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

[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 in dissemination. For today's call, Dominic Banal, the Global Markets Trading Head, will kick us off with UnionBank's macroeconomic and industry outlook. He will be followed by UnionBank's CFO, Dmi Lozano, who will present the financial performance. With that, let me turn you over to Dominic.

Good afternoon, everyone. So last time we had this event, the U.S.-Iran war had just broken out. That continues to grab headlines and the financial market attention. The latest move is again towards the direction of a possible peace deal, and that has led oil lower once again. After hitting a high of around $126 per barrel in April, it's currently sitting at $80 per barrel at the moment. The U.S. Fed under its new Chair, Kevin Warsh, held rates steady in their July meeting, although it was quite notable that there were three dissenting votes from governors, Hammack, Logan and Kashkari in favor of a 25 basis point hike. That pushback implied the market expectations with just 1.3 hikes priced in for the year with the peak of the policy cycle sometime in the middle of 2027 according to the latest futures market prices. The immediate impact of that no-hike decision was a curve steepening in the U.S. treasuries market, with the 10-year hitting a new cycle high of 4.74% and the 30-year hitting a new cycle high of 5.28%. In the immediate aftermath of renewed peace optimism, these yields have dropped by around 10 to 15 basis points from those levels, but remains slightly elevated due to policy uncertainty and partial war risk premium. Philippine dollar bonds also reaching new highs in line with the U.S. treasuries, although spreads did not reach the same levels as in May. 10-year spreads are currently sitting at 85 basis points above comparable U.S. treasuries, offering significant carry opportunities for investors. ontolocal news, despite two hikes from the BSP, both core and headline inflation remain above the BSP's target range at 4.2% and 6.2%, respectively. There are renewed risks to the outlook from the wage hike as well as El Nino and market implied pricing shows expectations of two more rate hikes for 2026. GS curve has been rallying in the past few days due to peace optimism and still offers a considerable premium over the policy rate at 4.75%. Even if the BSP does indeed hike to 5.25%, 10-year bonds would still offer a considerable 200 basis point yield pickup given current levels. And lastly, for dollar peso, we reached a new all-time high of PHP 61.845, but moved sharply lower this week, again, on peace optimism. With the dollar still showing strength against other global currencies, this should limit downside moves in the dollar peso going forward. That's it for the economic update. I now turn you over to Dmi for the financial performance.

Thank you, Dom. So let's take a quick look at the snapshot of the key metrics that we follow closely. What you're seeing here is that we continue to gain traction in our retail business and in recurring revenues. Our client base has increased by 1.4 million year-on-year, bringing the total to more than 19.3 million customers. This was supported by continued digital engagement as active digital users reached 7.2 million. That's 300,000 increase in the digital users quarter-on-quarter alone. This expanding customer base continues to translate into stronger revenues and above-industry net interest margin even as the bank focuses on the consumer segment. Our revenues continued its uptrend, growing 9% year-on-year, mostly driven by recurring income, while our trading income lowers due to prevailing uncertainties in the macro environment. Our net interest margin improved by 34 basis points to 6.9%, driven by our growing CASA and consumer loans. Further, this growth is supported by our ability to generate revenues from our expanding client base as evidenced by a 40 basis point increase in our net revenues to assets ratio going up to 7.4%. Next slide, please. So UnionBank delivered a net income. As a result of all of the above, UnionBank delivered net income of PHP 6.9 billion in the first half of 2026? That's a 113% increase versus the PHP 3.3 billion recorded in the previous year. The parent bank continues to be the main driver of the group's performance, accounting for 96% of the group profit. The group saw a dip in the quarterly performance, driven primarily by the underperformance of select subsidiaries. However, this slowdown was mitigated by the continued outperformance of the parent bank, supported by its core businesses, delivering a net income of PHP 6.6 billion, up 66% from the previous year. Our ROE continues to trend above the prior year, ending the first half at 6.8%. Despite the dip, the bank still expects to end the year higher than in 2025. Our net interest income continues to climb, ending at PHP 33.7 billion in the first half of the year, up 8% versus last year. This is on the back of our higher earning assets and widening net interest margins, which ended at 6.9%. The margin expansion continues to be driven by growth in low-cost CASA deposits. We were fortunate that CASA volumes were ahead of plan in the first half of the year, coming from increased volume in transaction banking. This allowed us to reduce funding costs even in a rising interest rate environment. Even factoring in swap costs, our NIM will only be around 6.43%, which is still ahead of industry average. Additionally, our earning assets continue to support our net interest income as it remains steady year-on-year with a 2% growth on core banking activities. Our gross loans grew by 8% year-on-year to PHP 577 billion, with highest growth observed in the consumer segment. Consumer loans continue to make up the majority of our portfolio at 61% of total loan mix. Within this segment, our cards are the primary drivers of growth at 22% increase year-on-year to PHP 140 billion. The bank's portfolio in the first half reflects the credit tightening measures that were implemented to mitigate risk amidst rising prices due to the Middle East conflict. We reduced our exposure and tightened lending to marginal segments, effectively slowing the growth of our mass market loans. This is reflected in the lower new-to-credit customers, making 15% of total mix versus prior year's 30% and also affected the volume of personal loans and Union Digital. On the funding side, the bank's performance continues to be supported by growth in low-cost deposits with CASA growing faster than industry at about 7% growth year-on-year. Our CASA to total deposits ratio is 65% at the group level, which trails a little bit behind the industry. But if you remove the impact of subsidiaries, the parent CASA ratio is above industry at 76%. This high ratio is driven by the outperformance mentioned earlier, where in the first half of the year, we were able to beat our plan on the back of increased transaction banking and digital business. Our noninterest income grew by 12% to PHP 9.4 billion year-on-year. Our customers' everyday banking transactions still account for 73% of our total fee income. However, we're happy to report that our Wealth and Bancassurance posted significant growth year-on-year at 56% as we see the synergies arising from recent consolidation of our wealth, private banking and trust businesses. Other noninterest income also improved 156%, up by around PHP 600 million year-on-year, driven mainly by our FX business. The strong growth in total fee income is expected to offset any foregone income from the alignment of our interbank fund transfer fees with the market. Operating expenses remained stable on a quarterly basis, averaging PHP 12.2 billion per quarter. Year-on-year, operating expenses increased by 6%, which is lower than the growth in revenues at 9%. As a result, our cost-to-income ratio improved at the group level as the bank continues to execute cost reduction initiatives, mainly through the parent bank. This is reflected in the parent's cost-to-income ratio, which is only at 53%, driving the improvement for the overall group. The balance sheet cleanup we have been doing, especially in 2025, has resulted in improvement of our asset quality today. As seen in this chart, our credit costs have improved by 100 basis points from 4.3% to 3.3% year-on-year and remained relatively stable quarter-on-quarter, even as the bank builds reserves to reinforce its balance sheet and despite challenges prevalent in the industry. This reflects the improvement in asset quality of the bank's total portfolio. And as a result, the bank's net credit margin continues to outperform the prior year. Having said this, we continue to be watchful of the macroeconomic conditions and the impact on our core business. Particularly, we are looking at any risk of credit deterioration in the face of the unfavorable expectations like slower GDP growth, stronger inflationary pressures and the tail-end effects of the Iran war. We are closely monitoring not only our retail segment but also our large corporate clients that serve the consumer market as the impact of these unfavorable conditions may roll forward. We will update you accordingly on how this will affect our credit costs moving forward. But for now, we are not yet seeing any major concerns. As mentioned, asset quality indicators continue to improve with our gross NPL ratio continuing its downward trend driven by the parent. Our NPL ratios remain higher than industry, largely because of our consumer focus. But isolating the consumer performance of the parent bank versus industry, we are performing better. In fact, based on recent reports that we've seen, our credit cards have shown an improvement in terms of the past due ratio. Year-on-year, it has trended downwards, moving against the industry trend. This is despite the fact that our cards continue to have the highest spend per credit card in the industry. At group level, our net NPLs are growing in line with the industry, while parent continues to improve. The higher-risk unsecured portfolios, particularly credit cards, personal loans and Union Digital, 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 than fully covered. Our NPL cover remains stable with a minimal decline year-on-year, aligned with the industry trend. However, as a stand-alone, parent NPL cover improves on a year-on-year basis. Meanwhile, CSB's coverage ratio remains lower due to the nature of teacher salary loans, which have historically shown strong recoverability supported by automatic debit arrangements with the Department of Education. Moving to the capital. Our capital ratios remain well above our regulatory minimums with group CET1 at 13.9% and parent CET1 at 14.5%, providing the bank with sufficient capacity to support future growth initiatives. There was a slight decline in the first quarter, which is an expected result of our dividend payout and increase in operating risk-weighted assets. This movement is aligned with our historical trend and similar to the past. We expect to return to our baseline levels by year-end. This is evidenced by the immediate recovery of our ratios in the second quarter. Starting next year, we will no longer be experiencing big dips in the first quarter as we have revised our dividend policy to break it into two -- into twice in the year. So in summary, what are the key takeaways we'd like you to leave with. Net income has reached PHP 6.9 billion, up 113% year-on-year with parent bank contributing 96% of this profit. Net revenues grew to PHP 43.3 billion, up 9% year-on-year, supported by expansion in loans and CASA, fees and strong margins. Credit costs are down 19% year-on-year. This reflects improved asset quality even as the bank builds buffers to strengthen the balance sheet. And for the outlook, top line is expected to continue to grow. This will be supported by recurring income and expansion in consumer and transaction banking. Our customer franchise remains strong. Asset quality continues to improve, and we are executing decisively on our cost reduction initiatives. The bank will continue to enhance its balance sheet and sharpen focus on the businesses that deliver long-term value for us. We remain mindful of our market conditions and the tail-end implications to credit costs of market uncertainties and the higher interest rate environment. So looking ahead, our base case assumes that performance in 2026 will continue to improve relative to 2025. However, we continue to be mindful of the current market conditions as tail-end implications from geopolitical uncertainties may still impact interest rates and asset quality over time. Thank you. And that ends the section on financial performance. I believe we move now to Q&A.

Yes. Thank you so much, Dominic and Dimi. So for our Q&A session today, we will be joined by Dmi ; Dominic as well as; Carlo Enanosa, UnionBank's Corporate Planning and Strategy Group Head. So we are now opening the floor for Q&A. [Operator Instructions] So we have a question here from the Q&A box. It reads as, may we request for guidance on foregone revenues in 2026 following the waiver of InstaPay and PESONet fees?

So for the remainder of the year, we estimate that the impact of the waiver of InstaPay fees will amount to around PHP 600 million. So full year impact was PHP 1.2 billion. But of course, this is just half year, it's just half of that.

Thank you for that, Carlo. The next question is actually a series of questions, which I will read one by one. So congratulations on the strong earnings results. First question, could you share your guidance on lending growth and credit costs for the rest of the year?

On lending growth, we expect to sustain what we have shown in the first half. But for the second half, there will be some catch-ups, particularly on institutional banking or the wholesale credit, and that's because there has been delays in terms of take-up coming from the large corporates. But we think that the growth will still primarily be driven by Cards, Teachers Lending and, of course, Institutional Banking.

Her next.

Sorry. For credit costs, well, like what Dmi mentioned earlier, we have done a lot of the cleanups last year, and we've seen it in improved asset quality, and you've seen it in the decline of credit cost. Now we're not saying that we can sustain it, but that's the expectation as of today. We have to be mindful that there can be tail-end effect coming from, of course, the impact of the conflict, Iran conflict in credit, particularly in the mass market segment. That's what we are watching out for. And also, we're also watching out for corporates that have some exposure in the consumer side. But as of currently, we don't see any cause for alarm.

Thank you, Carlo. Actually, that was also her next question. Can you expect catch-up provisioning in succeeding quarters, which you answered already. Her next question is, what is your optimal funding mix as we see further monetary policy tightening?

Let me take that. So obviously, the growth of CASA remains to be the priority. And Dmi mentioned earlier that so far, we have a good trajectory in our CASA. Our CASA is currently around 60% of our total deposit, although that's a bit on the high side because we do have some non-deposit liabilities, but we -- our aim is to further improve that. And our Transaction Banking as well as our Retail Banking franchises will ensure that, that is sustained.

And then the last question from this batch is on cost-to-income ratio. So CIR is stabilizing at around 57%, 58%. Where can we still see some cost optimization measures? And if you can share your optimal CIR or your CIR target for the bank?

Well, our optimal level that we hope to get it in the next year or so is 50%. I think the big challenge that we have had so far really is really more at the sub level. If you look at the parent, we're already at around 53%. So we think it's within shouting distance of the 50%. So a lot of the efforts -- I mean, there are efforts at the parent level. We're looking at a couple of the key ones, especially on the technology side that we think that there is room for reduction. But I think the big moves will come from improving the efficiency at our subsidiary levels, particularly Union Digital and CSB.

Thank you so much for that, Dmi. The next question is on impairment losses. How much was the allowance for impairment losses in the first half of 2026.

That's around PHP 9.4 billion for the first half.