Good afternoon, everyone, thank you for joining us today. My name is Chito Reyes. I'm with the Investor Relations and Corporate Planning Group. We're here to share with you our first semester results. First, for the second quarter, we ended with PHP 20.9 billion in net income. This is a new record for us. That translates to a return on equity of 15.8%, which is also, I think, one of our highest ever. We're very happy to share that. Secondly, in terms of the first semester earnings, we did PHP 39.4 billion, which is 12% higher than last year. This translates to a return on equity of 15.1% year to date. What were the earnings drivers? Primarily, the core businesses. Net interest income continued to grow at double-digit pace. We saw non-interest income picking up in the second quarter, particularly fees and insurance.
Fees and insurance primarily. In terms of the fees, I think the major drivers were credit cards still and loan fees. Customer loans, 13% year-on-year growth. This is the same growth rate that we showed in the first quarter. As we will show later, the mix is showing a better trend as all segments are now growing at a double-digit pace, unlike in the first quarter where only two segments were growing at double- digits. Asset quality, basically still stable, even if there's a slight uptick to 2.06. We continue with our conservative provisioning, and our coverage ratio is at 169% to date. We still have a solid capital position. We are able to self-fund our growth, and our book value continues to grow at 12% per annum. Currently, it's at PHP 102.
In terms of the second quarter highlights, I guess what we just like to show here is the progression of our quarterly income. From the beginning of 2023, from PHP 16.5 billion, we've steadily grown our quarterly income to the latest number, PHP 20.9 billion. As you can see also, the return on equity is more or less just within the range of 14%-14.5%-15%. In terms of the first half performance, PHP 39.4 billion, that's 12% growth, 15.1% return on equity. NII up 11%. Again, this is on the back of stable margins and a 13% loan growth. Non-interest income, double-digit growth coming from fees, treasury, and insurance premiums. We also saw an improvement in our life insurance business. First quarter growth rate was just around 3%. The year-to-date number is now at 5%.
Even that is picking up as well alongside our other service businesses. In terms of operating expense, I mentioned earlier, 15%. PPOP at 7%. Provisions, just slightly lower, about PHP 400 million lower compared to the same period last year. Again, what's more important to us is that despite that slight reduction in provisions, our coverage remains one of the highest in the industry. Going to the balance sheet. I mentioned earlier that the big movements in the balance sheet are still our loan portfolio, which is up 13%. We've reached PHP 3 trillion in terms of our loan book. The other major earning asset would be our treasury portfolio, which grew by 19%, and this now accounts for 22% of total assets. On the funding side, CASA growth remains modest at 5%, the bulk of our funding growth is still coming from time deposits.
Lastly, our book value, again, as mentioned earlier, is up 12%. In terms of our loan growth compared to the industry number, we've been outpacing the industry since 2023. If we look at the components, we've encircled the first quarter and second quarter numbers just to highlight the improvement that I mentioned earlier, that we saw better, stronger momentum, especially in the middle market and consumer segments. Middle market from single- digits now doing 10.5. Consumer from 13.5 up now to 15.7. Again, 13% growth in corporate, it's not a shabby number given the system growth rate of 10%. I highlighted this earlier on the funding side, deposit growth, CASA growth at 5%.
In terms of branches that we've opened year to date, we've opened 16, 15 of which are in the BDO Network Bank platform and one from the commercial bank. We still are focused on providing our clients with what we think is the best combination of both physical access and digital access. On the non-interest income side, fee income still constitutes the bulk, about 60%. In terms of premiums on the life insurance side, again, I mentioned earlier, 5% growth in premiums. If you look at, we've more or less maintained 80% of our premiums coming from the traditional protection side, which as you're aware, is the one that provides the long-term profitability for the business. That constitutes 80% of the total premiums that we generate. That's been growing high- teens, but close to 20% year-on-year.
On the portfolio side, the bulk of the portfolio is still on hold to collect about close to 60%, and it now accounts for 22% of total assets. In terms of operating expenses, in terms of cost income ratio from 61.5% in Q1, we're down to 60.6%. In terms of asset quality, coverage ration is ar 169% . But again, we're not seeing a concerning trend in any particular segment. These are primarily from company specific situations for the corporate side. In terms of the consumer side, it's again, alongside the growth in the business volumes. In terms of profitability, as you can see since 2023, we're running around mid-teens ROEs. In terms of capital adequacy, CET1 remains at 13.2% despite the loan growth at 13%.
With the returns that we're generating today, we're able to self-finance ourselves without having to go to shareholders for additional capital. Given the latest dividend payout, we've increased our cash dividends to PHP 1 per share starting the second quarter. That will translate to about a 27% payout ratio. Sustainable bond issues. I guess in terms of the funding that we've been doing on the sustainable front, we were the first bank to issue a green bond. We were the first bank to issue a blue bond. We've done three peso-denominated sustainability bonds so far, two of which were done this year. Again, that's an indication also of how strong the focus is in terms of funding sustainable projects. That is something that we're very keen to participate in. Can I ask Dante to just provide a short update on our macro?
Hello, everyone. In terms of just a quick macro update, in terms of economic activity, we continue to expect Philippine GDP for this year to trend slightly below the low end of the government 6%-7% target range. Household consumption, government consumption, and fixed capital investments remain below pre-pandemic trend. We do have this last bullet. We do have a scenario wherein full year GDP this year, next year, ends up above 6%, that would probably require a strong rebound in private sector CapEx. It's worth pointing out that private sector CapEx remains or has remained below pre-pandemic levels for the past four years. In terms of inflation and rates, inflation has trended well within the BSP 2%-4% target range. Core inflation remains stable, which suggests that even with the commodity price volatility, inflationary pressures are not broadening.
The BSP has said that the balance of risk to the inflation outlook has shifted to the downside for this year and next year, they are on track to cut policy rates fairly soon. Overall, it does seem that growth slowdown is a bigger concern than a re-acceleration in inflation. It's not just our data that's showing this. I think the BSP and the Fed are seeing the same things and saying the same things. If we get a more constructive monetary policy backdrop, that should translate to a more stable rates and FX environment, hopefully that restarts the private sector CapEx cycle, which has been missing for much of the past four years. Thank you very much.
In terms of our business outlook, on the intermediation side, we're looking at hopefully we can sustain the loan growth that we've seen so far. The upside could potentially come from the CapEx type loans. Hopefully, more companies will gain confidence to embark on their expansion programs as interest rates start coming down in the third and the fourth quarters. Margins have remained stable. Based on our latest sensitivities, we think that the impact on declines in policy rates will not be as significant this year. On the non-interest income side, we've seen strong momentum in the second quarter. Again, we're hoping that we can continue with that given the initiatives that we are implementing. On the asset quality side, again, we believe that our NPL ratio remains manageable, we believe that we have enough internal and existing provisions to cover for potential losses.
In summary, I think our performance again reflects the strength of our business franchise and that we've been effective in terms of implementing our strategy. Multiple drivers are in place to support long-term profitability and return on equity. Lastly, our investments in technology, resiliency, and processes as business enablers again will help carry us through going forward. I guess that ends my presentation, and we can start with Q&A. We have our President and CEO, Mr. Nestor Tan. Please. We also have representatives from our different business units. Please stand up and be recognized. The Head of our Consumer Banking business, Mr. Rolly Tanchanco. The Head of our Institutional Banking business, Charles Rodriguez. Our Branch Banking Head, Cora Mallillin. And last but not least, our Treasurer, Coco Martin.
Hi, this is Richard Tan. I'll be moderating the Q&A section. Let me start off with a question from Citi, Yong Hong. Fee income growth was exceptional in 2Q. What are the drivers for the quarter-over-quarter growth? Is that sustainable, and what does it mean for your full-year fee income guidance?
Well, I think it's a seasonality thing. The fee income is actually broad-based, the increase. We do hope that it will continue. Sometimes these fee income services, like insurance, do tend to have peaks and troughs. We do hope it continues. This is more in line with what we expect for the year.
Second, if I may add, just a major big component of that would be fees related to consumer banking. This can be seen in the loan growth in consumer banking has, in fact, picked up momentum in the second quarter. The other area would be loan-related fees. If we're able to see sustained loan growth, I think there's a very good probability that we may be able to see the fee income being sustained.
Okay. Related question on NPL coverage from Morgan Stanley. What is the level of coverage ratio that you are targeting?
We're not targeting a certain level of coverage. What we're targeting is a certain level of cushion for unexpected loss.
Thank you, sir. Another question from Selvie of Morgan Stanley. Is there any sector that you are turning more cautious on in terms of asset quality given slowing growth from higher rates?
Well, it's not really sector based. It's client by client. We do a lot of bottom-up analysis and see which are vulnerable.
Additional question now from Morgan Stanley also. Can you share your strategy on retail lending and risk metrics you looked at if you are planning to grow more aggressively in this segment?
Well, it's really a matter of coverage for retail lending. We cannot be fancy because it's a straightforward product. The important thing is to push for financial inclusion. Cover more markets, cover a wider range of markets, and we make sure that we're able to sell the value proposition of our offering. There's not much change in our strategy except marketing, really. We haven't adjusted our underwriting standards. We're still at the same level, so we don't expect any deterioration of the loan. It's really just a matter of covering a bigger market.
Hi, thanks. Just quickly on the NPL side, are you worried at all about the whole no POGOs thing, with office vacancies going bonkers? I think David Leechiu came out and saying he's expecting rents to fall 50% in the residential space because of the foreign tenant, et cetera. How worried are you about the office sector in general and real estate broadly?
Well, in terms of economic activity, it will have an impact, but it won't have an impact on our portfolio because we're not big in commercial real estate lending, and we don't lend to POGOs.
Yes, good afternoon. Just a quick question on the second quarter results. Two questions. One is there any seasonality to the second quarter numbers? Second, is it something that we should be trying to take a look, say, factor or let's say maybe annualize moving forward? Yeah.
It's the normal seasonality of the quarters, meaning first quarter benefits from a portion of this year-end, then it slows down, then it normalizes second quarter. I would say this is the normal second quarter low end. Then depending on the outlook, third quarter either starts early with the trade activity or starts late. It starts to pick up, then fourth quarter would be the normal strong quarter. In terms of seasonality, it's the same as we've seen in the previous years. If you look at our quarterly return on equity, first quarter is always the weakest because of high expense. We have our annual expenses like business permits and the like all coming in during that period.
Thank you.
Question from First Metro Investments, Cristina Ulang. Congrats to your record income. How damaging was El Niño to economic activity, your earnings and asset quality? How are banks coping, you also with climate change related risk, loan portfolio-wise and bank infra-wise?
Okay. El Niño, we're not big into agri-lending, even if we do, it's not really at the production level. It's mostly in the middle part of the value chain, traders, millers, and the like. They tend to be resilient. Economic activity, you will see it more in terms of the price of commodities, and that's where inflation comes in, not so much on banking activity. What was the second question?
How are banks coping-
With climate change?
How is BDO coping with climate change related risk?
Oh. Except for the ESG that we have to comply with, I think climate change is a long-term thing which probably we won't notice in a big way until it's there. I think from a policy perspective, this has to be revisited. This is a personal opinion, because climate change is the choice of two evils. I always say it's a trade-off between E, which is environment, and S, which is the social aspect of it. Will we stop lending because of the environment at the expense of having no power? We don't know. To say it hasn't impacted us yet, but it will rear its ugly head very soon once we start to have things like power shortages.
Thank you, sir.
Well, thank you for attending. Thank you.