Union Bank of the Philippines ($UBP)

Good afternoon. Welcome to Union Bank's earnings results briefing for the first quarter of 2026. My name is Jacqui De Jesus, and I will be your moderator for today's call. [Operator Instructions] This briefing will be recorded. For today's call, Johnson Sia, the Treasurer and Global Markets Head, will kick us off with Union Bank's macroeconomic and industry outlook. After that, Union Bank's CFO, Dmi Lozano, will present the financial performance. With that, let me turn you over to Johnson.

Good afternoon, everyone. So we just start with a quick economic update. We deliberately kept this short and simple because as we all know, economic developments are happening on a blow-by-blow basis. We don't know what we wake up to. So we prepared this last week. And so we see oil still above 110 since the closure. There was some hope over the weekend that a cease fire was going to happen. But this morning, we all know what's happening. Both sides rejected their proposals and therefore, oil stuck up. So the situation remains quite volatile. So I'll just take you through what has happened in the last few weeks and what we foresee happening in the very near future. Next slide, please. So first, on the U.S. policy rates, we have, of course, ever since the Iran war,pre-Iran war, the market was expecting the Fed to cut by more than twice to bring down interest rates by at least 50 basis points by year as of today in -- from a cut, they're now expecting there's a chance a 30% chance of a rate hike by the end of the year. Of course, again, there are so many things that are ongoing. We have a new Fed Chair, and we also have, of course, this Iran war that where anything can happen. Next. So if you look at the treasuries, they have -- rates have gone up since the start of the war and have kind of remained there. This is one of the -- in contrast, for example, to the stock market where the stock market initially fell but recovered and hit all-time highs. Treasuries have not recovered to their lower rates prior to the war and this reflects partly market's concern about higher inflation brought about ofcourse by the oil price shock even if the situation gets resolved, some permanent damage of supply has happened. Next, please. In terms of credit spreads, not so bad news that credit spread just for the Philippines have not really blown -- have not really exploded not like the parity issue last year. So it widened at the start of the war, but it has come down to pre-war levels. Next, please. Then of course, we all know the situation in the Philippines. In the last Monetary Board meeting, the BSP hikes 25 basis points in response to, of course, the threat of inflation and signaled more to come. And when they hike last time, it did not even take into account the inflation shocker that happened last weekend where April CPI surged to 7.2%. So if you look at what the market is pricing now based on Oil and gas prices, the market is pricing as many as 6 hikes by the end of the year. So that's probably going to be 250 basis points hike and 25 basis points hike. So we're pricing as high as 6%. Of course, there's a bit of market positioning here, a bit of buying and a bit of hedging. But from another 50, 75 basis point hike projected by the BSP, the market is looking more like 100 to 150 basis point hikes. Next, please. And as a response, the curve, the green curve there is pre-war remember there was an initial wave of selling in March. The red line shows the peak and then rates kind of eased off as hopes of a resolution to the war happened. But after the inflation numbers, the curve went up again. But if you notice the curve is a lot flatter. 10 years and above are not as high as the previous one. Next. Dollar pressure remains quite vulnerable. Again, there's a lot of external factors here. It hit a high of 61.75. Last Friday, it recovered all the way to below 60 levels. This morning, I haven't check the latest one, but it's trading at around 61 figure as we speak. Next, I think okay so we do -- we have underperformed our peers, partly because of our dependence on oil and DXY, which is a measure of dollar strength, more or less just goes by -- it depends really on the odds of maybe, okay, ceasefire happening. Next, okay, I think that's it, and I'd be happy to answer questions. Thank you very much.

Good afternoon. We can move on to the financial performance. But before we go over the results, as we usually do, let me just do a quick recap and revisit the outlook we shared when we discussed our full year 2025 results in the last analyst briefing. At the beginning of the year, we highlighted four key expectations for the bank. First was continued expansion in net revenues. Second, credit costs gradually normalizing towards steady state levels. Third, the balance sheet position to support future growth. And lastly, a transition from stabilization towards earnings expectations. As we go through the results, we will be able to see if the first quarter performance is starting to validate these early expectations. Sorry, I think we are having a problem with our presentation, just give us a minute -- looks like we're back on track. Yes. So let's move on to the performance. So starting with earnings, Union Bank posted net income of PHP 3.8 billion in the first quarter, up 167% year-on-year and 9% quarter-on-quarter. More importantly, this continuous sequential improvement in earnings that began in the second half of 2025, reflecting the benefits of many of the actions we took last year and the last couple of years actually. Growth was driven primarily by strong core recurring income and improving operating performance across the parent and the subs. This was achieved despite securities trading losses arising from market volatility in March associated with the Iran conflict. The results were largely driven by the parent bank, while our subsidiaries also recorded better contributions versus the same period last year. Next slide, please. So now let's break down the usual drivers behind the earnings momentum. Starting with customer growth, our client base increased by 1.3 million year-on-year, bringing total customers to nearly 19 million. This was supported by continued digital engagement, that active digital users reached 6.1 million, up nearly 500,000 quarter-on-quarter. This expanding customer base continues to translate into stronger revenues. On a year-on-year basis, net revenues continue to trend at record highs, supported by above the industry net interest margins, which improved by 34 basis points versus last year's 6.7%, versus last year, sorry, to 6.7%. Our ability to generate recurring fees from our growing client base also continues to strengthen, which resulted in a net revenue to asset ratio of 7.5%, which is above the industry average. Growth in fees continues to be driven by higher transaction volumes across credit cards, Instapay, bill payment and other digital transactions. Next slide. Drilling down further into the margins. Net interest income climbed to PHP 17 billion, up 9% year-on-year. This was supported by a 34 basis point improvement in NIMs, which remains among the highest in the industry. Margin expansion continues to be driven by the growth in low-cost CASA deposits, supported by higher transaction banking volumes and lower policy rates at least for the early part of this year, both of which have helped reduce funding costs. CASA growth was largely driven by the continued deepening of transaction banking relationships established over the last couple of years. That said, given the current environment, particularly ongoing geopolitical uncertainties, we remain mindful that rates could become more volatile moving forward. It is important to note that for every 25 basis point movement in policy rates, our earnings are impacted by approximately 2 basis point impact on our NIMs. In terms of earning assets, growth was broad-based across the group with total earning assets increasing by 3% year-on-year. Our gross loans grew by 8% year-on-year to PHP 565 billion with growing -- with growth coming more balanced across both consumer and institutional segments. Consumer lending continues to make up the majority of our portfolio at 60% of total loans. Within consumer, our unsecured consumer loans, mainly credit cards grew by 19% year-on-year to PHP 153 billion -- at the same time, institutional loans also expanded by double digits to PHP 224 billion. This reflects improving pipeline conversion following the expansion of our institutional banking team last year and gives us confidence that we can grow this if and when we find the right opportunities. The bank also continues to maintain a strong capital position, providing us with the capacity to support future growth across all segments. Again, with that said, given the softer slower-than-expected GDP growth, we remain cautious as weaker business activity and consumer spending may eventually have implications on credit demand and portfolio performance. The bank's performance continues to be supported by growth in low-cost deposits with CASA increasing by 8% year-on-year, slightly above industry growth of 7%. Last year, we also launched several initiatives to strengthen deposit generation, including government disbursement programs, retirement investment solutions and KYC-as-a-Service for partner lending. These initiatives supported CASA growth by driving higher transaction banking volumes and the continued deepening of transaction banking relationships. Together, these initiatives expanded our CASA base while also creating additional fee income streams for the bank. The bank also continued to optimize its funding mix through alternative funding sources such as interbank borrowings, repos and currency swaps. Our noninterest income declined on a quarter-on-quarter basis, mainly due to the lower one-off income. But importantly, the underlying recurring fee income business continues to expand. On a year-on-year basis, noninterest income grew by 23%, driven primarily by higher recurring fees from customer transactions, bancassurance and other retail-related activities. Fees from parent bank customer transactions increased by 4% year-on-year, supported by higher fund transfer fees, ATM fees, commissions, brokerage fees and other service charges. Meanwhile, wealth fees grew by 45% year-on-year and bancassurance revenues increased by 57% both of which are driven by customer activity and continued cross-selling across our retail franchise, quite promising, and we look forward to more of this moving forward. Other noninterest income also improved, driven mainly by higher FX gains and drop sales. Overall, the bank's fee income to asset ratio stood at 1.3%, more than double the industry average. We expect this trend to continue as we further expand our retail customer base and continue to look for cross-sell opportunities. Operating expenses increased by 8% year-on-year, largely reflecting continued investments in the business. But on a quarter-on-quarter basis, expenses were relatively flat, indicating improving operating discipline as revenue growth continues to scale. As a result, the bank's cost-to-income ratio improved further to 57%, and we expect this trend to continue moving forward as operating leverage improves. As mentioned in our previous analyst briefing, we expected credit costs to improve further in 2026. And based on our first quarter results, we are now starting to see this trend materialize. Credit cost declined by 67 basis points from 3.9% in fiscal year 2025. This was driven mainly by better portfolio performance in our key subsidiaries. CitySavings saw credit cost declined by 54 basis points, while UnionDigital improved its coverage ratio to over 100% from around 49% previously. Its new portfolio is also now generating positive credit margins in the first quarter of 2026. Looking ahead, we expect credit cost to continue improving throughout the year, particularly within the parent bank portfolio. Having said this, we remain mindful of the current environment as geopolitical and macroeconomic pressures may still have implications on asset quality over time. In response, we continue to implement risk management and portfolio monitoring measures to ensure that there is no deterioration across the portfolio. So on asset quality. First, our asset quality indicators continue to improve during the first -- during the quarter, largely reflecting the cleanup actions implemented last year, particularly across the subsidiaries such as UnionDigital. Both gross and net NPL ratios continue to trend downward, while coverage ratios have been improving. Now while our NPL ratios remain higher than industry average, this is largely because the bank is more consumer-focused relative to peers. Naturally, consumer portfolios tend to carry higher NPL ratios, but they also offer higher yields, which helps compensate for the higher credit costs associated with these segments. But what's important is that the higher risk unsecured portfolios, particularly credit cards, personal loans and even UnionDigital continue to trend downward on a net NPL basis and now carry relatively low NPL ratios because these portfolios are already well covered or more fully covered than they were in the past. Credit cards and personal loans are also among the key revenue-generating drivers of the parent bank. Meanwhile, CSB's coverage ratio remains relatively low due to the nature of the teacher salary loans, which historically have strong recoverability supported by auto debit arrangements with the Department of Education. Moving on, our capital ratios remain well above regulatory minimums with CET1 at 13.8%, group CET1 at 13.8% and parent CET1 at 14%, providing the bank with sufficient capacity to support future growth opportunities. However, given the current environment, we continue to remain disciplined in how we deploy capital, supported by proactive risk management and the portfolio actions that we discussed earlier. So finally, the actions we took over the past year were meant to stabilize the business and improve portfolio quality. As a result, earnings have grown sequentially from PHP 3.2 billion in the third quarter to PHP 3.8 billion in the first quarter of 2026. This shows that the momentum we started the second half of last year has carried over into 2026. This was supported by strong core revenues, expanding customer activity, loan growth and improving margins. With most of the one-off items now behind us, the bank's core business is positioned to drive earnings expansion for the balance of the year. Looking ahead, our base case assumes that performance in 2026 will continue to improve relative to fiscal year 2025, but we remain -- but we continue to remain mindful of the current environment as tail-end implications from geopolitical uncertainties may still impact interest rates, growth and even potentially asset quality over time. So it's a good first quarter it hass performed better than expectations, but we need to see how the second, third quarter and the balance of the year are impacted by what's happening in both the geopolitical as well as our own macroeconomic situation. So hopefully, for all of us, things start to improve soon. Thank you.

Thank you so much, Dmi and Johnson. For our Q&A session today, we will be joined by Dmi, Johnson and Carlo Enanosa, Union Bank's Investor Relations Head. So we will start off with the questions we received in advance. The first question reads as, can you provide guidance on loan growth, credit cost provisioning and NPL coverage given expectations of softer consumer spending in 2026? I think you guys are on mute.

Sorry about that. I'll take that. So given the current environment, we are closely monitoring how the situation develops. As of this time, we have not yet seen any material deterioration, but it's early days. It's only been around 2 months since the start of the conflict. So we still have a lot more time to see the impact. We continue to monitor the flow rate across different segments very closely. But as of this time, we have not yet seen any material deterioration. Historically, the impact of NPLs and credit cost is usually seen at the tail-end rather than immediately. So we probably need another couple of months before we see how much of an impact we would be expecting. Having said that, we already started tightening underwriting standards last year and continue to do so today. We tightened underwriting standards in marginal segments and also some lending experiments on the digital banking side. So the mass market segments are typically the first to be affected during slow economic conditions. So we have been doing tightening since last year and further tightened in March. So we'll see if that at least allows us to lessen the impact of the -- what's going on around us. The bank is conducting a name-by-name assessment to identify companies that may be vulnerable to the evolving Middle East situation, companies and industries actually and we are reviewing financial liquidity, behavioral and external indicators, which may result in potential downgrades and higher ECL requirements. Although we are not adjusting our overall growth assumptions for the year, any slowdown in certain segments may be offset by growth in other areas such as institutional banking. We still expect to sustain loan growth while credit costs and NPL metrics so far atleast have continued to improve versus 2025 levels.

Thank you for that, Dmi. The next question is, what caused the significant drop in CET1 ratio from the fourth quarter of last year to the first quarter of 2026?

Well, if you look at our numbers historically, we usually peak, CET1 peaks at the end of the year and then drops in the first quarter. And that's because of a few things that happen every year. One is ORWA is adjusted at the beginning of the year. And if you're a growing entity, then the ORWA will have bigger numbers, so more of a reduction or more of an impact on your CET1. Secondly, that's also in the first quarter when we give out the dividends. And it hasa big-- it causes a big drop in the CET1. In fact, if you probably recall, we have a new dividend policy that we announced in the stockholders meeting and where we will be splitting the dividend across -- doing it twice a year, once in Feb and once in July, just to reduce the sudden impact of issuing these dividends -- all the dividends in one time. And also in particular, this one is unique is we also have the FVOCI impact in March coming from the mark-to-market impact of the Iran conflict. So it's really those three. But again, part of it is sort of BAU -- every year, we expect ORWA and the dividend, but we also now got this in March by FVOCI.

Thank you so much, Dmi. That's very, very clear. That's all the questions we have that were sent in. So for those who have questions from the floor. [Operator Instructions] Okay. So there's one question on the Q&A box. It reads as, are there any plans to grow the investment portfolio given the better yields, especially at the longer term?

Yes, let me take that. Yes, definitely. We've always been looking at the opportunities. Before the war we were actually looking at growing the dollar side of the book. But given what's happening, we've decided to sort of shift to more capital friendly securities. Previously, the investing in peso securities, for example, was not very attractive because yield was almost. But now that the yields are making a lot of sense, it's something that we're serious in.

Thank you so much for that, Johnson. [Operator Instructions] Okay, The next question reads as, are there any initiatives worth noting to grow CASA at a faster pace?

Well, I think I mentioned a few of them. The real -- the big one is continuing to add products and deepening our relationship with our key customers. So transaction banking is our biggest driver for CASA growth. We've seen that happen so far this year since the beginning of the year, and that they continue to be our answer as far as this growth is concerned. The more transaction come to us, the more CASA is basically left in the accounts. On the retail side, CitySavings has been issuing new products for their drive to grow their CASA. So it's still small overall. But for them, it's a big deal as in the past, they were mainly driven by time deposits. But they have seen significant increase from there what used to be very minimal CASA now because it's called the power savings account that has been attracting quite a bit more CASA also for CitySavings. So you see both us and the parent and CitySavings growing that. But I don't think -- are there any special ones I can think of but

mostly government and corporate initiatives that are attached to banking side.

Yes that's the one that's been a pleasant surprise, right? So we've really seen -- I think it's -- if you ask me it's also about the institutional banking -- we have a lot of new people there. Part of the benefit there is new relationships, deepen more -- deepening the relationships. And so that's why we've seen stronger growth on the loan side, but also hand in hand on the transaction banking deposit side as well. So this gives us a lot of confidence that moving forward, we will have a strong and growing CASA base. And also when the time is right, that the pipeline for loan growth as well will be strong and we'll be able to bring in good attractive customer base for us.

Very clear. Again, final call for any other questions. Okay. So the question is asked, would it be okay to share the industry where demand came from? And could you share the segment for the rest of the year?

The industry where loan demand...

I think this is loan demand.

Loan demand. And then what was the second part?

Could you also please share the segment for the segment for the rest of the year? I think whether it's corporate or retail?

Well, I think one of the -- I don't have the data in front of me, but one of the ones we've seen in the a lot in the first quarter and also the first few months of the second quarter is project finance. There have been some big infrastructure-related projects that we participated in. So I think that's probably one of the drivers -- so I think that will now, of course, the question would be with what's happening with some of these projects moving forward also be delayed or pushed back, so that could affect part of the pipeline. But we do see a lot of that -- at least we've seen a lot of that in the first 4, 5 months of the year. So I don't think there's a specific sector or infra, I guess, would be the one that we see on the private sector side.

Thank you so much, Dmi. I think with that, we can wrap up today's Q&A. So thank you very much, our panelists, Dmi, Johnson 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. On behalf of everybody and the entire presentation development team, we would like to thank everyone for joining us. See you all again in August for our second quarter briefing.