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

Good afternoon. Welcome to Union Bank's earnings results briefing for the first half of 2025. My name is Jacqui De Jesus, and I will be your moderator for today's call. [Operator Instructions] Number three, this briefing will be recorded. By joining this session, you consent your name, voice, image and chat comments being recorded for use and dissemination. For today's call, Dominic Banal, the Trading Head for Global Markets, will kick us off with Union Bank's macroeconomic and industry outlook. After Union Bank's CFO, Dmi Lozano, will present the bank's financial performance. With that, let me turn you over to Dominic.

Thank you, Jacqui, and good afternoon, everyone. Let's go to the first slide, please. So in the latest FOMC meeting, rates were left unchanged as predicted by the market. It was a rather hawkish press conference, which included a quote from Fed Chair Powell that you could say Fed was looking through inflation by not hiking. As a result, market priced in just 1.5 cuts until the end of the year immediately after that meeting. However, the most recent non-farm payroll report shocked market watchers after the headline was worse than expected and a sizable revision to prior readings meant that average job creation in the past 3 months was at just 35,000 jobs. Market then immediately priced in a 90% chance of a cut in the Fed meeting on September 17. Let's go to the next slide, please. So most major economies were able to strike tariff deals with the U.S., one more slide forward please, including Japan and the EU. Notable holdovers were large emerging markets, China and India as well as U.S. neighbors, Mexico and Canada. One more slide forward. Another slide forward. So where does that leave us? So in terms of policy rate projections, Fed futures market is implying there could be cuts in the next 2 Fed meetings and 2.3 total cuts until the rest of the year. Next slide, please. Treasuries market has rallied considerably since the non-farm payroll report, down 15 to 25 basis points on that day alone. That brings us to the current level of around 4.28% for the 10-year bellwether, while the front end 2 and 5 years continue to drop on rate cut expectations. Next slide, please. So the shape of the ROP dollar bond curve is still attractive, one more slide forward, especially due to the cuts on the horizon. While we see credit as tight as these levels across the emerging markets complex, investments in the belly and the long end of the curve will yield 120 to 150 basis points positive carry if the cuts indeed come into fruition for the rest of the year. So in local news, the most recent comments from the BSP are for two more rate cuts this year. Government -- Governor Remolona also commented that they won't have to follow Fed rate moves in September. Two other positive developments for markets are the lower CPI, which came in at just 0.9% in July, well below the BSP's 2% to 4% target range. Also, the Bureau of the Treasury issued 5-year retail treasury bonds at a coupon of 6% with an expected offer size of PHP 500 billion. This was significantly lower than what the market was initially anticipating. And as such, we could see some spillover demand in the secondary market. The U.S. and the Philippines also agreed to a tariff deal. One slide down, sorry, settling at 19%. And as largely communicated by officials from the BSP, DOF and Economic Planning Department, the impact should be manageable for the Philippines with only 15% of exports going to the U.S. Next slide, please. One more slide forward. Philippine government securities yield curve is upward sloping and attractive given the strong possibility of further easing in 2025 and into 2026. At the current pricing of 5- to 10-year bonds at 6% over 75 basis point pickup against the current policy rate at 5.25%. The policy rate could drop to as low as 4.75% from year-end if BSP's guidance of 2 rate cuts is delivered. And last slide, please. Let's go to the last. Peso is going through volatility in the past few months with multiple spikes. It reached a high of PHP 58.63 on potentially diverging policy paths between the U.S. Fed and the BSP, but soon it retraced the bulk of the move. The peso is trading in the middle of the recent range of PHP 55 to PHP 59 per dollar and is currently at PHP 57.20. Now I turn you over to Dmi, our CFO, for the financial highlights.

Thank you, Dom. As usual, we'd like to start with a snapshot of our key -- some of our key performance metrics. What you can see here is our top line performance remains strong in the first half, supported by continued growth of our retail customer base, which now stands at over 18 million customers. This is an increase of 9% year-on-year. This growth reflects improved market penetration and more effective customer acquisition driven by our transaction banking ecosystems, digital onboarding initiatives and some key strategic partnerships. The bank also capitalized on a more favorable interest rate environment, resulting in a net interest margin of 6.4%, up 61 basis points from the same period last year. Notably, our net interest margins adjusted for the cost of alternative funding remained strong at over 6%. This performance continues to exceed industry benchmarks and highlights the underlying strength and efficiency of our core lending operations. These improvements in earnings were primarily driven by the repricing of long-term corporate loans, the continued expansion of our consumer lending portfolio and the stable CASA base of the Fed Bank. The uplift alongside an improved net revenue to assets ratio of 6.9% from 6.3% underscores the efficiency of our asset deployment and the resilience of our core lending operations. These gains were largely fueled by the expansion of our consumer lending portfolio, which continues to be a key growth engine. As a result, recurring net revenues rose 9.7% year-on-year to nearly PHP 40 billion, with core income streams contributing significantly while trading gains remained flat, underscoring the resilience and consistency of our underlying business performance. The bank reported net income of PHP 3.3 billion for the first half of 2025, reflecting a 36% year-on-year decline with annualized ROE of 3.3%. While this headline figure may appear soft, we view the dip as transitory and largely attributable to nonrecurring items in the first half. Specifically, profitability was impacted by tax-related write-offs, temporarily elevated provisions linked to the onboarding of new-to-credit customers in late 2024 and other one-off expenses. These provisions were prudently set to manage early-stage credit risks and are not expected to persist into the second half of the year. Importantly, the increase in credit cost is expected to be compensated by strong revenue growth from the onboarded clients, which tend to begin to materialize within 18 to 24 months after the acquisition. On a normalized basis, excluding these one-off effects, net income would have posted double-digit growth year-on-year and ROE would have approached 6%, underscoring the strength of our core business. Looking ahead, we remain confident in delivering strong results -- stronger results in the second half, supported by solid fundamentals, the non-recurrence of extraordinary items and continued cost stabilization. These factors position us well to retain earnings momentum and improve shareholder returns. On a positive note, net interest income continues to trend towards record levels, supported by the bank's highest ever net interest margin. This milestone reflects our deliberate pivot towards higher-yielding consumer segments, particularly credit cards, personal loans and salary loans, which have proven to be resilient and profitable growth drivers. Net interest margin improved by 61 basis points year-on-year, primarily due to a 67 basis point reduction in funding costs. This was enabled by easing monetary conditions, sustained growth in low-cost CASA deposits and targeted initiatives to optimize our funding mix and reduce reliance on expensive funding sources. Additionally, our average daily balance of earning assets grew by 3% year-on-year, reinforcing the scalability of our lending operations and the effectiveness of our asset deployment strategy. These trends affirm the bank's ability to generate sustainable income growth while maintaining prudent cost and risk management. At the parent, our deliberate pivot towards higher-yielding consumer lending, combined with the disciplined repricing of maturing long-term institutional and commercial loans has allowed us to sustain and gradually expand our margins, even amid a declining interest rate environment. This reflects our strategic focus on optimizing portfolio mix and enhancing yield resilience. Gross loans remained broadly flat year-on-year, reflecting our disciplined approach to portfolio management. Consumer loan growth was led by an 18% year-on-year increase in credit cards, 29% surge in personal loans and a 12% rise from Citi Savings Bank, affirming the effectiveness of our targeted retail strategy. Institutional and commercial loans were intentionally held flat as we continue to prioritize capital deployment toward higher-yielding consumer segments. But despite the muted growth in these books, we successfully improved yields through selective origination and better repricing of maturing loans. Consequently, our loan portfolio remains one of the most consumer-centric in the industry, strategically positioning the bank to capture higher margins and drive sustainable long-term profitability through diversified and resilient income streams. Our growth in credit cards and personal loans has also been fueled by strategic partnerships with leading brands across technology, retail and lifestyle. These collaborations allow us to offer exclusive benefits, whether it's flexible payment terms for latest technology and devices, lifestyle rewards like free S&R Pizza or co-branded campaigns with global names such as Samsung. By aligning with trusted brands, we not only attract new customers, but we also deepen engagement with our existing customer base, creating a more rewarding banking experience. As a result, new card acquisitions grew to nearly 32,000 per month. And our expanded portfolio has grown PHP 134 billion, driven by innovative lending programs and a stronger risk framework. The bank's low-cost deposits grew by 4% -- sorry, next slide, please. The bank's low-cost deposits grew by 4% year-on-year, in line with industry trends. This growth in CASA was driven by the continued success of our cash management solutions, which have enabled higher transaction volumes and deepened client engagement. In addition, the group's strategic decision to fund more assets through bills payable has reduced our reliance on time deposits, further contributing to the increase in CASA. This shift reflects our ongoing efforts to optimize funding costs and enhance balance sheet flexibility while still maintaining a stable and diversified funding base. Noninterest income on the next slide, declined by 5% year-on-year, primarily due to additional costs from alternative funding strategy. These losses, while nonrecurring in nature, reflect the cost of managing liquidity in a dynamic rate environment and do not detract from the strength of our underlying business. More importantly, our recurring noninterest income continues to build momentum. Fees generated from parent bank customer transactions and our trust, wealth management and bancassurance businesses grew by 14% and 15% year-on-year, respectively. This growth underscores the resilience of our fee-based businesses and the success of our cross-sell initiatives, which we still expect more growth from in the years to come. We expect this upward trend to continue, supported by the sustained expansion of our retail customer base and the deepening engagement across our financial ecosystem. These drivers will be instrumental in diversifying our revenue streams and enhancing earnings stability over time. Operating expenses rose by 8% year-on-year. This increase is largely volume driven, reflecting higher customer acquisition costs, expenses at scale with our expanding retail footprint and business activity. It is important to note that our cost base reflects deliberate investments in 3 key areas: First, infrastructure spending to support the rapid expansion of our customer base; second, initiatives aimed at enhancing operational and financial resiliency; and third, continuing investments in innovation to future-proof Union Bank and ensure long-term competitiveness. Despite these strategic investments, our cost-to-income ratio has remained steady at 59%. Looking ahead, we remain confident in our ability to further optimize costs and unlock operating leverage. With sustained revenue growth and disciplined expense management, we are well positioned to reach our medium-term target of a 50% cost-to-income ratio. The bank closed the first half of 2025 with a credit cost of 4.3%, elevated but in line with our prior guidance. This was largely driven by the parent bank's consumer portfolio following a strategic acceleration in customer acquisition in the latter part of 2024. While this temporary pressure -- with this temporarily pressured credit costs, our full year net credit margin remains strong and is expected to exceed industry averages, underscoring the resilience of our portfolio and the disciplined risk management, which we have been employing. Union Digital is showing operational improvements following strategic shift towards lower risk, higher quality segments, characterized by smaller ticket sizes and shorter tenors. This has led to better loss rates and more stable portfolio performance. We have already written off most of the legacy exposures and NPLs are now fully covered. As of today, the majority of outstanding loans are performing and generating positive net credit margins, reflecting the more disciplined risk approach that has been adopted by Union Digital. Looking ahead, we expect credit costs to ease in the second half of the year, mainly coming from the parent bank with normalized projections at around 3.6%. This reflects the maturing of newly acquired accounts, improved risk segmentation and the credit model enhancements that we have been working on. In addition, we anticipate net credit margin to steadily improve and remain above the industry average despite accelerated provisions. We remain confident in our ability to manage the portfolio quality while supporting growth across our various consumer segments. This is an interesting slide. The bank's NPL ratio declined to 7.3% in the first half of 2025 compared to the same period last year despite a slight quarter-on-quarter increase. This sequential uptick reflects our continued focus on expanding the higher-yielding consumer portfolio. But importantly, coverage for the unsecured consumer portfolio, which is our primary growth area has remained above 100%, ensuring adequate protection against potential losses. Moreover, noticeable improvements in the NPL and NPL coverage of the subsidiaries have been quite clear and noticeable. The bank's overall NPL coverage ratio improved significantly from 66% in the second quarter of 2024 to 82%, driven largely by progress in Union Digital. Through consistent provisioning and write-offs, Union Digital's NPL coverage now exceeds 100%, reflecting a more disciplined approach to manage legacy exposures and strengthening asset quality. Our capital adequacy ratios remain well above the average of listed peers, and we expect this strength to be sustained through year-end. This solid capital position is critical as we continue to scale our loan portfolio, particularly within higher-yielding segments. It provides us the necessary buffer to absorb credit risks while maintaining the regulatory compliance and as well as funding future growth with confidence and flexibility. So as we navigate the evolving operating environment, our priorities remain clear and focused. Key areas of strategic execution includes: one, improving profitability. We are actively deploying capital toward more efficient and higher-yielding segments, particularly in consumer lending to enhance margin and return on equity. And we've seen this in the strong performance of our revenue and our interest income. Strengthening credit quality and risk management, we continue to refine our portfolio mix, enhance credit models and maintain robust provisioning to ensure asset quality and resilience. And you saw that in the ratios in the previous slides. And third, reinforcing capital strength. Our capital ratios remain well above peer averages, providing a solid foundation to support the loan growth while maintaining our regulatory compliance and absorbing potential risks. So thank you. Thank you for taking the time to listen to us, and we can proceed now to the Q&A or I pass it on to Jacqui first.

Yes. Thank you so much, Dmi and Dominic. For Q&A today, we will be joined by Dmi, Dominic and also Carlo Enanosa, Union Bank's Investor Relations Head. So we will start off the Q&A portion with questions we received in advance. [Operator Instructions] So the first question is on provisions. Provisions remain elevated this quarter despite earlier guidance of declining credit costs. What are driving these provisions? And how much more provisions are we expecting to book in the second half of this year?

So provisions remain elevated this quarter, but our guidance really is that the improvement will start in the second half. So the elevated levels now largely are still due to our strategic initiative to enhance -- to onboard new credit clients late last year. While this segment offers attractive yield potential, it also carries a higher initial risk profile, which we are prudently managing through conservative provisioning. This typical gestation period of 18 to 24 months means that credit performance is still stabilizing, and we are proactively building buffers to mitigate early-stage volatility. If you are able to go deeply into our numbers on the consumer side, this peaked in the first quarter around Feb and has steadily been declining since then, but we'll see that in the second half. While we cannot provide forward-looking statements on NPL cover, what we can say is that our unsecured consumer loans are now fully covered. Our current NPL coverage ratio is above 100%, quite a bit, there's a buffer above 100%, reflecting a stronger credit position across our various consumer segments. Despite this temporary increase in provisions, we remain optimistic about the long-term impact of this strategy. As these new clients mature and begin contributing more meaningfully to our portfolio, we expect to reap the long-term benefits of stronger revenue growth. The second half, we anticipate provisions to start tapering off. And as I said, we've already started to see that as the portfolio seasons and risk levels normalize. At the same time, we should begin to see the positive impact of new revenues or growing revenues as our customer base grows and starts delivering the returns that we expect.

Thank you for that, Dmi. The next question is on loan growth. What's the reason behind your slower than industry loan growth for this quarter? Are you -- what are your expectations for the second half of the year?

Our overall loan growth may appear slower than industry, but it's important to highlight that our focus segments, particularly cards and personal loans and teachers' loans are all growing at a much faster pace. These segments are not only expanding, but are also delivering higher yields, which support our strategy of deploying capital where it generates the strongest returns. We're seeing solid traction in these areas as we continue to scale them. And we expect stronger momentum in the second half of this year. This targeted approach allows us to grow profitably and sustainably even in a competitive lending environment. It also allows us to be selective on the corporate side. We're able to reprice the maturing loans, which probably were issued when interest rates were much lower. And so we get that benefit as well. And it also allows us to reduce loans that are no longer profitable for us.

That's very clear. Shifting a little bit here. There's a question on Union Digital. Can you provide us with updates on Union Digital? What are your plans for this business moving forward?

Union Digital continues to show encouraging progress. We've made significant strides in improving the quality of the portfolio. In fact, the new portfolio for those that are booked starting August of last year are now generating a positive net credit margin. Now we've also been actively writing off the legacy loans while strengthening the underwriting for the new origin returns. So as presented earlier by Dmi, you'll see that the NPL coverage ratio is now above 100%. And what's important is the majority of our outstanding loans are now newly booked are generating the positive net credit margin. And this shifts the position of UD, Union Digital for a more sustainable growth moving forward. Now looking ahead, our focus remains on scaling responsibly. We'll continue to leverage on the data and the credit models that we have made over the last couple of years. And the focus of Union Digital will continue to be in the underserved segment. We're optimistic about the trajectory of the business and confident in its ability to contribute meaningfully in the long term.

Thank you so much. The last question we have that was sent in is something that Dmi already touched on earlier. But the question is, what is your NPL target cover?

Well, we -- the NPL target, we don't really provide a target NPL cover because it will depend on the mix. But what's more important is that, as you can see, the unsecured segment, for example, credit cards, personal loans and even that of Union Digital, which caters to quick loans or mass market personal loans are all 100% fully covered today. And that's because of the enhanced credit models that we've implemented and as we continue to fortify our balance sheet, we expect that coverage ratio will approach 100% moving forward as we shift the mix towards the unsecured segment.

Yes. And just to highlight, we mentioned it earlier, we went from 66% a year ago to now already 82%, right? So we're strengthening across the board, especially with the subsidiaries. And also, I think the other important highlight is our biggest, I guess, lending portfolio is the unsecured consumer, which is the cards and personal loans. And that one is already as of second quarter, 140% covered. So very robust coverage ratios. And if I recall correctly, above industry averages.

Thank you very much. So that was the last question that was sent in through us. [Operator Instructions] Maybe last call. Okay. So I do not see any questions on the Q&A box nor do I see any hands that are raised. So with that, I think we can wrap today's earnings call. So thank you very much, Dmi, Carlo and Dominic. For the benefit of those who missed the session or would like to rewatch the event, a recording of this briefing will be uploaded on our website. So on behalf of Dmi, Dominic, Carlo and the entire presentation development team, we would like to thank everybody for joining us today. See you all again on our third quarter briefing on November 6, and good afternoon.