratio, et cetera. Just wondering that although there are synergy potentials on paper in terms of ability to transact with the ecosystem of the JG Group, that is, of course, a strong point, what were the other metrics that you considered when you actually agreed to this valuation multiple?

Well, actually -- thanks for that, Karthik. Actually, if you look at -- you're right that many -- most banks are trading at multiples lower than what we're looking at. But if you look at transactions where banks were bought out and, I guess, in the Philippine context, most recently, the level, for example, at which UnionBank bought the Citibank assets, there -- they paid in excess of 2x book. And so from that perspective, and if you look at similar transactions that have been done regionally, I think that's generally what you'll see is that in order to acquire assets, you have to pay significantly above where they're trading in the market. And in general, the transactions are above 2x book. So if you look at it from that perspective, then the transaction that we did is actually priced quite a bit below that. And if we wanted the transaction to happen, if we wanted to be able to bring these 2 institutions together, we paid what we felt was a fair value to both parties.

If I can add, Eric, because I negotiated this with Lance, right? It's really driven by the fact that the synergies between our groups, the new products, bringing the ecosystem of the whole JG and Robinsons Retail, Robinsons Land onto our platform is very attractive. Secondly, the reason a lot of banks trade significantly below book, in my view, is the fact that there is lack of growth opportunity and lack of growth where people don't believe there's much growth. When you look at what Robinsons Bank has been able to achieve over the last 5 years, it's very impressive. They've been able to tap new products, new markets. They have about an impressive product offering to the ecosystem of the Robinsons Group and the JG Summit Group. And one of the things that I talk a lot with Boyie Sarte, who is their president, is how easy it would be to just basically lift that platform and replicate it on us because they don't have -- they didn't have the balance sheet or the manpower to grow very quickly or even faster, is what's very attractive. So in my mind, clearly, there would be no deal below book. Lance wouldn't -- Lance doesn't need to sell this bank, right? And why would he put money 3 years ago just to sell it for less? Very astute. But the question was from our side, could -- can we see even faster growth with us together? And can I accelerate what they were doing? And both of us agree that we can do that on the BPI platform.

Excellent. That's it from my side. Wish you and the team all the very best with the integration. Congrats on the acquisition once again.

Our next question will be from Selvie Jusman. Selvie, go ahead.

I just have 2 questions. So I wanted to understand the rationale for the acquisitions. I think you did mention about the potential synergy. But I just want to understand it a little bit better. So whether there is an angle on the digital side. You mentioned that, I think, Robinsons Bank has about 20% stake in one of the digital banks that were given license by BSP. Or is it like from the capital management angle, like what TG mentioned earlier, quite a lot of it on the product offering ecosystem? So if I were to look at it in a more holistic view, how are you thinking about the deal? So that's my first question. And then my second question is in terms of -- I think it's still quite early in terms of the synergy. But have you come up with like a potential number in terms of like, for example, what is the potential cost base for RBC that you can cut? Yes, that's my 2 questions.

Sorry, can I just get that second question again?

The second question, I'm trying to understand if you have worked out in terms of like some numbers as to what kind of synergies we can get. Especially I think on the overhead side, the colocation or like the branches, what is the potential cost saving, which is, I think, a bit more low hanging fruit? And I think the synergies on the revenue may be a little bit more difficult to quantify in the early stage, but I just want to get color on that.

Yes, actually, so on both of those and beginning on the cost side, synergies on the cost side, we have some initial numbers. We've run some initial numbers on that. And we believe that bringing -- basically kind of bringing Robinsons Bank kind of within the umbrella of BPI, there will certainly be areas for cost savings. I think at this time, pending further due diligence, I mean, what we've done just very rough computations that are really quite general. And at this point, I don't think we are prepared to really give specifics in terms of how much cost savings we believe are going to be generated by the merger. But given the scale that BPI has and our ability to kind of, as TG mentioned, really allow them to achieve economies of scale over a much quicker -- over a much quicker timeline, we certainly believe that there are efficiencies to be gained here. If you look at overlapping locations of branches, for example, there will certainly be scope for cost savings. I think as you mentioned also on the revenue side, it's -- I think it's still a bit early for us to be releasing any specific numbers in this area. But as TG mentioned and as I have mentioned as well, I think there's really a scope for expanded business opportunities for us. TG, do you want to add anything to that?

Yes. I guess I'll be -- we've said it, and I can't repeat it enough that the real attraction here was the synergies with the group, the JG and Robinsons Group, in terms of bringing the whole -- not only their business but the ecosystem of their business, which is already being done in a small scale with Robinsons. And their issue was they couldn't scale it fast enough. That's one. You mentioned the digital bank GoTyme. To me, that's a plus. I've never really thought about it. But I had dinner with the GoTyme Board last night, and there are interesting aspects to what we can do together. Many of you know my view on how BPI will compete with the digital banks. But TymeBank of South Africa has a pretty interesting business model that's quite unique. And so we'll continue that discussion. It just so happens that 20% was housed with Robinsons Bank, and we'll keep that, and we'll work together and see how we can work with GoTyme Bank going forward. I think on the synergies -- Eric, sorry. When we looked at it, there are -- we try to quantify it. I think it will be too premature to be talking about it. But when we presented this to our Board, we justified the premium paid over book just by the cost synergies.

All right. Okay. Thank you. All the best for the deal.

A quick example, Selvie, so for example, they've got just under 2,000 people. I would suspect most of them in the branches because they've got 189 branches. They've got 2,000 people. Our attrition alone in -- at BPI, because we've got 19,000 people, approaches 2,000 people a year. It's a great source of people. Even if you just put the organizations together, there's a lot of -- it will help us a lot in our staffing.

Thank you, Selvie. We're taking a question from the chat box. One from Rachelleen Rodriguez. Given the lower ROE of RBC, do you think this will be a drag to BPI? And how will RBC's high cost-to-income ratio impact BPI?

Yes. Maybe I'll take that. Yes, their ROE is lower than ours, but again, given the differential in size, the impact is not likely to be much. I think we showed that number earlier -- well, sorry, we did show their number earlier but not the combined. When we look at what the impact is going to be, again, given their relatively small size, it's not going to move the needle that much. Plus, we expect that as the combination -- as we're able to bring them together and achieve cost savings, that through the synergies, that their ROE will naturally go up as well, right, and kind of come closer to where we are right now. And because of that, we think there's really not going to be much impact to us on this.

Yes. If you just look at the math, right, their earnings are 5 -- it's about 5% of our earnings. So our calculation on a pro forma basis, our ROE drops -- the combined pro forma, our ROE goes down by about 27 basis points, if I'm not mistaken. And from that, that's easily made up by the cost synergies if we execute it well. And it doesn't even consider what might happen from the lift in revenues from us being able to expand their book with their products just because we've got more capital and more people to execute.

Thanks, TG. We'll take a question from DA. DA, go ahead.

A few questions from me. First one is on our bank in particular. Is there any reason why you agreed to do our bank and not any other bank? Is it because of the franchise and ecosystem that they have? Or is it them being available, for example, whereas others aren't?

Show me another Gokongwei bank, and I'll do it again.

Well, for example, the other banks that are non-Gokongwei, there's no interest in them. Is that fair?

Yes. If it's too small, yes, it's not worth.

Okay. And then just going back on the synergies. I wanted to check because you did mention its 5% impact to earnings and you are giving 6% stake...

No, no, no, it's -- their earnings are 5% of ours.

Yes. Correct. Correct. It adds 5% to your earnings by getting them in, but they're giving 6% stake. So it looks like it's slightly dilutive at the beginning. My question is, is there a timeline, for example, where you expect this to be accretive to you?

Within the first year after the merger, I think, because it's so small, DA, right?

Yes. Yes. Understood. Understood. And then last one, do you have appetite for further M&A on top of this one? And if yes, any criteria that you would have for the deals that you would be doing?

I answered that already in your first question.

Next question comes from Gilbert -- [ Anthony ], sorry. What benefit of -- for the minority shareholders of BPI and Robinsons Bank or JG Summit Holdings from this transaction.

There are no real minority shareholders of Robinsons Bank, right? I mean the shareholders of Robinsons Bank are JG Summit Capital and Robinsons Retail.

Okay. Thanks, Eric. We have another question from Gilbert of Macquarie. Can you explain in detail the PV multiple acquisition you used?

Yes, we agreed. Basically, we agreed not so much on multiples, but basically, looking at where we thought they would agree to purchase -- or for us to purchase the shares. Looking at that, what we felt was a reasonable valuation in the context of where -- yes, I guess, where they would sell and what we felt was a reasonable valuation for us and especially, as TG mentioned, where we believe we could really kind of make it back with the cost synergies and the expansion of the business.

Okay. Thanks, Eric. We'll take a question from Joseph Sinay of T. Rowe Price. Joseph, you may unmute your line.

Sure. Can you hear me?

Yes, we can. Go ahead.

Excellent. So congratulations on the acquisition. I have a couple of questions here. First, can you help describe the timing of the transaction? Like was this a long courtship? Was this love at first sight? And why now? Why not 3 months ago? Why not postpone it to 3 months later? Like is there something special about the timing now that now is the time we did it? That's my first question.

You strike when it happens, Joseph.

But is this something like you've -- coming into the leadership role, like you had this idea that this would be a great fit? Or was that something that they did in the last 12 months or so that made you say, this is it?

It's just really more of an opportunity that arose. And so it wasn't something that we've been studying for 3 years, hey, let's watch Robinsons Bank, and then we think they're a great target acquisition. It's not -- that's not really the way it happened. But the opportunity came about. We thought it was a great opportunity. We thought there were benefits to both sides. And given that, we fairly quickly came to an agreement on what worked and how to proceed and are moving on that basis.

And from their perspective, did they subject you to a competitive process? Or was it...

I think you'll have to ask them that. I think if you're asking, did they shop themselves around, my feeling is they did not. And are you asking did we actively look for an acquisition? My answer is no.

Got it. Got it. And my last question is, do you remember the -- can you recall the last time BPI made an acquisition? And how does that -- did you have an integration? How are you thinking about integrating this bank into BPI if it's been a while since the last time?

Well, the last one would have been BPI Family Savings Bank, right, which was at the start of this year. And we're in the process of integrating it right now. We believe we'll be completed with that transaction by the time all the regulatory approvals are secured, and we believe we'll be prepared to do that integration at the time that we can actually start doing the integration.

Thanks, Joseph. We'll take a question from [ Fazin ]. [ Fazin ], go ahead.

Can you hear me?

Yes, we can. Go ahead.