Union Bank of the Philippines (UBP) Earnings Call Transcript & Summary

[Presentation] Hello, everyone. Welcome to our analyst briefing. Today, as part of our great transformation and ongoing efforts to improve the delivery of our briefings, we are going to report the financial performance for the first quarter of 2023 outlook and strategy of our publicly listed company, Union Bank and its subsidiaries. But first, here are the house rules. [Operator Instructions] The briefing will be recorded for documentation purposes. By joining this session, you can send your name, voice, image and chat comments being recorded for use in dissemination. If you do not consent to the foregoing, please do not join the session. Our program will flow as follows: To present our performance, we will have Mr. Dmi Lozano, our bank's CFO. To present our macroeconomic and industry outlook, we will have Mr. Johnson Sia, our bank's Treasurer and Head of Global Markets. To present our bank's strategy updates, we will have Mr. Carlo Eñanosa, our bank's Head of Corporate Planning and Investor Relations. At the end of the presentation, we will conduct a poll. We encourage everyone to participate. We will raffle off 4 Hamilton tickets to 2 winners, which means 2 tickets each. To be qualified for the raffle, you must answer the poll at the end of our presentations. At the end of the poll, we will conduct a Q&A session. And at the end of the event, when the Zoom platform closes, a pop-up screen will appear, which will allow you to provide feedback regarding the event. And now on to our presentations, beginning with a short video. [Presentation]

And now I will turn you over to Mr. Dmi Lozano.

Good afternoon, everyone. I'm here to present to you our financial performance for the first quarter of 2023. Just before I go, as you know, the format is a little bit different this quarter. So please give us feedback. We want to make sure that now that we have time specifically for Union Bank that we maximize it and give you the most useful information that you need. So please, at the end of this presentation, please feel free to either answer the survey or give us any comments that you have. So let's move on to the numbers. We are pleased to report that Union Bank has registered net revenues of PHP 16.1 billion in the first quarter, which is a 57% increase compared to same period last year. Even when we exclude the one-offs, our recurring revenues amount to PHP 15.7 billion, which is 51% better than the first quarter of 2022. Furthermore, our ratio of gross consumer loans to total loans is now at 57%, which is quite a strong change for us, which indicates the strength of our consumer lending business and how much we are focusing on this. We have also recorded an impressive 82% growth in fees and other income, exclusive of trading income. Overall, it was a good start for the bank with net income of PHP 3.4 billion for the first quarter of 2023, which is about 30% higher than the same period last year. We are proud of the progress we have made and the results we have achieved in the first quarter of 2023. Our net interest income grew 43% to PHP 11.5 billion, which is a significant increase from the same period last year. The growth in net interest income is an outcome of the success of the key initiatives, which we began last year, which I will discuss in more detail. First, the contribution of Citi amounted to PHP 3 billion, which has been a significant driver, and we will continue to be a significant driver of our growth. Second, our net interest margins increased by 55 basis points on a year-on-year basis due to the growth in consumer loans in CASA. And third, our subsidiary, Citi Savings and UnionDigital also contributed to the growth in our net interest income, which is quite especially for UnionDigital, quite amazing given how young a company it is. Finally, our earning assets also increased and it increased by 28%, mostly coming from consumer loans and the redeployment of excess funds to securities at amortized costs. This growth in earnings assets has helped us to generate more interest income and increase our profitability. We are pleased with the financial results of our strategic investments, as I've mentioned earlier, and we believe that they will continue to generate value for our customers and shareholders in years to come. Moving on, our investments have allowed us to capitalize on opportunities in the market. And one of the significant drivers of our growth in consumer lending is the acquisition of Citi's consumer business. This acquisition contributed PHP 81 billion or 46% of our consumer loans. And as a result, the bank's consumer loans grew by 150% to PHP 178 billion. We'd also like to highlight that the significant organic growth of our legacy business. Excluding the acquired Citi portfolio, the parent bank's card business, mortgage, auto loans and other consumer loans, altogether grew by 36% year-on-year. Additionally, Citi Savings loans, which [ cater to teachers' ] and motorcycle lending grew by 35%. And UnionDigital contributed PHP 9 billion worth of digital personal loans after only 8 months of operations. Overall, our gross loans grew by 43% to PHP 490 billion, and our consumer to total loans ratio jumped from 40% to 47%, reflecting the success of our strategic investments and our focus on consumer lending. We believe that there's still significant potential in the consumer lending market, and we will continue to leverage on our strengths and capitalize on opportunities to expand our reach in this particular sector. On the funding side, our total deposits grew by 22% due to our sustained growth in CASA deposits. Over the last 3 years, following the pandemic, the bank has benefited from the shift towards digital, and we have seen significant growth in our CASA ratio. From a pre-pandemic CASA ratio of 39% in 2019, it has now increased to 60%, which is a testament to our commitment to digital innovation and customer centricity. Furthermore, we have seen an increase in the balances of retail customers who opened an account purely online. This demonstrates that our digital channels are effective in attracting and retaining customers. Those reflect that our customers are becoming more comfortable using their online accounts. We are also pleased to report strong pickup on our cash management digital solutions from our corporate clients, which has also boosted our CASA growth. Overall, our robust CASA growth has provided us with stable and low-cost funding, which is crucial for the sustainability of our business. We will continue to leverage our digital capabilities to grow our deposit base and provide our customers with a seamless banking experience. I'm also happy to report that our noninterest income has doubled to PHP 4.6 billion, mainly due to the growth in our customer base, which is now at PHP 12.1 million for the whole Union Bank Group. We have also seen a significant increase in digital fund transfers and payment transactions such as InstaPay, bills payment, bancassurance and credit card transactions. Furthermore, the acquisition of Citi's Consumer business has also contributed to our noninterest income growth. Excluding trading, our noninterest income amounted to PHP 4.2 billion. As we continue to expand our customer base and develop our digital capabilities, our noninterest income will continue to grow, providing a stable source of revenue for the bank, a stable and sustainable source of revenue for the bank. Now going into our operating expenses. For the first quarter of 2023, our total operating expenses amounted to PHP 10.1 billion, which is 67% higher than the same period last year. However, I'd like to emphasize that this increase is mainly due to onetime expenses related to the integration of the acquired Citi business into our systems. Excluding the onetime expenses related to Citi Integration and UnionDigital, which was not part of the first quarter 2022 operations, our total OpEx only grew by 14%. This increase is mostly due to volume-related expenses and noncontrollable expenses, such as regulatory fees, depreciation, card-related expenses, DST and GRT. But as we continue integrating the legacy Citi business and optimizing our operations, we fully expect our operating expenses to normalize and trend towards a more -- much more sustainable level. Now moving on to our capital ratios. We are also pleased to report an improvement in our capital adequacy and CET1 ratios, which are at a good level and are more than sufficient to cover the further expansion of our balance sheet. Our key ratios will bounce back. Our first quarter performance resulted to our return on beginning equity of 9.1% and cost-to-income ratio of 62.5%. We will be able to catch up as we continue to build on our earning asset base. We acknowledge that we have yet to fully leverage on the additional capital that was brought in by our shareholders, and we are still carrying the one-off costs of the transition service agreement of Citi. Assuming a normalized expense view without the [ PSE ], cost-to-income will be back down to 58%. Overall, Union Bank has a strong start -- has had a strong start for the year 2023, with notable achievements across different metrics, and we are quite optimistic about the bank's growth prospects and remain committed to delivering sustainable value to our stakeholders. This wraps up the financial presentation on Union Bank's quarter 1 results. Let me now pass the floor to Johnson Sia, our Treasurer and Global Markets Head, who will delve into the macroeconomic and industry outlook.

Good afternoon, everyone. So I just wanted to go through a very short and brief macroeconomic outlook. Union Bank's forecast is that -- so just talk the background, obviously, one of the key drivers of income is funding costs, which we have seen was elevated starting last quarter of last year and continued to go up in the first quarter. But we see that coming very close to one end already. After the inflation [ sharp ] in January of 8.7%, we have seen the inflation come down. And [indiscernible] last forecast, it's going to go down and even the Central Bank has forecasted that it will go back to their target and forecast by the end of the year. And with the peak of inflation, we also expect the Central Bank to quickly wrap up its rate hikes. The forecast is that they will raise interest rates one more time, although that remains to be seen because the Central Bank said that if inflation continues to be -- to come down, they might hold the rates next week. On the spending side, this is just the data coming from our own credit card billings. We obviously see a steady rebound from the -- in fact going beyond the pre-pandemic area. So we see the consumer spending to be sustained even in 2023 and beyond. So in the next 2 slides, let me just talk more about the rates outlook. The next slide shows -- if you can go to the next slide. So as you know, the interest rate hikes last year was not only caused by global inflation, but also because of a very aggressive fed outlook. But again, we see that coming to an end. This is not just our own forecast, but this is the market's forecast. This is the Fed fund's [ futures ]. We see that they're going to raise rates this week to a nominal rate of 5.25. The rates that you see there are effective fed fund's rate. But the market is factoring in the Fed to start cutting rates by the third quarter. And in fact, by the end of the year, it will be lower than where we are now. For the local interest rate side, the next slide, please. We do not have a BSP fund futures price. But the way we look at how the market is pricing it is looking at the shape yield curve. The blue dotted line, light blue dotted line there was the peak of the shape of the yield curve back in November last year, where your 10-year bonds were above 7.5%. At the start of the year, it was still a bit steep. But if you look at the current yield curve, you actually have a -- it's not exactly inverted, but you actually have all the bond yields below the BSP policy. I mean, 10 years and below, okay? Now the Philippine market is not used to a very -- a flat or a rather flat curve. Therefore, the shape of the curve like this tells you that the market is also expecting the BSP to have -- to be near or already at its peak, and we'll expect rate cuts as early as fourth quarter of this year. So given all this, we expect short-term interest rates that they would have peaked already and they should be coming down by the end of the year, and that will reflect also in our funding costs for the next 3 quarters. So I will end my outlook there, and I will pass it on now to Carlo for the strategy update.

Thank you, Johnson. So in our stockholders' meeting last Friday, our CEO reported that we are going for gold in 2025. The objective is to become among the largest and most profitable retail bank in the Philippines in 3 years' time. Now our transformation strategy, which started as early as 2016 sets the foundation for us to be confident in achieving this. We have first mover advantage in digital since we started this way back in 2016. And this has resulted for us to scale our customer and transaction base. In 2019, when we launched our fintech subsidiary, and it started UBX and its targeted operations, we were able to embed financial services of Union Bank through their digital platforms. And in 2021, we won the Citi Consumer Bank deal that further accelerated our ambition as it added middle income to high net worth customers into our base. It also further diversified our consumer loan offerings. Then UnionDigital was launched in 2022 so that we can cater to all the retail segments. And behind all of this transformation strategy is our ecosystem strategy, in which we provide digital transaction banking solutions to Amper corporates, government entity so that we can extend to offer financial services to the members of their communities. Now in the succeeding slides, I want to give an update to where we are in this journey. Next slide, please. So while we're done in putting in the necessary infrastructure that will deliver the basic hygiene required for a customer, we need to be 24x7. We need to be reliable. We have to have real-time transaction secured. And all of this resulted for us to double our customer base to close to 12 million today, even without a large branch infrastructure. Now note that pre-pandemic, our total customers was only at 5 million. Our consumer loan as a proportion of total loans also increased significantly. It's now 3x higher than industry. And even our subsidiary, Citi Savings are able to grow their portfolio, learning from how the parent applied digital. Now in the next slide, you'll see that UBX today already has 4 business platforms, generating revenues. They are tracking to reach breakeven profitability this year. Next slide, please, on UBX. Okay. So this is the slide in UBX, and you'll see that 4 business platforms are already generating revenues today, and they're tracking to reach breakeven profitability this year. Now on the next slide, the integration of Citi is within plan. We are still under a transitional services agreement as mentioned by Dmi today, which means we are running in 2 systems. And by the second half of 2023, we will start to issue new-to-bank cards under the Union Bank brand. Now we originally estimated that we will fully exit the [ TSA ] before the end of the third quarter this year. But this is now to be extended up to the first week of December. So this is our revised plan. Both parties agreed to extend the testing phase to ensure that we have a smooth threat migration. Having said this on the business side, all KPIs that we track against our model assumptions are ahead of our expectations. You'll see here that new-to-bank customers per month are averaging around 17,000, which is significantly higher than pre-pandemic levels of only 10,000 per month. Volumes are also ahead of our model assumptions. And in fact, net income contributed by the business in the first quarter of 2023 is higher than what we budgeted for the period, even if adjustments in rates only took effect in March. So it's only 1 month contribution for the quarter, the lifting of the rate cap. Now moving forward, of course, starting April up to December, there will be the full impact of the rate cap adjustments. Given this, we are confident that we will realize the full benefit of the cost and cross-sell synergies immediately starting 2024 or by December of 2023. Next slide, please. We also like to update everyone that UnionDigital is already profitable. We launched a digital bank from scratch in 6 months' time last July. And after another 6 months in operations, they are now profitable. Loan releases are on an upward trajectory, and it seems like they will reach profitability in record time in their first full year of operations. So at this point, let me turn you back to Dmi to summarize our 1Q results and outlook.

So in closing, we believe that 2023 will be another historic year for Union Bank. We have a solid recurring income growth coming from net interest margin and fees. All subsidiaries are now contributing to the bottom line. And all of our digital innovations are delivering. Our commitment to you for this year is to: Number one, complete the migration of the acquired Citi business into our systems so that we can realize the cost synergies by 2024. And number two, with the fresh capital we've raised, we will continuously grow our retail franchise with the objective of becoming one of the largest and most profitable consumer banks in the Philippines over the next 3 years. Thank you, and we can go to our Q&A.

[Operator Instructions] We have received advanced questions. We will take it up now. If we have time, we will address questions raised live on the platform. And now for our first question. Our first question is, would you be able to share with us the year-on-year loan growth of the bank? Could you also share with us the total loan book right now of UnionDigital?

Well, the growth -- we have that in the presentation in more detail, but the growth that we saw for the non-Citi retail business was close to 40%. The total loan book, I'm trying to check, it is in the presentation, I think we have it also in the presentation there. I'll get back. PHP 490 billion is the total loan book. Sorry, of UnionDigital. Sorry, the total loan book of UnionDigital is only about PHP 9 billion now.

For your second question, when do you expect added operating costs arising from the streamlining of the acquisition of Citibank's local consumer business to normalize?

Well, we expect some of these costs will start going down by July, August of this year, but I think completely, we expect the whole process to be completed by beginning of December. So the full impact of the synergies will only really be felt in 2024.

Next question, what's the bank's outlook for loan growth for 2023? And which segment is expected to drive growth?

Well, we're looking at loan growth of mid- to high teens, but really at the bulk of this, at least, for Union Bank is coming from the consumer segments.

Next question. What are the bank's expectations for NIMs given the elevated interest rates?

Well, as mentioned in our presentation, we believe we can sustain our current margins, which is about -- I believe it was about 5.5% NIMs, so which is above the industry. But this is for several reasons, right? One is, we think that inflation, hopefully, our policy rates have hopefully already reached their peak. So we expect that the pressure to squeeze the NIMs has started to die down soon. And number two, strong growth trajectory in our higher-yielding consumer loans continues to happen, right? So that's really the difference between first quarter of last year and this year, despite higher funding costs. Yield on our loans has also gone up quite significantly because of the shift to more retail on our portfolio. And number three, the full effect of the lift in credit card cap rates is also going to be felt in the second quarter and forward. So we think that, that will help again absorb some of the increasing funding costs.

Next question, what is the bank's NPL cover as of 1Q 2023? Apart from this, I'd like to ask what Union Bank's NPL coverage ratio was for 3Q 2022 and 4Q 2022? Also, does the bank have a target for credit cost?

Okay. So our NPL cover is at around 65%. Now, while some people might get used to seeing some of our other peer banks, this may seem a little bit low. But really, it's driven by the fact that we have a higher proportion of consumer loans to total loans for Union Bank, which is actually significantly higher than the peer set. If we are to separate wholesale versus consumer loans, the NPL cover of our consumer portfolio is at about 51%, which is comparable to that of the industry. Our consumer portfolio has lower required coverage because a large part of these are mortgages, which do have collateral and are secured and also the teachers' loans are part of a low settlement risk, and they are part of the payroll deduction programs that we have, right? So the consumer segment, actually, in this case, has a relatively low risk profile. We do not have a target for credit cost, a specific target. We have a target for loan growth. And usually, the credit cost moves in tandem with that. So credit cost varies across the different segments. If it's credit cards that grew more than expected, then -- and this being unsecured, we expect higher credit cost versus mortgage, which is collateralized. I think your second question was NPL coverage ratio third quarter and fourth quarter of 2022. Yes, I don't think this was disclosed, but it has been ranging between 60% and 70%, right? That's really the range that we have been moving in the last several quarters, [ at least ] to 70%.

Next question. NIMs declined about 40 bps quarter-on-quarter, driven by a faster increase in funding costs versus asset yields. What led to the big jump quarter-on-quarter, in the jump, in the bills payable and other liabilities interest expense?

So this is good question -- So we'll pass this on to Johnson, if you don't mind.

Yes. So it is a shift of -- there is an increase in the interest expense coming from bills payable, and this is deliberate. And this has to do with optimizing our funding mix. As you know, the deposits have a high intermediation costs. We have one of the highest reserve requirements. So therefore, we have been funding ourselves using alternative instruments like repos and other currencies than swapped up to pesos. So it's all about trying to optimize the cost of funding.

Next question, what led to that higher credit costs quarter-on-quarter? And what is the credit cost guidance for the year?

Carlo, we'll pass this on.

So the higher credit cost quarter-on-quarter is really coming from the strong consumer loan growth, particularly in the credit card segment because technically, because credit card is unsecured, then of course, as you grow the credit card base, ECL will also be higher. But the nice thing is the yields that is attached to the credit cards compensates for the higher credit costs. Now for the credit cost guidance, we don't really give forward-looking statements. But just to give you an example, pre-pandemic, I think our credit cost was around 80 bps. And of course, the credit cards being unsecured would have around 250 to 300 basis points is a credit cost. So it depends on how fast we can grow the unsecured segment. Our credit cost can go over 100 bps this year, which is still in line with our budget because if -- again, if the unsecured segment will continue to grow.

Thank you for that, Carlo. We have time for one last question. And our last question is, can you give some color on the rise in provision expense in 1Q 2023?

I think that's similar to the credit cost. It's really coming from the growth in the consumer segment.

Thank you for that, Carlo. Thank you, sir. That wraps up our Q&A. We still have some questions, rest assured that we'll answer them all by e-mail. For the benefit of those who missed the session, I would like to rewatch the event, you'd like to remind everyone that this briefing was recorded and will be uploaded on our website as soon as possible. [Operator Instructions] Before we end, on behalf of Dmi, Johnson, Carlo, and entire presentation development team, we would like to thank our analysts, investors and other friends in the financial community for joining us and for helping us tell our story. For those of you who will join us for the AboitizPower and AEV analyst briefings, see you at 4:00 p.m. and 5 p.m. later. And for the rest, see you all again for our first half briefing on August 1. Until then, goodbye for now.