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

Good afternoon. Welcome to Union Bank's earnings results briefing for the first 9 months of 2025. My name is Jacqui De Jesus, and I will be the moderator for today's call. [Operator Instructions] And lastly, 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 him, 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. So the FOMC cut rates in its October meeting as had been widely anticipated by the market in the [indiscernible]. However, Fed Chair Powell cautioned the market in pricing an upcut in the December meeting, calling it and “I quote: "not a foregone conclusion, far from it". Good news for the market is that the end of qualitative tightening was announced starting December with the Fed rolling over any maturities in its treasuries and MBS portfolio into treasury bills. The big reason for this less dovish commentary from the Fed is the unavailability of the full state of government data, which was impacted by the shutdown with Fed Chair Powell calling it driving in the fog and saying that you have to slow down as a result of this lack of clarity on where the economy currently stands. The U.S. government shutdown is now up to a record 36-day counting with the 14th vote for a stop GOP funding failing to pass in last Tuesday's vote and no clear signs of progress as no new Democrats voted for the bill. The furlough of government workers is expected to continue until such time that the funding bill is approved and government services are back to full capacity. Latest forecasts are for the shutdown to continue at least well into next week with 37% believing that it could last past November 16 according to a USA Today report. Next slide, please. So on to interest rate expectations, market [indiscernible] on a December cut, which was previously as much as 100% priced in. Currently, the odd stand at 65%. At the end of 2026, interest rate projections now stand at 3.07%, having previously been as low as 2.93%. We expect that the release of any government data leading us to the meeting in December will heavily influence the Fed's rate decision. Next slide, please. U.S. Treasury yields [indiscernible] by 18 to 21 basis points in the aftermath of the Fed decision comments, which brings us to levels that are quite attractive given that cuts are still projected and the [ front end ] of the curve is still much higher than the long-term [indiscernible] of around 3%. Next slide. So given that the 2026 dollar policy rates are expected to average around 3.4%, any asset acquisitions in the long end of the curve is expected to add interest income immediately. We expect that as a result of this Philippine dollar bonds should be very well supported in the secondary market ahead of anticipated issuances in the first quarter of 2026. Next slide, please. So in local news, BSP unexpectedly cut rates to 4.75% and signaled a larger [ dovish ] for future monetary policy, saying that they had previously thought that the so-called goldilocks rate was closer to 5%, but they're now of the view that's actually closer to 4%. Unfortunately, this dovish turn comes at the cost of lower anticipated GDP growth due to the ongoing [ current ] control standards, which has soaring business and investor sentiment. Both Monetary Board member [indiscernible] and Secretary of Finance [indiscernible] echoed the governor's comments on the potential for a cut as well as slower [indiscernible]. Policy projections [indiscernible] statistic, which is derived from the peso interest rate swap market, shows that the market is currently expecting 80% chance of cut in the December meeting as well as potential further action in the February meeting next year. Next slide, please. So a result of these dovish projections, the yield curve will steepen in the front end declining 26 to 30 basis points while the [indiscernible] up to the 10 years declining by 7 to 16 basis points. And due to the light BPR option schedule, investors are left to scramble for holdings in the secondary market, which could continue to rally into next year [indiscernible] anticipated. [indiscernible] dollar peso briefly touched the new all-time high of PHP 59.26, but has since moved to below the previous all-time high of PHP 59, currently trading at PHP 58.85. We expect that this was mostly due to the soaring investor sentiment, especially when viewed in conjunction with the equity market weakness. However, the trading expects that there's room for the peso [indiscernible] given seasonal flows in the last 2 months of the year. That's it for the market update. Now I turn you over to Dmi for the financials.

Thank you, Dom, and good afternoon, everyone. Thank you for joining us again. Start off with our usual slide giving some of the key metrics that we track closely. And what you can see here is that we continue to gain traction in growing our retail business and our recurring revenue. Our customer base has increased by 1.8 million year-on-year, bringing the total to over 18 million individual customers. This includes close to [ 183,000 ] new credit card clients this year and our growing active digital customers of 5.7 million from just 5 million versus same period last year. On a year-on-year basis, our net revenues have demonstrated consistent improvement. This is supported by our above industry net interest margins, which is also up by 51 basis points versus last year. Additionally, our ability to generate fees from our expanded client base has also contributed to this growth, resulting in a net revenue to assets ratio of 7%. This is fueled by increasing transactions from credit cards, InstaPay, bills payment and other transaction banking services. Union Bank of the Philippines posted a third quarter net income of PHP 3.2 billion, an improvement of 77% quarter-on-quarter. In fact, it's almost double the first half income. This brings net income to PHP 6.5 billion for the first 9 months of 2025 with an annualized ROE at about 4.3%. The parent bank continues to be the main driver of net income. Profitability was impacted by a few things: number one, tax-related write-offs; and two, provisions linked to the onboarding of new-to-credit customers since the middle and late of 2024. These provisions have normalized in the second half and they are starting to point downwards for improved asset quality. Looking ahead, we remain confident to maintain this trajectory in the fourth quarter, supported by solid fundamentals, non-recurrence of extraordinary items and continued cost stabilization. These factors position us well to regain earnings momentum and improve shareholder returns. Net interest income climbed to PHP 47.5 billion, supported by a 51 basis point improvement in net interest margin. We're now at 6.4%, among the highest in the industry. The margin expansion was mainly driven by growth in low-cost CASA deposits and lower policy rates, both of which have helped bring down our funding costs. Our earning assets grew by 3% year-on-year. However, if we further dissect our earning assets, you can see that our unsecured portfolio continues to be the main driver, which I will be discussing in the next slides. Our gross loans are relatively flat year-on-year as we deliberately manage the growth of our institutional lending business and focus on growing high-yield consumer business, in particular, credit card side of the business. Consumer loan growth remains strong. The parent bank's unsecured consumer loans rose by 16% to PHP 138.5 billion on the back of targeted digital marketing campaigns and strategic portfolio actions. Consumer loans continue to comprise a significant portion of the bank's loan book, accounting for 60% of total loans, nearly triple the industry average. The bank's low-cost deposits grew by 8.8% year-on-year, which is better than 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. The growth in CASA also reflects our shift toward alternative funding sources such as interbank borrowings, repos and currency swaps, which have helped optimize our overall funding mix. Our net interest income has declined -- sorry, our noninterest income has declined year-on-year, but this is attributable to the lower trading gains. If we net out our trading gains, fees and other income will be flat year-on-year. Looking at the right side of the chart, you'll see the decline in other fees is largely attributable to the swap losses incurred as part of our funding strategy. These losses, while nonrecurring in nature, reflect the cost of managing liquidity in a dynamic rate environment. Importantly, our recurring noninterest income continues to build momentum. Fees generated from parent bank customer transactions, wealth management services and bancassurance operations grew by 15% year-on-year. 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 the next few years. As a result, the bank's fee to income -- fee income to assets ratio now stands at 1.3%, almost double the industry average. Total expenses grew by 7%, and this is aligned with continued investments in customer acquisition, service delivery, client engagement and improving operational efficiency, key pillars in the expansion of both consumer and institutional banking franchises. Our cost to income currently stands at 59%. But if we exclude the impact of the subsidiaries, the parent cost-to-income ratio is now down to 54%. As mentioned in previous analyst briefings, we expect credit costs to ease in the second half of the year, mainly coming from the parent. Looking at it on a quarter-on-quarter basis, credit costs have dropped to PHP 4 billion in the third quarter, down by PHP 2 billion. This brings credit costs lower by 152 basis points -- points to 3%. The decrease is primarily attributable to the parent bank's consumer portfolio. Union Digital is showing operational improvements. We have already written off 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 a more disciplined and sustainable lending approach. Looking ahead, we expect credit costs to continue to improve in the fourth quarter and beyond, mainly coming again from the parent bank and to a lesser extent, Digital. We remain confident in our ability to manage the portfolio quality while supporting the growth across our consumer segments. For the group, NPLs declined to 7.1% as of September 2025, down a bit from 7.2% last year, while overall coverage improved from 58% to 70%. This reflects the continued improvement in asset quality across both the parent bank and subsidiaries. On the right side of the page, you'll see that the parent's unsecured consumer portfolio remains well covered at 148%, while Union Digital's asset quality has also strengthened with NPLs down to 18.5% and coverage now exceeding 100%. These improvements stem from our early actions taken at the start of the year, tightening risk controls, addressing legacy exposures and recalibrating our underwriting. We positioned ourselves ahead of the curve, and we're entering the next phase with a clear, more resilient portfolio. Our capital adequacy ratios remain well above the average of listed peers, and we expect this trend to be sustained through year-end. With stronger asset quality, higher coverage ratios and solid capital ratios, the bank is well positioned to support future business expansion. So as you can see, our third quarter results are starting to show clear improvement. Net income rose to PHP 3.2 billion, driven by higher revenues -- higher top line revenues and lower credit costs. This trend is expected to continue, supported by expanding customer base, better NIMs as funding costs decline. Our quarter-on-quarter gains were primarily driven by lower credit costs. And during the first 6 months of the year, credit costs averaged about PHP 2 billion per month. Recently, we've reduced this by approximately PHP 550 million per month compared to that 6-month average, consistent with the guidance shared earlier this year. Portfolio quality is also improving with parent unsecured loans and Union Digital well now over 100% covered. So overall, we remain on track with our outlook and confident in maintaining this steadily improving performance over the next few quarters. And that's it for the main presentation. We move on to the Q&A session.

Thank you so much, Dmi and Dominic. So for our Q&A session today, we will be joined by Dmi, Dominic and Carlo Enanosa, Union Bank's Investor Relations Head. [Operator Instructions] So the first question is loan growth remains flattish, which is lower than industry, do you expect some catch-up in the fourth quarter and better growth next year? What are your specific plans to beef up this growth? Could I ask Dmi to answer this question, please?

Sure. Thank you. Well, our loan growth is currently very flat, both on a parent and overall basis. But I think it's worth looking at, breaking it down a little bit and seeing where there are pockets of growth and which are the areas that we've deliberately chosen to slow down a little bit. Institutional loans declined by 2% as we've been managing our growth in this segment as we prioritize higher-margin products, especially on the consumer side. So there on the consumer side, total industry growth was 21%, mainly driven by unsecured lending. But for us, we grew by only 3%. The main reason for this is the decline in home mortgage loans, which contracted by about 20%. The mortgage market, particularly for vertical developments, has been soft with limited new demand. And given this, we decided to focus our efforts on the new low risk end of the mortgage segment. So that was a deliberate choice for us so far this year. If we net out home loans, our other unsecured -- or our unsecured businesses, credit cards and personal loans actually grew in the mid-teens. That growth is broadly in line with industry consumer loan growth, while we were able to improve quality along the way. So basically, we put the corporate or institutional is relatively flat or slight decline. Mortgages decline and -- but it was made up for in the credit cards and personal loans. But we also have to look at our subs. If you look at our subs, there's also a couple of stories there. Union Digital was a significant reduction. We peaked at over PHP 7 billion by third quarter of last year. We're down below PHP 3 billion already by the third quarter of 2025. On the other hand, our other subs, Bangko Kabayan, actually went up by about 10% -- more than 10%. And CSB and their teachers loans grew by almost 10% as well, right? So I guess we have some that went up, some that went down, but the net result is it was relatively flat across the group. We do expect to grow especially for next year. But I think for the balance of this year, we'll probably finish 2025 with similar growth as what we're seeing right now in the third quarter.

Thank you so much, Dmi. While I have you, there's a related question on NPLs. So I think you touched upon this earlier in your presentation as well, but how much provisions are you expecting for the rest of the year? And are we expecting to see significantly lower provisions next year?

Well, we've already -- we've started -- so let me take a step back. Early this year, we started already doing a bit of credit tightening. We saw already the impact of the large growth that we experienced last year. So that's -- but we were already paying the price for that in the first half with higher -- quite significantly higher provisioning. But we had been anticipating that, and we were already signaling that by the third quarter or in the fourth quarter, we will start to see that stabilizing. So we began to see that in the latter part of the third quarter. I think it went down our credit -- let's call it, our average provisioning has gone down by about, what is it, 25% just in the month of September. And that is what we expect it to be for the balance of the year. Actually, the trend is continuing downward. So overall, we do expect at least on a credit cost perspective, this should be improving in 2026 as well because the trend is already -- we're already seeing the impact of tighter underwriting. We're also being more selective in the markets that we look at. And even the mix of our loans is also -- our unsecured loans is also moving towards the more, I guess, the lower risk segment. So we do expect that the cost of credit, which has already started to decline, will continue to do so over the next few quarters.

The next question is on NIMs. Given the low interest environment, do you expect the NIMs to go down next year? Maybe we can ask Carlo to answer this question.

Yes. So our balance sheet is structured in a way that we benefit in a declining interest rate environment. And the reason is because a big portion of our loan book is in the consumer segment, which is relatively fixed and higher yielding. So of course, as rates go down, we are able to reprice our funding and that results to an expansion in net interest margin. Now we estimate that for every 25 basis point reduction in policy rates, the income or the uplift in our net interest income is about PHP 300 million.

Thank you so much, Carlo. Next question is also for you, maybe on costs. What is Union Bank's target CIR? What are the steps that you're taking to reach that?

Okay. So Dmi mentioned earlier that our cost-to-income ratio currently stands at 59%. But that is because our subs, particularly Digital, is still operating at a net loss. But if you net that out, the bank's cost-to-income ratio is at 54%. And this is despite the fact that we continue to invest in IT resiliency, customer acquisition, particularly in the credit cards and also digital marketing and portfolio actions on [indiscernible]. Now in credit cards, it's a bit different because most of the acquisition cost of credit costs are front loaded and it takes around 18 to 24 months for it to generate the profit for each customer that you acquire at the start. So as we scale the credit cards and the consumer business, we expect the revenue to come in while maintaining the same level of cost to run the business. So that's one. Second, we also expect the subs to rebound from its current performance starting next year. So we're going to see some significant improvement in the cost-to-income ratio of the subsidiaries as well. Although I think our target would be to be at the 50% cost-to-income ratio. And in the next 3 to 5 years, we expect it to even go below that.

Thank you so much, Carlo. I see a question in the Q&A box and it reads, aside from the higher provisions cover, what are some of the credit screening shifts or changes that Union Bank has done to protect, if not further improve asset quality in the Digital Bank?

Okay. So for Union Digital, recall that in the past, we expanded rapidly. So what we have done at least starting August of 2024 is that we focus on the lower risk [indiscernible]. That's one. And that's why there's a big contraction in the loan portfolio of Union Digital. In fact, today, the new portfolio or what we call as the new bank is already generating a positive net credit margin. And that's because we're focusing on additional data and focusing on the ecosystem customers that is coming from [indiscernible].

One way of looking at it is we're focusing on customers that we have much more information on. So we're able to make better judgment on the credit quality. And we're also doing now -- we're able to get more repeat customers as well. So the quality, again, with people that we work with, we know and you've seen the track record.

I do not see any more open questions in the Q&A box. And those are all the questions that were sent in. [Operator Instructions] So there's one that came in. When do we expect Union Digital to be profitable?

Well, the new portfolio is already profitable margin. Now the question is scale. Of course, we want to scale it as fast as we can, and I think we have a good chance of turning profits by next year.

The next question is on loans again. So why are AMC and corp loans weak? And in what industries are these showing?

Well, I think this is more for the deliberate strategy. At the beginning of the year, we made already a decision that we would focus our capacity in the growth of our cards business and basically unsecured consumer business. Our goal was to -- while interest rates started off high, our goal was to try to get the margins -- the business with the strong margins. And that's really what we focus on. So it wasn't that we weren't able to grow the business. It was because we deliberately try to focus on the consumer side. On the other hand, when it came to the wholesale business or the corporate business, we also were focusing on customers where we have a holistic view of their business, and we're also getting their transaction banking, cash management, et cetera, so that we can ensure improved profitability regardless of what the lending rates are. So we focus on some select clientele. I don't think it was driven by industry per se. I don't think we have like preferred industries or non-preferred industries. It was really more which clients that we have strong relationships with and not just lending, but also good source of CASA, good source of transaction banking and maybe most importantly, a good source of ecosystem that we could also be doing business with aside from the anchor customer as well.

I think you answered as well the next question here. The next question was which sectors for AMC are you more comfortable to take on for this year and the next year? Yes. As you mentioned, I guess, it's very specific, client specific.

Yes. But I guess, I mean, there are some -- I think nowadays, obviously, looking at infrastructure or construction that we have to be careful given what's happening. So -- but again, it's not an industry issue necessarily. It's also specific to our borrowers and who they're working for, right? So we are very careful. We study those industries in particular quite closely to make sure that the underlying business that they can support the cash flows that will be sustainable.

There are no open questions anymore. Again, final call for anybody in -- okay. So the question reads, how much more upside is there for consumer lending? Are Philippine households already highly leveraged? What's your assessment?

Well, if you look into just the credit cards data, we have close to 50 million working population but the credit cards [indiscernible] and we all know that a person will have typically 2 to 3 credit cards. So that's still a little bit underpenetrated. But of course, we have to watch out for the digital lenders as well because it affects what is happening at unsecured lending even for the lower risk or what we call [indiscernible] credit cards. But I think there's still a lot of upside on the credit card space. And you see that the industry is growing [indiscernible].

I think when we talk to Moody's, if I recall the discussion, I don't have the data in front of me. We are seeing more debt on a per household basis. So it's growing. But in comparison to our regional peers, we're still not on the high end of that. So yes, I guess it's a mixed bag, more debt per family, but not yet necessarily on the high end, but definitely worth looking out for. We also see relatively low savings per household, which I think is a counter to that, right? So we may not have as high debt, but if we have those savings that means that there's also a chance of some degradation there. So we're being careful. I think as an industry, we are seeing some uptick on the at least the unsecured side. So we do have to be more careful on who we are able to -- who are the new ones we onboard into our credit card business.

Thank you, Dmi and Carlo. The next question reads as what would the PHP 300 million NII uplift translate to in terms of NIMs basis points for every 25 basis point cut?

I think that would be around 3 bps. 3, 4 bps.

So 3 to 4 bps. Okay. So the next question is, who do you consider your toughest competitors? Is it the top 3 banks, GCash for your digital bank or more your peer banks, the same sized ones?

That's an interesting question. I think this is -- the answer I would give is it depends on what business we're looking at. I think for the Digital Bank, we are focused more on lending. So our competitors are those that are now starting to grow their lending business, including non-digital banks, right? So you're seeing this from some nonbank financial institutions. You're seeing this also from rural banks, some of the rural banks that are taking a more digital approach lending. So basically, these are people willing to lend to the, I guess, higher risk segments. So not necessarily other digital banks, though we are starting to see people like GCash, Maya, et cetera, starting to a bit more. When it comes to teachers loans, we also have a new set of competitors there, but they are all related, I guess, to the larger banks. So you see BDO, Network Bank, East West, China Bank Savings and a couple of others. I think on the credit cards, it's the big boys, the big ones will be BDO, BBI. So it really depends and -- which part of our business we're looking at. But all of them are tough, right? We have very good -- it's a pretty big set of competitors we're working with. Everybody has the balance sheet to grow their business. So we just need to make sure we have our pencil sharpened. We try to run as low-cost business as possible so we can save our bullets in providing the best quality experience for our customers. So that's our focus. How do we make sure that we are able to differentiate ourselves, give them the best quality in terms of whether it's consumer, transaction banking, et cetera. And that's how we make a difference.

Thank you very much for that one. Yes, I don't see any more open questions on the Q&A box. I think with that, we can wrap up our Q&A portion. So thank you very much, Dmi, Dominic and Carlo. 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. See you all again in March for the full year briefing. Good afternoon.

Thank you.

Thank you.