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

Good afternoon. Welcome to Union Bank's Earnings Results Briefing for the Full Year of 2025. My name is [ Jacqui de Jesus, ] and I will be your moderator for today's call. [Operator Instructions] This briefing will be recorded. By joining this session you consent your name, voice, image and chat comments being recorded for user examination. 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 that, Union Bank's CFO, Dmi Lozano, will present the bank's financial performance. With that, let me turn it over to Dominic.

Thank you, [ Jacqui, ] and good afternoon, everyone. So a lot has changed in the last few weeks, the Israeli-Iran war bringing significant volatility to the market. Oil trading today at around $115 per barrel, a significant jump over last Friday's levels on news that the UAE and Kuwait have announced cuts to production levels due to storage and bottleneck concerns. A Bloomberg article today citing a potential 4 million barrels per day reduction in production in the next week. That's around 5% of global production. Additionally, Trump recently said that the war could take 4 weeks. So there won't be any immediate relief outside of a surprise ceasefire. As a result, rate cut projections have been pared down in the U.S. from February as much as 2.3 cuts were priced in, while today markets only pricing in 1.5 rate cuts in the U.S. The more important implication here is that the monetary policy is not as clear going forward. U.S. yields have moved much higher in the last week as well. Initially, there was some safe haven buying. But in recent days, the worst impact on inflation has been the focal point of markets. Yields are higher by around 30 basis points across the curve in the last week alone. A steeper curve does mean that the ROP dollar bonds and other emerging market credits are quite attractive, especially given the overnight rate of the U.S., which is currently 3.75%. Emerging market credits wider by around 25 basis points against the U.S. in the past two weeks. Locally, BSP Governor Remolona offered insights on the recent moves saying last week that the 10% increase in global oil prices at that time was still manageable, but that the 50% increase is something that was not part of their projections. And hence to quote, we have to deal with it more and more strongly, saying also that this is a breach of their tolerance range. He also said that the expected inflation move is more of a supply chain problem, but that they would have to do something on the demand side to compensate for that. Lastly, cautioning that they might have to hype if oil rises sharply and persistently. The Philippine Government meanwhile has taken some steps to alleviate the price shock. There are moves to suspend the excise tax and oil, while also lining up supply from the U.S. and Australia. GSEs have moved sharply up around 30 basis points month-on-month as of last Friday's levels. Market activity is quite sparse in the past few days, but we could see about derisking here given that the BSP has flagged the possibility of an abrupt turn in the policy cycle. Compounding the oil shock is the base effect for Philippine inflation in the next 4 months, where negative 0.6% of inflation from February to May last year will roll off just as we feel the effects of this new oil price shock. We could see headline numbers quite dramatically with the Economic Planning Agency recently saying that April inflation may be at least 4.5% and as high as 7.5% in a worst-case scenario. Our dollar-peso reached a new all-time high of PHP 59.71 this morning, another 1% depreciation for the peso in a global strong dollar environment. We do expect some resistance at the PHP 60 level here, but with volatility in global markets still picking up, a temporary breach of that level is not out of the question. Our dollar is showing strength across the board against both Asian and major currencies in the past month due to safe haven demand. That's it for me. I now turn you over to Dmi for the financials.

Good afternoon. Just starting with some of our key KPIs that we usually show. What you can see here is our business drivers remain quite solid. We continue to gain traction in growing our retail business and recurring revenues. Our customer base has increased by 1.6 million year-on-year, bringing our total to nearly 19 million. This includes close to 378,000 new credit card clients this year and our growing active digital customers of 5.9 million from just 5.1 million versus same period the year before. On a year-on-year basis, our net revenues continue to trend at a record high. This is supported by above industry net interest margins, which are up by 46 basis points versus last year. Additionally, our ability to generate fees from our expanding client base has also contributed to this growth, resulting in a net revenue to assets ratio of 7.1%, significantly above industry average. This is fueled by increasing transactions from credit cards, InstaPay, bills payments, et cetera. In terms of profitability, UBP closed 2025 with full year net income of PHP 10 billion. This is down year-on-year, but mostly due to one-off items booked at the subsidiary level. These items were related to initiatives to strengthen our financial and operational resiliency. And excluding these, our net income would have grown by double digit year-on-year. On the bright side, we continue to show sequential improvement as seen in the upward trajectory of our quarterly results. Moreover, second half results ended at PHP 6.8 billion, which is more than double what we saw in the first half. The parent bank continues to be the driver of net income on the back of continuous growth in the consumer portfolio. Looking ahead, we are confident that in 2026 that we would be able to continue this stronger trajectory. As mentioned, most of our one-off expenses were concentrated in the subsidiaries. Excluding these items, the group would have delivered double-digit earnings growth, and this underlying performance was largely driven by the bank. Looking at the drivers, the group was largely supported by its consumer portfolio, which continues to generate higher net credit margins. In 2025, the consumer portfolio accounted for roughly 2/3 of the bank's net credit margin. The key contributor to this consumer strength is the Citi portfolio, which continues to deliver solid results, accounting for a significant share of group net revenues, maintaining strong credit card performance and continuing growth in AUM. Our consumer franchise also continues to receive industry recognition for innovation and client experience. In 2025, the bank was recognized as the best domestic retail bank. We also received Credit Card of the Year for our partnership with S&R as well as best global bank offering for high net worth clients. Net interest income has climbed to PHP 64 billion, growing by 11% year-on-year. This was supported by a 46 basis point improvement in net interest margin to 6.4%, which remains among the highest in the industry. Margin expansion was mainly driven by the growth in low-cost CASA deposits, supported by higher transaction banking volumes and lower policy rates, both of which helped reduce funding costs. So given recent events, this is something we really have to look out for. For every 25 basis point improvement in policy rates, our income would increase by approximately PHP 288 million, but the reverse would also be true. Earning assets grew by 3% year-on-year. However, when we break this down further, the unsecured portfolio remains the main driver. I will discuss this in the succeeding slide. Our gross loans grew by 4% year-on-year. Looking under the hood, growth was mainly driven by credit cards and City Savings Bank, which grew by 21% and 8%, respectively. This brought total consumer loans to PHP 334 billion, accounting for 61% of the bank's total loan portfolio, which is quite well diversified across credit cards, mortgage loans, personal and salary loans and even vehicle loans. Other consumer loan products, example, personal loans and mortgages were steady or even declined in 2025. This is due to our deliberate efforts to enhance back-end infrastructure before aggressively growing the portfolio. We've made progress here. And in 2026, we expect these products to contribute to loan growth. Institutional loan growth was modest during the year. However, the bank has strengthened its institutional banking team by hiring seasoned bankers with strong credit relationships as this positions us to accelerate growth in this segment moving forward. A bright side in the bank's performance is the growth in its low-cost deposits with CASA growing by 12% year-on-year, outperforming industry growth of around 6%. This growth was supported by higher transaction banking volumes. During the year, we launched several initiatives to strengthen deposit generation, including government disbursement programs, retirement investing solutions and KYC as a service for partner lending. Together with these initiatives, we've been able to expand our CASA base, while also creating new fee income streams. Our digitally acquired accounts increased to 3 million from 2.7 million in the previous year, further expanding the bank's low-cost deposit base. The bank also continues to optimize its funding mix by using alternative funding sources such as interbank borrowings, repos and currency swaps. Moving on, our noninterest income declined year-on-year. This was mainly due to lower trading gains and gains from foreclosure, sorry, and FX-related income. However, the growth in our recurring fee income base is quite promising. Fees from parent bank customer transactions grew 11% year-on-year, driven by fund transfer, ATM fees, commissions, brokerage fees and other miscellaneous items. Meanwhile, wealth management and bancassurance hit the PHP 1 billion mark in 2025, growing by 51% year-on-year. This strong performance was underpinned by increasing AUM, steady volumes and our partnerships with ATRAM and Insular Life. We expect this trend to continue as we expand our retail customer base and deeper customer -- and deepen customer engagement across our financial ecosystem. The bank's fee to income -- fee income to asset ratio stood at 1.3%, more than double the industry average. So one key area we also have been looking at very closely, and we continue to do so is OpEx. Operating expenses totaled PHP 47.9 billion last year, growing 8% year-on-year. But excluding onetime items, total cost growth would have been around 5%. Our cost to income currently stands at 58%. And if we include the onetime impact, our cost-to-income ratio would be 56%, which is in line with the industry, but still far from where we want to be, which is closer to 50% in the short to medium term. It's important to note that both of our OpEx items are focused on continued investments in customer acquisition, improving service delivery and client engagement as well as improving operational efficiency, all key pillars in the expansion of both our consumer and institutional banking franchises. As mentioned in our previous analyst briefing, we expected credit cost to ease in the second half of the year. We are now seeing this trend materialize. Credit costs declined by 88 basis points from 4.3% in the first half to 3.5% by year-end, excluding the one-off noncredit-related items. The improvement was driven mainly by better portfolio performance in the bank's unsecured consumer loans, particularly credit cards and personal loans. These portfolios continue to season well following the tightening of credit policies earlier in the year and late in 2024. Union Digital also showed operational improvement as credit costs declined to 1% last year to -- from 1% last year to 0.2% with the legacy portfolio almost fully running off the balance sheet. Remaining NPLs are now fully covered. And as a result, we expect Union Digital to generate positive net credit margins in 2026. Looking ahead, we expect credit cost to continue improving in 2026. And we remain confident in our ability to manage the portfolio while still maintaining growth in our consumer segments. Asset quality indicators improved quite nicely over the course of the year. Gross NPL performing ratio declined by 37 basis points to 6.8%. The net NPL ratio, though showed a much more dramatic improvement, declining by 100 basis points year-on-year. NPL coverage is also trending positively up to 71% from 58% with unsecured loans more than fully covered. On the bottom right, you see the parent's unsecured consumer portfolio remains well covered at 138%, while Union Digital's asset quality has also strengthened with NPLs down to 12.6% and coverage now exceeding 100%. These improvements reflect the credit discipline we implemented earlier this past year, and we tighten -- as we tighten risk controls and address legacy exposures. As a result, we are now operating with a much cleaner and more resilient portfolio, which helps lead us to the next slide, which is on our capital ratios. Our capital adequacy ratios remain well above the regulatory minimum, giving us the dry powder we need to capitalize on any opportunities that may emerge or where things are now just to protect us from the possible volatility. With stronger asset quality, higher coverage and solid capital ratios, the bank is well positioned to support future business expansion and absorb any challenges in the near term. A couple of items that we want to bring up specifically on our dividends. We'd like to inform the market of our dividend declaration and a key change to our dividend policy. The Board approved a regular cash dividend of PHP 1 per share payable on March 23, 2026. This is equal to what we paid in the year before. Our Board also approved the bank's dividend policy effective in 2027. The bank now intends to declare PHP 1 per share annually paid in two equal tranches of PHP 0.50 in February and another PHP 0.50 in July. Aside from this, the Board may also declare special dividends when conditions permit. These changes will enable us to better balance shareholders' return expectations as well as the bank's capital position. So as we come to a close, just going through the key takeaways that I'd like you to come away with. And as you can see, our second half results show clear improvement. Net income rose 108% compared to the first half, driven by stronger revenues and lower credit costs. Our revenue base continues to track its record levels. This is supported by consumer growth, improving NIMs and the strength of our consumer franchise. At the same time, asset quality continues to improve. NPL ratios declined and coverage levels increased, positioning us well for growth. With most one-off items now behind us, the bank's core business is positioned to drive earnings expansion. Overall, we are confident in exceeding our 2025 performance in this 2026. Thank you. Back to you, [ Jacqui. ]

Thank you so much, Dominic and Dmi. For our Q&A session today, we will be joined by Dmi, Dominic and also Carlo Enanosa, Union Bank's Investor Relations Head. [Operator Instructions] Okay. So our first question is for Dominic. So it reads, how do you think the current war in Iran will impact interest rates, particularly since this could be inflationary. How are you currently positioned both in your investment and loan portfolios?

There are moving parts in the Iran-Israel conflict right now. So it's really tough to pin down some sort of base case scenario. But for sure, that there's an increased risk that the global monetary policy environment has shifted the other way. After around 2 or 3 years of cutting, we are now facing potentially if there's a persistent increase in energy prices, potentially the start of hiking cycle. And that's something that we had anticipated at the start of the year, not the war, of course, but the end of the rate cutting cycle. So our gaps have moved to reflect that market expectation. Sir Dmi earlier mentioned a model saying that for every 25 bps, our net interest income will move by PHP 288 million. But we expect that if there's an actual [ repricing ] strategy available to us that -- to at least partially offset that impact.

The next question is for Dmi. So it reads net income is down year-on-year due to credit costs. What drove the significant increase in provisions this year? And what is the expected trend for 2026?

Well first, the provisions really relate to the onboarding of new to credit customers, which started in 2024. As these portfolios began to season, we recognized higher initial provisions, which really started to come out in 2025, especially early part of the year. However, performance has improved over the course of the year as we expected. Credit cost in the parent consumer portfolio declined from 3.2% in the first quarter to around 2.4% by year-end, reflecting better portfolio performance in the unsecured consumer loans as we were able to weed out the underperformers. These portfolios continue to season well following this tightening of our credit policies, and we expect to continue to see this as 2026 moves along. Secondly, we recognized several one-off provisioning items in certain subsidiaries as part of the balance sheet cleanup that we have been -- have embarked on that were very important for us last year. Also, some of these were related to all the findings that we wanted to ensure had already been cleared before the end of 2025. And these include adjustments identified during the year as part of our efforts to strengthen the balance sheet and align provisioning levels with updated assessments and credit models.

The next few questions are from our Q&A box. I think the first one you just touched upon. Could you provide the breakdown of the one-off costs for this year for 2025?

So the one-off costs are composed of a couple of things. The first is, there were IT bills that were classified as OpEx coming from the audit, so we had to recognize that. Originally, they were part of CapEx, but we had to recognize as an expense. Second is like what Dmi mentioned, there were catch-up provisions, particularly on the subsidiaries. That's the second composition of the one-off expense. And the third is coming from 2024 post audit adjustments, which I think we also declared during the first quarter analyst briefing. What does that mean? That means that they were supposedly for 2024 performance, but because the audit happened coming from the subsidiaries, they were reflected in the group's net income only in 2025. So that is really the composition of the PHP 4 billion more or less one-off expenses that we've identified.

The next question is on Union Bank's cost-to-income ratio target for 2026 or the medium term?

For 2026, our target will be on the low 50s level. Our going concern target is to go down below 50%. So in the medium term, we should be at around 50%.

The third question from our Q&A box is, of the NPLs reported, can you break this down further? If these are from your existing or new client base? Can you share the demographics? And moving forward, would you have any target customer base to grow your consumer and/or overall portfolio?

So the NPL ratio provided is a combination of both -- of the total existing customer. So this includes, of course, the legacy and the new customer base. You're seeing a significant decline because we've already tightened credit exposures and fully provided for the legacy NPLs, particularly coming from UnionDigital. Now moving forward, our target customer base in the consumer front will be a combination depending on the product. Of course, the middle market -- the middle income to upper income will continue to be serviced by a credit card segment coming from the parent bank. But the mass market sector, which is the lower income segment will be from City Savings and of course, UnionDigital.

Let me also add a little bit to that. I think one, if you talk of target market, one is segmented high net worth or middle market. I think the other way to look at it is, one of the areas we're focusing a lot on and probably a lot of our growth, and correct me if I'm wrong, Carlo, is we're really targeting ecosystems that we're working within the Union Bank ecosystem, right? So we have -- aside from our payroll, a lot of our other customer base, our existing transaction banking clients as well as many others, that's really where we've been focusing on. And that's also where we've seen better performance as far as credit is concerned. So I think if you -- if that's a question about target market, I think that's the target market. We won't be stretching too far out. I think a big chunk of our new customers for this year will be coming from that market that we...

The next question is a clarification on our earlier statement. For the 25 basis point rate cut, net interest income will increase by PHP 288 million. So this is just for clarification.

Yes. That's according to, of course, a model, and our model would have several complicated assumptions surrounding it. And as I mentioned earlier, if we see a bigger move, we do expect to have strategies available to us to be able to offset at least partially some of that [ income. ]

The next question is on operations. How should we look at loan growth given the inflationary pressures coming from the Middle East conflict?

Well, let me take a stab at it. So I think it's really hard to tell at this point because it depends on how bad the situation gets, right? But I think some initial ones is, it's going to be challenging, right? One is the OFW market could obviously be impacted by this, and that will affect -- for example, mortgages where one of the usual target markets tend to be the OFW market. On the credit card side, yes, maybe people start to cut their discretionary spending, [indiscernible] travel, restaurants, entertainment, et cetera, then again, that those tend to be some of the bigger spending on credit cards. So I think on one hand, that could be the impact. But also, it could be that then people start using credit cards more, which isn't necessarily good to cover some of their needs, right? So I think it is something to watch out for. We will be tracking where the spending is going, if it's changing the mix and if people are taking on more debt versus what they used to. So I think we need to keep a careful watch on this because it can go in many directions and most of them tend to be on the risky side. So we just have to be very conscious of this and watch it on a very regular basis. As Dominic said earlier, we will move quickly. If we start to see things whether it's on the security side or even on the credit portfolio side, we will move quickly to try to address.

The next question is on OpEx. Should we expect OpEx to be in the mid-single-digit level again in 2026? Any chunky OpEx expected for this year?

Yes, I think it should be in the single-digit level. We don't expect -- and while it's chunky, the growth...

Next question is on credit cost. Do we have guidance for 2026 credit cost in terms of basis points?

Okay. Credit cost is expected to trend downwards. We've seen it quarter-on-quarter. We've already fully provided for the legacy portfolio. Now while we see that at 3.5% for the full year, I think moving forward, it should be in the lower 3% level for 2026. We can't give an exact number, but it should continue to trend...

And I think what we were just asking earlier is probably going to be a driver of this. What does it mean? What does the Iran war mean and all of the secondary effects, what will it mean for our consumers. So -- and some of the corporates as well. So I think it's going to be -- while we believe it will be in the low 3s, it's going to be a challenging environment for all.

The last question we see in the Q&A box is on FX and trading-related income. What is the mix coming from normal customer flows? What is your outlook this year given prevailing macro backdrop?

Yes. So for our FX and trading-related income, we have tried to increase the customer flows. So what I track in my group at least, customer-related flows, dealership flows and those sorts of activities make up maybe around 40% of our trading income.

There are no open questions right now. [Operator Instructions] With that, I think we can close the Q&A session. So those are all the questions that were sent in and also that were raised in the Q&A box. If there are any questions, please feel free to send it via e-mail as well. To reiterate, we will -- for the benefit of those who missed the session or would like to re-watch the event, a recording of this briefing will be uploaded on our website. So on behalf of Dmi, Johnson -- sorry, on behalf of Dmi, Dominic and Carlo and the entire presentation development team, we would like to thank you all for joining us. We will see you again in May for our first quarter briefing.