Hey, good afternoon, ladies and gentlemen. Welcome to BPI's first quarter 2023 earnings call. This is Chinky Lukban, your moderator for this afternoon's session. I am pleased to introduce to you our speakers and panelists this afternoon. TG Limcaoco, President and CEO. Eric Luchangco, Chief Finance Officer and Chief Sustainability Officer. Juan C. Syquia, Head of Institutional Banking. Theresa Marcial, Head of Wealth Management. Jojo Ocampo, Head of Mass Retail Products, and Ginbee Go, Head of Consumer Banking. We also acknowledge the presence of the rest of the BPI senior leadership team joining this call.
This afternoon's agenda will begin with the opening remarks from our president, TG Limcaoco, followed by our CFO, Eric Luchangco, who will walk you through this quarter's macroeconomic updates, performance highlights, digital and sustainability updates. The floor will then be open to questions from the audience. Just some housekeeping reminders before we proceed. Identify yourself by your name and company, so we can address you accordingly. Keep your lines on mute to minimize background noise. Finally, this call is being recorded and legal disclaimers apply. Now, let me turn you over to TG for his opening remarks. TG, go ahead, please.
Thanks very much, Chinky, and good afternoon to everyone joining us on this first quarter earnings call. The first quarter was marked by continued momentum of our earnings from the second half of 2022 that continued well into the first quarter of the current year, really driven by above-market growth in both our deposits and our loans, and continued expansion of our NIMs, despite the rising cost of funds brought about by very strong competition for time deposits and a low CASA ratio that fell, but not inconsistent with historical norms.
The quarter also showed the bank with strong non-interest revenue and lower provisions that were justified by lower NIM, lower NPL versus last year, and a higher NPL coverage. Our digital strategy continued to make progress in the quarter as we launched a new version of our BPI banking app. Now let me turn over to our CFO, Eric Luchangco, who will provide more detail and more color on the results for quarter one. Eric?
Yes, good afternoon, and thank you for joining us. Let me start my update with a brief overview of the economic backdrop. Globally, inflation continued to ease over the quarter on the back of lower energy prices, but core inflation remains fairly elevated, pushing global central banks to continue tightening monetary policy rates, leading to slowing growth, although more prominently in advanced economies. Locally, we expect the Philippine GDP to grow 5.9% this year on the back of continued growth in private consumption and government spending. Following the high inflation print in the first two months of the year, BSP increased policy rates by 75 basis points to end the quarter at 6.25%, and the yield curve flattened.
Recently, the BSP has turned a bit more dovish and indicated that it is open to a possible pause in rate hikes in May. Banks should continue to benefit from asset repricing if high interest rates persist, but this has slowed loan growth and increased pressure on NPL ratios, even though they remain well below recent peaks. The collapse of Silicon Valley Bank left Philippine banks largely unscathed, despite their diversified, given their diversified deposit bases and healthy liquidity and capital positions that exceed the requirements of BSP. Moving on to the performance highlights. For BPI, we had a strong start to the year, underpinned by broad-based growth. For the first quarter, we generated PHP 12.1 billion in after-tax earnings and a 15.4% return on equity.
We further strengthened our balance sheet, and our growth in loans and deposits has remained ahead of industry averages. Our capital position remained robust, with CET1 ratio at 15.7%, indicating sufficient buffer for our future loan growth and investments in our strategic initiatives. Asset quality has been resilient, remaining better than industry average. We booked lower provisions given our high NPL and collateral covers and our still benign NPL ratio. We expanded our client base and increased our client engagements. We continue to deliver on our digital agenda with the release of our new BPI app, while our investments in customer experience have resulted in higher market share and NPS. Looking into our financial performance in a bit more detail. Our net income of PHP 12.13 billion is up 52% year-on-year, driven predominantly by growth in revenues.
This is our highest on record quarter income, excluding the PHP 12.5 billion in the second quarter of last year, which included a one-off gain from the sale of property. Some things to note are net interest income of PHP 24.16 billion, which is up 27% year-on-year on loan growth of 13% and continued NIM expansion, which is up 52 basis points. Solid trading income at PHP 1.26 billion is up 40%. Strong fee income at PHP 6.3 billion is up 15%, backed by an increase in the customer base and volumes, all coming together for a growth in revenues of 25%, for a total of PHP 31.7 billion. Revenue growth more than offset the nearly 20% growth in operating expenses, driven mainly by structural salary adjustments, increased marketing expenses and technology spend.
Provisions was 60% lower than the previous year, though. We generated good returns for our shareholders with ROE rising to 15.36% and ROA to 1.88%, the highest level since 2013. Compared to the prior quarter, net interest income increased 34%, driven by lower OpEx. No, sorry. Net income increased 34%, driven by lower OpEx and to a lesser extent, higher revenues and lower provisions. OpEx declined 15.8% quarter on quarter, following the 26% increase in the prior quarter due to milestone payments related to tech spend and other year-end related spending. The PHP 31.7 billion we generated in revenues was a new high for recurring revenues, excluding the second quarter of 2022, which included the PHP 5 billion in gains from the sale of property.
The revenue reflects a consistent and sustained sequential increase in net interest income from accelerating NIM and above industry growth in assets that you can see in the red bars. Trading gains of PHP 1.26 billion, up 40% year-on-year from the sale of FVOCI securities as market conditions became favorable. The securities portfolio also booked significant gains from improvement in the market valuation of securities, which flowed through other comprehensive income. Fee income of PHP 6.3 billion, which is down 7% quarter-on-quarter, due to the seasonally strong quarter last in the fourth quarter. Year-on-year fee income was up 15% as activities remained robust, supported by a wider customer base. NIM also improved. The strong momentum in net interest income we saw in the previous slide was driven by both higher loan balances and NIM.
Although the loan book contracted 2% versus last year, which is typical moving from year-end to the first quarter, loan growth resumed in February through March, and the positive trend in loan growth is seen continuing with a 13.2% growth versus last year. NIM also improved, building on the trend of previous quarters. NIM widened 52 basis points year-on-year and 19 basis points quarter-on-quarter to 3.94% as assets repriced at a faster pace than the cost of funds. These numbers do not yet reflect the impact of the lifting of the cap on credit card loan rates, which we expect to support further yield expansion. We expect the impact to be more pronounced now compared to when the cap was implemented in 2020, as our credit card loan book has increased 53% since then.
We expect NIM expansion to taper this year. However, the higher loan base should moderate the impact of a stabilizing NIM on profitability. Looking at the loan book in more detail, the total outstanding gross loans reached PHP 1.715 trillion, with all segments except Mortgage posting strong growth. This was led by personal loans up 94%, credit cards up 39%, and microfinance up 24%. Auto, which lagged early last year, has caught up and logged a 16% growth rate exceeding the corporate and SME, which was still up a respectable 12.5%. Mortgage was weighed down by the CTS segment as supply of new developments has lagged recently, but regular end user housing loans was up 10% year-on-year.
The exceptional growth in personal loans is on the back of higher loan releases, which reached PHP 1.8 billion in March, up 170% year-on-year. We expanded our distribution channels, improved our online application process, and implemented alternative scoring methods. Credit cards also maintained its strong growth momentum, backed by an expanding card holder base and volumes as we launched aggressive fall-off-your-seat offers for acquisition and marketing campaigns. Moving on to fee income at PHP 6.3 billion, up 15% year-on-year, driven by Cards, Investment Banking, and Asset Sales. Other than Wealth Management, Insurance and Rental business, all business segments posted higher income. Credit cards, our largest fee business, contributing nearly 30% of total fees, reported record fee income. Credit card loan billings registered 12 months of sequential growth.
This was driven by a 22% increase in the card holder base and 52% increase in billings year-on-year, both above industry averages. Fee income from wealth management declined 9.2% year-on-year due to lower AUM from redemptions and lower market valuation. As of March, however, we have seen five consecutive months of inflow and improvements in market valuation, particularly on fixed income securities, which account for the majority of AUM. Operating expenses stood at PHP 15.1 billion, down 15.8% quarter-on-quarter due to milestone payments in the prior quarter. OpEx is up PHP 2.5 billion or 20% year-on-year, with increases in all expense categories. Manpower expense is up 16% due to structural salary increases, the annual pay hike and a slight increase in headcount.
Technology spend is up 43% year-o n- year, mainly from continued investments in digitalization. Other expenses were driven by growth in marketing and advertising. Despite the 20% increase in OpEx, cost income ratio declined 2 percentage points from last year on strong revenue generation. We continue to make progress on our efficiency initiatives. Our client base expanded to about 9.5 million, up 1 million clients from last year, further improving our client to employee ratio. We served our clients with a reduced branch footprint following the colocation and consolidation of 115 branches since 2019, in line with our strategy to optimize and rationalize our branch network without giving up any territory. Our efficiency gains from digitalization and strong digital adoption of our clients have allowed us to improve our cost income ratio by 5 percentage points from 2019.
We have seen some concern over rising costs as a result of our 4Q 2022 figures. However, we believe this quarter shows that last quarter was an exceptional rise. Total resources stood at PHP 2.67 trillion, up 3% quarter-on-quarter and 12.4% year-on-year. Loans stood at PHP 1.72 trillion, while deposits were at PHP 2.15 trillion, up 13.2% and 13.6% respectively. Despite the decline in CASA reflecting the market trend, the bank continues to maintain high quality funding with CASA ratio at 70% and LCR at 161%. We gradually built up our securities book up 7.7% year-on-year as interest rate increased.
With the securities book, we have much higher allocations to FVOCI securities relative to FVTPL and HTC compared to last year. Composite duration remains conservative at four years. We continue to see strong metrics on asset quality. Though we saw a slight uptick of 6 basis points in the NPL ratio over the quarter, this was largely due to the slight contraction of loan volume rather than a sizable increase in NPL levels. NPL ratio stood at 1.82%, down 55 basis points from last year's 2.38% and is only 16 basis points above our pre-pandemic ratio. NPL cover was at 177%, up 22 percentage points from last year.
We continue to book provisions, though at a much more moderated pace of PHP 1 billion for the first quarter, equivalent to 24 basis points credit cost. On the following slide, we'll discuss the thinking behind our provisioning level in a bit more detail. Our sizable provisioning was accumulated during the pandemic. As we didn't have a playbook for COVID, we planned based on our experience from the Asian financial crisis and significantly boosted our credit cost, which increased almost five times in 2020 from the prior year, 2019. Seeing a more moderate scenario than feared, we then slowed down provisioning through 2021 and again in 2022. Three years into the pandemic, we've accumulated PHP 55 billion in reserves against the PHP 31 billion NPL level.
Since we're now seeing past the peak in NPL formation due to COVID and with the economy recovering, we might not see NPLs increasing materially in 2023, and we have room to moderate provisions. Our current loan loss buffer is very conservative, with NPL cover standing at 177%, as previously mentioned. I would add that our collateral cover has remained at about 200% level. I would also add that under increasing pressure from our external auditors, we have decided that we were well-positioned to reduce provisioning this year in order to bring our NPL cover down slightly. If we see unexpected credit losses creeping into the book, we can use the buffers. Furthermore, as you'll see on the succeeding slide, the bank's capitalization levels remain in excellent condition.
CET1 stood at PHP 300 billion, up PHP 14 billion quarter-on-quarter, while the CET1 ratio rose to 15.7% and CAR rose to 16.58%. Year-on-year, CET1 capital increased PHP 31 billion, primarily from income accretion and supported by improvement in mark-to-market valuations on the FVOCI book. These factors were partially offset by the cash dividend declaration. CET1 ratio and CAR declined 56 basis points due to faster accumulation of risk-weighted assets. Nonetheless, both the CET1 ratio and CAR remain comfortably above regulatory requirements. In March, the board approved the declaration of property dividends consisting of 406,179,276 common shares of BPI held in treasury to be distributed to all stockholders on the record date as of March 29, 2023. Actual distribution will be announced.
Sorry, actual distribution date will be announced after we secure regulatory approvals. The property dividend is on top of the regular cash dividends. Last year, consistent with our dividend policy, we paid a total of PHP 2.12 per share, up 18% compared to the fixed dividend per share paid in prior years. Before I move on to digital metrics, I just wanted to briefly plug our new BPI app, which we launched in March. The new app features an improved user interface where users can get things done in fewer taps. It also has an online account opening facility, so that new clients can open a BPI SaveUp account within 5 minutes using just one ID. Clients can start banking instantly via the new app.
By the end of this month, BPI will be the first banking app to offer AI-powered tracking and insights. The app will offer financial advice, payment reminders, and actionable tips to help millions of Filipinos improve their financial wellness. This new BPI app is key to the bank's phygital approach to making the bank more accessible to Filipinos through physical channels, digital channels, and platforms. Now, moving on to digital metrics. We continue to expand our client base. During the first quarter of the year, we added 220,000 new retail clients, bringing our retail client base to 942 million.
Digital customers stood at 2.95 million, up 148,000 from the beginning of the year, and 5.7% above the level of 2019, bringing our digital penetration rate up to 31% of our total customers, compared to only 6% in 2019. In terms of engagement, digital customers had about 3.1x more transactions than non-digital customers during the first quarter. As a result of this higher engagement, digital customers generated 1.9 x more revenues than non-digital customers. This multiple is slightly lower than the 2.07x at the end of 2022, as we converted more non-digital customers into digital customers. These shifting customers take time to ramp up their engagement, as we'll show on the following slide.
With the cost to serve for digital and non-digital customers being comparable, despite digital customers transacting more, digital customers are more efficient, with lower cost income ratio of 33%, making them more profitable. We wanted to share some additional information illustrating what I mentioned earlier about the benefit of digitalizing customers. On the left chart, you'll see the percentage of revenue coming from digital customers, as we had defined earlier. What you'll see is that the percentage of revenues from these digital customers is becoming increasingly relevant for us, such that we expect it will soon surpass that of non-digital customers. Moving on to the right-hand chart. What we show here is the income growth for clients that shift to digital versus those that do not, broken down into AUM buckets.
The three-line graphs that you'll see show the progression for each client bucket with AUMs at the top of PHP 500,000-PHP 1 million, in the middle of PHP 100,000-PHP 500,000, and then at the bottom for those at the sub-PHP 100,000 AUM bucket. For each graph, you will see a gray line for those that are traditional or non-digital customers. In gold for those that have been digital ever since, and in red for those that have transitioned from traditional customers into digital customers. What this shows is that customers that turn digital over time generate better revenues than those that do not, and shows the value that our digital initiatives are delivering. As we broaden our customer base, we expect to broaden the benefits of all our digital initiatives.
Finally, on sustainability, BPI further strengthened its leadership in environmental, social, and governance initiatives. To date, BPI Direct BanKo has assisted 274,000 self-employed micro entrepreneurs with dispersed loans reaching PHP 37.6 billion. BPI Business Banking has helped over 132,000 SMEs with total loan releases reaching almost PHP 400 billion. BPI Sustainable Development Finance has funded 398 energy efficiency, renewable energy, green building, climate resilience, and sustainable agricultural projects amounting to PHP 252 billion. By the end of 2022, 51% of BPI's corporate portfolio will have supported the UN SDG goals. BPI once again posted a number of firsts on the ESG front.
In April 2023, we added the sixth IFC- EDGE certified branch with more scheduled through the end of this year. In 2022, BPI was the first branch to have earned IFC and World Bank's green building certification, known as EDGE, for five BPI branches, with more EDGE certifications planned for the rest of 2023. BPI also converted two more bank-owned buildings to using 100% renewable energy, which brings that total number to three BPI buildings. We raised over PHP 10 billion in Green Saver Time Deposits, which are like green bonds except in time deposit format, making them available to retail investors. In January, BPI issued its second social bond, called the BPI RISE Bonds, proceeds of which are allocated to eligible MSMEs as vetted by Sustainalytics.
In 2022, BPI garnered a record number of 10 ESG accolades, recognizing the various ways in which BPI has upped the bar for the industry in terms of ESG. Keeping up that momentum, we have already received our first ESG award for 2023 as the best sustainability bank in the Philippines from the International Business Magazine Awards 2023, making this a back-to-back win for BPI. To close, with a summary on profitability, we delivered a strong first quarter operating performance. On our balance sheet, we continue to maintain a healthy balance sheet with ample liquidity and capital. Asset quality remained resilient with ample allowance for credit losses. Our digital initiatives continue to drive loyalty, growth and efficiency.
Finally, we further strengthened our leadership on sustainability. Overall, we're very encouraged by our operating results for the first quarter. While risks and uncertainties remain, we are confident that the bank is well-positioned to perform within our operating environment to deliver growth and enhance shareholder value. Thank you, and we now open the floor to questions.
Thanks, Eric. Ladies and gentlemen, the floor is now open to your questions. There are two functions at the bottom of the Zoom webinar screen you may use to queue. One is the raise hand function. I will then prompt you, so you can unmute your line for you to speak. Alternatively, you may type your question, and I can read it on your behalf. Our first question comes from Yong Hong Tan of Citi. He has three questions. The first is how much OpEx was recognized in the first quarter as digital spend? Should that normalize through the year?
Second, given NPL cover above pre-pandemic levels, can we expect to see credit costs remain at current levels through the year, barring any idiosyncratic episodes? And finally, are you comfortable with low to mid-double digits loan growth this year? Could you provide more color on why is there a seasonal contraction in loan volume in the first quarter?
Yeah. Okay. Let me take that one by one. First, in terms of OpEx recognized in the first quarter, in terms of digital spend, I think we provided that number here and on the slide. I believe we had it at PHP 3 billion for the year. Sorry, PHP 3 billion for the first quarter. I think that's a level that we can expect to be kind of in that range through the course of the year. Okay. The second is given NPL cover above pre-pandemic levels.
I think in terms of the credit cost, we believe that our provisioning in the first quarter is sufficient, more than sufficient, probably to cover the kind of losses that we expect. Actually, we expect that all things being equal, you know, if we continue to see the operating environment continue to be as it is now, you should expect to see credit costs at about this level.
Obviously, you know, we will be flexible if we see market conditions changing, and so we can make adjustments midstream. In terms of comfort with the low to mid-double digit loan growth, I think that this is a level that we are generally comfortable with. It is normal for us to see contraction in the loan volume in the first quarter just because of seasonal requirements heading into the year-end that then normalize in the first quarter. I'm not sure if Juan C. would like to add anything to that.
Hi. Good afternoon, everyone. Yes, Eric, thanks. Just briefly, yeah, Eric's right. There is seasonality, and I think we could share that across all the segments, so from our end to Ginbee and to Jojo's segment, Mass Retail. It's very similar that there's heightened activity towards year-end. The buildup actually begins third quarter for inventory, and of course, it ends with the consumers year-end, and then tapers off after the year-end.
Maybe just a bit of flavor, so we just reviewed this internally as well. The magnitudes vary from year to year, but definitely it's downward. I think given the I think last year there was a more bullish sentiment after the year-end than what's transpired this year. The big drops this year, I'm guessing that at least on the institutional side, might be a little bit larger than last year's and more similar to the prior year. That's where we are, Eric.
Just to add to that, I mean, the demand itself from the corps, right, really grows into the year-end.
Yes. We're gonna see, I think, actually the acclimation to where this government is headed, so commitment to larger projects that build capacity for the country in terms of infrastructure and other required resources. That's good. We're expecting that to take place later in the year, Eric.
Okay. Thanks, Eric and Juan C. For our next question, comes from Aakash of UBS. Akash, we may unmute your line.
Great. Thank you, Chinky, and thanks, TG and Eric, for the presentation and the rest of the management team. I have a few questions. The first one is, as you just, you know, mentioned that the momentum for loans has resumed in February and March, does it mean that your year-end target of 12% or 13% is still intact and you're on track to get there for loans overall? Is that fair?
Yeah. Sorry, Juan C, do you wanna get that or?
Yeah. For institutional banking, yes. Thanks for that question. Our expectation is really that we will on the corporate side, the growth will continue to beat the GDP levels because I think actually for those of you who visit the Philippines, now that the economy is, you know, probably fully opened up, you're gonna see the lack of infrastructure and therefore the spend needs to go up. We're expecting that to be led. Then from there, I guess the smaller or the mid-sized segment, corporates and then the retail will follow. That's the expectation. We expect to beat GDP. Of course, as Eric said, if the temperature and the sentiment changes, we'll have to adjust. We're ready to support our clients in that front.
Okay. Great. Thank you. Next question. I think going into this quarter, there were some concerns around funding pressure, which you also mentioned in your presentation. If you look at the funding cost increase on the slide that you showed earlier, it seemed like the funding cost increase in Q1 was 33 basis points versus 37 basis points increase in Q4, Q- on- Q. Is it fair to say that, I mean, the pressure on funding costs has actually eased a little bit at the margin compared to Q4? And or in other words, like the mid-sized banking, you know, the competition was happening in the mid-sized bank space, which has not affected the big banks like yourself as much yet. Is that fair to say?
We have seen some easing in terms of the cost pressures, especially towards the latter part of the quarter. So some of that is coming down. Yeah, I guess that's-
Okay. Got it. Eric, when you said the NIM, you expect it to taper this year, can you be a bit more specific about when are you thinking the NIMs will actually peak out? Is it gonna be as soon as Q2 or maybe towards the end of the year?
I think that's highly dependent on when the government or when BSP stops raising rates, right? If they do take a pause in May, and if that pause is kind of through to the end of the year, I mean, if that is what they do, then I would say that we would probably peak out in call it about the second quarter of the year, towards the tail end of the second quarter of the year. You know, there very well could be another rate rise, at which point it will probably extend again the amount of time before rates peak.
I see. Okay, great. Thank you. I think it seems a bit earlier than I would've expected, if we assume the scenario that BSP doesn't raise rates anymore, and the funding cost competition is also easing at the margin because there's still a lot of loan repricing that will happen through the course of the year, right? I thought maybe Q3 or Q4 is when the rates or when the NIMs will peak.
Overall, you're right on the earning asset side. We should expect to see some of that continue to move up a little more, but I think the pace at which it's gonna move up is gonna be moderated, and then we have to see how cost of funds is going to move as well, right? As you mentioned, we've seen a little more competition on the funding side. Although we've started to see that ease, you know, I guess I would say we're not yet at a level where we feel like it has really normalized. Therefore, I guess we're maybe a bit cautious on that end.
Okay. Got it. Thanks, Eric. Third question is on the OpEx. I think despite this 20% increase in OpEx in Q1, just wanna check, your 10% or lower OpEx for the full year guidance, is that still on track?
Given the things that we've been working on and some, I guess, new initiatives that have come along the way, and we're always looking for good opportunities, I think OpEx will probably be a little more elevated than the roughly 10% guidance we had mentioned at the early part of this year, but still looking for low double digits.
Okay. Understood.
I think on that, Akash, we're willing to push on the OpEx because what we're seeing is a stronger revenue growth. I think the metric that we wanna be very careful about when we look at OpEx is our cost to income ratio. For as long as the OpEx we are spending is generating, you know, more revenues and better bottom line, I think we're prepared to do that on what we call our selling expenses and our marketing exp enses.
We're very conscious of that. When we see, for example, on the card spend, we're doing very well on the cards. I'm willing to give Jojo more money there for as long as she's delivering on the bottom line better than, you know, better than the 49%-48% cost-to-income ratio that we're seeing. If there's anything that might look elevated on the cost, it's probably on selling expenses and marketing, because it will deliver better than planned revenue growth as well.
Okay. Got it. Thanks, TG. Makes a lot of sense. The next question I have is on the coverage and credit costs. I think you already mentioned that you're comfortable keeping credit costs at this kind of level for the rest of the year. Is that assuming that the coverage also stays here, or are you baking in some increase in NPLs? Like, is this level of coverage the level that you wanna target, or do you wanna go lower than this?
I'd generally be comfortable even if or to see credit costs come down a bit. In fact, as I mentioned, our auditors believe this level to be highly elevated, especially considering the level of collateral cover that the bank has. Therefore, we do see bringing it down as something that is reasonable. We don't see it coming down all the way down to 100%. You know, a little down from where we are, maybe about the 150%-160% level, we would not see that as problematic.
I see. Okay. Thanks.
Akash, the battle we're having is with the auditors who feel that we're over-provisioned. They point out that our coverage is 180%, 178%. Our NPL is at 1.8. Even our restructured loans is like at about 2%. Even if all of our restructured loans went bad into NPL, our coverage would be about 100%, and then that doesn't even include the collateral. Our auditors are arguing that we're over-provisioned. We're trying to strike a balance there.
Right. I think makes a lot of sense, TG, Eric. Th anks for that. Just final question, you know, if I put this all in context, it does look like that, maybe close to 15% ROE is kind of achievable for this year. I just wanna get your thoughts on that. Do you think that's a fair assessment?
Yes.
Okay. Short answer. Thank you. Fantastic. Thank you very much. That's all my questions.
Thanks, Akash. Our next set of questions will come from D.A. Pan of JP Morgan. D.A., go ahead, please.
Hi. Good afternoon, everyone. Thanks for the call. Just a few follow-up questions from me. First, sorry, it's on NIM again. I think, Eric, you mentioned you expect NIM to taper off. Just want to understand, from the rate hikes that are already done, how much more pass-through do you think we'll see both on the asset and cost of fund side, or do you think that's substantially done already?
No. Sorry. I think I didn't mean that NIMs would taper downwards. Well, NIM growth is going to taper off. I don't actually think that we will, although I said that, you know, we'll probably see NIMs peak towards, maybe, the end of the second quarter, assuming no more rate increases for the rest of the year. That doesn't mean I think that NIMs are gonna taper off within the year, but we will probably see that tapering off of growth. I think we'll continue to see maybe a slight increase in terms of earning asset yield, but based on what we've seen in the earlier part of this year, it looks like the cost of funds may be a bit competitive as well, and therefore leading to kind of tapering in terms of the NIM growth. I don't see it coming down within the course of this year.
Maybe the quick one here is to ask Juan C, see how much of his loans reprice against the policy rate, right? Most of your loans are within 30-60 days.
Correct.
Go ahead.
Yeah, that's right. I think as Eric also was alluding to earlier, there is an element of competition, right? We all, as you'd expect, the high-quality borrowers get chased by not only the big banks but all the banks. There is a lag there, and that's what I think we've experienced in the past. This start-end of March, this last few weeks, as the market got more acclimated with the higher interest rate environment.
They've accepted that this is more or less where the regime is. There's been some more repricings this time. I think it's also reflective on the liability side, where you would have all seen how TD rates, if you just scan the publicly announced rates for all the banks, you see they adjust upwards as well in the last quarter or so. We do see that, I guess, affecting the way we're able to price loans. To TG's point, the bulk of our loans, be it term or working capital are still a floating rate loans. No? For those that were fixed prior to the pandemic, there are a number of them that are already in the fifth year or so from their. Even if they were longer term, that will be also repricing this towards the second half of the year.
Yeah. To put it really simply, right, D.A, most of our corporate loans are floating rate, repricing anywhere 30-90 days. For as long as policy rates keep on rising, our asset yields will continue to rise. The thing that we need to watch out for is the funding costs. That's been a surprise in the Q4 and Q1. That said, we've been very really diligent now about watching our funding, not chasing the deposit levels throughout the quarter. When I think about what will happen when the BSP begins to pause and lower rates, I would expect policy rates to remain still high, not to fall, right? Therefore, our asset yield should hold and continue to rise for another 30-90 days after. Then funding costs should come down faster.
Understood. Those are all very helpful. I guess moving on to different topic, on just the growth side. If I look at the different buckets, credit cards and personal have been growing really strong. I understand you guys have been very aggressive on marketing campaigns, but apart from that, any significant change or drivers in these? And could you talk about the sustainability of the growth of these buckets in particular?
Hi, this is Jojo. I'll answer the question on credit cards and personal loans. Well, other than the fact that we have been grabbing market share from our competitors, really the fact is that the economy has opened up post-COVID and travel is back, restaurants, dining and entertainment is back up. In general, the industry has actually grown. The source of our growth is primarily from grabbing market share from our competitors. Personal loans also, we see that personal loans are really used for home improvements, also for travel, for education and also for short-term business needs.
Likewise, with the economy growing and opening up after COVID, the industry has also grown. Specific to the growth of BPI's personal loans, again, this has come from grabbing market share from our competitors, increasing our channels of distribution. We have a lot of Digital Channels now open, as well as third-party sales and direct sales efforts from our telesales agents. Those are the factors responsible for the growth of our personal loan business, as well as the walk-in clients and referrals from our branch network. That has been a very strong source of referrals for both credit cards and personal loans.
Any guidance on the potential growth of these buckets?
Well, we hope to continue the strong double-digit growth. We actually expect credit cards to grow by at least 25% year-on-year for 2023, but we're actually growing faster than that. Personal loans to grow at least by 60% versus prior year.
All right. Last one from me. Just any worries from the global events happening on banking? Any potential risk you're seeing to the system and to you guys?
Well, we haven't really seen any impact. I mean, between what's happening in the U.S., I mean, with Silicon Valley Bank and then Signature Bank, even First Republic Bank. Of course, First Republic Bank a little more fresh. We haven't really been seeing any impact from that, neither from what happened with Credit Suisse in Europe. I think it's not just us and not just the Philippines, but it seems like Asia overall, at least from what we've seen, has been less impacted. I think specifically in our situation, we haven't really seen significant concerns translating to us.
I think specifically, if you look at the events in the U.S., I can say that really it doesn't really translate here. But what would worry me is the kind of scrutiny that the U.S. banks or even Credit Suisse would have had, and the regional banks, the kind of scrutiny that their depositors and their investors have given them will eventually come here to the Philippine banking system. Therefore, the banks will be under tighter scrutiny, and people will just have to be a little more careful the way they operate their businesses. The BSP is aware of that. There's a lot of discussion on the BSP's level as well on that.
Understood. Thank you very much.
Thanks, D.A. Our next set of questions will come from Harsh Modi of JP Morgan. Harsh, go ahead please.
Yeah, hi. Thanks. I have two a bit broader questions. First is that you talked about the back and forth with the auditors. On the standard assets, I would expect that every bank would keep whatever it is the expected credit cost, probability of default, loss given default. That, in my mind, would be a particular number, 50, 100, 200 basis points or whatever be the case, and then management overlay. Is that something which you have flexibility on management overlay? Or is there something which is a bit more unique where, based on the domestic accounting rules, you can only do provisions against restructured and NPLs?
Currently, let me just make sure I understand your question correctly. Currently, the way we've been working with our auditors is, you know, they've identified that, or they've seen, as I think probably you have as well, our NPL cover has just been moving up and up and up, right? On our end, we've wanted to treat the situation fairly conservatively by making sure that we are sufficiently provisioned. The level of our provisioning was really coming up to the limit of what our ECL model was saying under an adverse scenario. This is what the most that you can expect to happen.
I think if not for that model, the auditors would have pushed us even sooner. At least those were the conversations they were having. They would have liked to see our level of provisioning come down even sooner. We had that ECL model, adverse scenario to go back to as a way of saying that, you know, we want to make sure we're adequately provisioned for an adverse scenario. They are continuing to, as our ECL model has now started to point to an easing situation from an economic perspective, they're now saying that we have to start to come down in terms of our provisioning levels. Is that the answer?
No. Not that, Eric . I was talking more about for the standard assets, not the NPLs, not the restructured book. At any point in time when you make a loan, there is a probability of default, and there is a probability of loss given that default.
That's what our ECL model takes into account, right?
Right. Right.
Yeah.
To me, on that, basically you're saying that even assuming your restructured as well as standard assets, there was not much to worry about and you can't. Okay, that's fair. All right. Now, the second question is probably what I wanted to get to. I'll take a couple of minutes. Wanna understand on the digital spend that you are doing, what is it getting you? In the sense, are you able to get better market share? Is it more on the deposit side?
Is it more on the payment side? Is it more that you're able to do better lending? Or your ability to gather data is better, leading to better asset quality? Or are you able to generate fees? Like, how do I start contextualizing what the digital spend is leading to which part of the bank? How do we see that in numbers? Because you are sufficiently advanced in this. I have a follow-up question on GCash after this.
Yeah. I guess that one of the reasons that we showed that slide, that new slide that we showed earlier with the progression of revenue growth for customers that have shifted digitally, is to show kind of the benefits that we believe are occurring, right? We're seeing better revenue out of those customers. Now, if you're asking-
Just one thing. One thing on that. What I've seen in some other parts of Asia is the smartest, wealthiest, most profitable customers are the ones who go on to adopt digital first. Is it that these customers were profitable even before and then they became digital customers because they are ahead of the curve? Or because they became digital customers, they're starting to transact more?
Well, what I think I mean, if you recall that, the chart that I had showed earlier, it showed three things, right? Three types of customers. The gray were those that remained non-digital. The red were those that transitioned from being non-digital to becoming digital. Then the gold was those customers that were always digital. Now, when we say always digital, obviously we didn't always have a digital platform. But this measure of the digital customers only goes back to 2016. If we can just advance from this slide, maybe a couple of slides forward to the slide. Back to this slide t here.
You can see, I guess, reinforcing what you said earlier, that the most sophisticated and best customers are the first to shift to digital. These are the customers that you see as consistently digital because they shifted to become digital pre-2016. Right? The red is those that shifted after 2016. You see the gold is consistently the one at the top, and that reflects the fact that they shifted earlier, they're more sophisticated, and their revenue growth is even stronger, right? Then you look at the red, which is showing better growth, and then the gray showing the least amount of growth.
Fair point. Now in the market, this is all internal within the digital versus traditional. Thanks for that. In the market, as you are going and competing with especially other larger banks, where are you able to get more market share? Which part of the business, either on revenue side or on balance sheet side? How do I think about your market share, let's say it figures out because of all the digital spend?
Yes. In terms of where it goes, I think that was part of your original question, right? Where does this go within the bank? Where or who benefits from this? I mean, initially, deposits should be one of the beneficiaries, but then even we expect it to come into other areas as well, as we're able to offer them products. One of the benefits of digitalization that we're trying to seize on is really to make more customized offerings, right? It allows us to create customized offers for the customers, depending on what kind of activity we see them doing. Therefore, it should come to some customers. I mean, different products to different customers, right? In general, I guess it's more consumer-oriented. That's where we can, in a sense, there's more incremental benefit to the digital, I guess, spend and digital initiatives.
Right. No, no. I get that, Eric. What I'm trying to understand is what does it do to your market share? Do you, like, have any view that you can increase because your offering is so much better than competition, that you can increase your market share by, I don't know, 200 basis points in next two years? What is the number that we should look at to track the end result of what you're saying, customized product offering and better time to market and so on and so forth?
Like even within your Management team, how do you evaluate these various, especially on the market share side of it. It may be wallet share, as in total revenue market share, it may be deposit or loan market share. How do we think about the number, and how do we track it to figure that it is actually working as intended?
Let me take that, Eric. I think, Harsh, the whole objective of the digital strategy, one is first and foremost, customer acquisition. We want to get more and more customers onto our platform regardless of where they are on the economic spectrum. Internally, and maybe we've said it to some people, that the goal by 2026 is to have 50 million people as part of our ecosystem. Not all of them will have deposits. I think when you look at market share, it'd be great to have better market share and deposits, and that's clearly one of Ginbee's KRAs. In the end, we're looking at revenues from all these customers.
I believe that there's a lot of potential from customers who may keep very small deposits, but will be using BPI as a sort of, a funding account and pay, you know, generating fees for us as they pay bills, where the biller pays us, for the transaction, the merchants pay us. Merchants keep balances with us because they're paid from these small accounts. I think that's what we're aiming to do. That's why for us, and what Eric's been trying to show, is that we're tracking the revenues from our customers who are using our digital platforms primarily.
We believe that that will continue to grow, and that will continue to lift our revenues going forward. That's why we're spending to make sure that we have a complete suite of digital tools, digital platforms, to just bring in any customer, regardless of where they are on the economic spectrum. We haven't really spent as much time in what we're trying to do on the corporate side, but that's one of the things that we're also working on.
Right. 15 million. You have about 9 million customers now.
No, 50 million .
50 million . Wow. By when?
2026.
Wow. That's impressive. Okay. I definitely misheard it. Thanks for that, TG. If that's 50 million, okay, then by definition, you need the best in class tech offering that your cost of service is close to nothing.
Yes.
Okay. Yeah, that's exactly what I was heading to. Okay, fantastic. If that is what your ambitions are, which now starts making sense, even if it is small ticket and all of that's fine because it gets you data. Okay. The second question I'd have to you is, how do you then think about your cost spend in absolute sense? Like, are you done with the bulk of the spend or let's say wherever you are right now, do you see that growing at a CAGR of, let's call it 10% or is it more like 15%, 20%? What your ambitions are, not only tech and you alluded to marketing and so on and so forth probably would be chunky as well. How do I think about the cost number over the next, let's say, three to five years? I know it's not a guidance but l ike what is the range you're thinking about?
Yeah. One of the metrics that I'm trying to keep hold on is that our technology spend should be close to 10% of our revenues. That's a function of two things. The first is that whenever you build a technology platform or a tool out there's an upfront cost, right? To build whatever you call it, the platform. Then there is a running cost as transactions go. You're paying for data transmissions, you're paying for storage, you're paying for security, which is based on the kind of volumes that you're getting. I would like to think that the upfront cost is a one-time, and improvements on the platform over time are very marginal.
As our transactions go, you want the cost per transaction to actually come down. Today we're doing a lot of software as a service, and so we need to negotiate with our vendors to make sure that that comes down as volume goes up. That's why I say if we're able to generate more transactions and more revenues, you'll naturally see the technology spend go up because right now we're doing a lot of software as a service. One of the things that we're working on is to rethink this and whether that's the model to go forward given our ambitions.
No, exactly, because the reason I ask that is if you are looking to scale up 5x you can't have any outsourcing. You are to in-source most of the tasks.
I gotta in-source more. Absolutely.
Exactly.
That's one of the things we're working on.
Okay. Okay, cool. What it also means is you may have a cost hump in next year or two if you do choose to in-source because the step one of that is quite costly. Is that fair or not really?
That's one of the things that I need to look at, whether that step up, right? If it ever happens, is worth it.
Okay. Thanks. The second question then to you. Thank you for that. That is very impressive. On GCash, what's the relationship right now? How has it evolved? Over the next couple of years, how do you see that evolving?
I look at GCash as a distribution channel for many of our products. I think it's a great distribution channel. They've got 76 million customers or so they say, and maybe 20 million who use it regularly. We've had good success with them. We have 500,000 new customers just on our investment funds. We have I think 300,000 new depositors using GSave. I don't even know the number of the insurance products that are sold through them. They've decided, you know, and rightly so, they're an open channel, so they'll carry everyone. I like the fact that we are close and therefore maybe we get a little advantage, you know, in the positioning on the app, but I see them as a distribution channel.
On our side, part of our 50 million strategy is to also come up with a payment app, which is our wallet, which is Vybe. I'm of the belief that payments per se, P2P payments, will go down to practically zero. The BSP is pushing it. Therefore you need to figure out how to monetize it somewhere. For our perspective, we will be using Vybe to try to get people to do payments through us, but hopefully take their data, be able to have them pay bills which will still generate fees, and eventually then be able to move them into banking apps or banking services through us. They don't necessarily have to, you know, use any of the fintech tools.
Yes. That is a top of a funnel product and ultimately only 2%-3% of those customers will make you money.
Yeah.
Over time. Okay. The final question if I may. Sorry for this basic one. Over the last few years, one of the key refrains I've heard from many CEOs and Philippine bank CEOs was that we want to use technology, but the tech infrastructure, the telecom infrastructure and also the acceptance was not great. A lot of that changed dramatically in last three years. Now, given where we are, do you think the externality, which was a bit negative, has it become positive and you are quite comfortable with the stability and of the infra and all of that?
Yeah. I think the stability of the infra is good. Certainly, people have gotten used to it, at least for now, you know, the upper end of the market is very digital. We have seen some people kinda regress because there's no more pandemic, so we're seeing more payments coming again through credit cards, which is actually good for us. Actually, anecdotally, many of the small businesses are seeing less P2P transfers and more credit card transactions going through, which is actually better for us, right? I think the central bank is very committed to try to push the digitalization of the banking industry and even the use of wallets.
They're really pressuring the banks to bring P2P fees down to zero for small transactions under $10, under PHP 500, that's probably going to happen by natural competition. I can see that being even higher, I mean, the threshold at which payments are free. There's even talk within the BSP that maybe they'll try to get the model like they do in some Scandinavian countries where they mandate that banking apps or payment apps are whitelisted with the telco so that people don't have to pay for the data. There's a lot of talk in the BSP to try to push it, and I don't think we can roll back from that.
Perfect. Thanks a lot, TG. Thanks, Eric.
Thanks, Harsh. Our next question comes from Rafa of Regis. Rafa, go ahead please.
Hi, guys. Bringing it back to analog. Just quickly on the deposit growth. Where do you think or why do you think deposit competition is still so intense considering how liquid the financial markets are with an LDR of 70-something%? You'd expect the loan competition to be intense. What do you think is driving deposit competition, and where do you think it's going in the next quarter or so?
We'll let Ginbee do that.
Hi, Rafa. You know, in the deposit business, relationship is key. In the traditional banking, relationship is key. Most of the time, the pressure on pricing is really driven by our more affluent customers who seek yield, especially at this time when policy rates have gone up and there are opportunities to really go for yield in turn, instead of liquidity. To make sure that we defend total relationship, consumer relationship, we do need to be able to compete on price onboard. However, as TG mentioned, we are very deliberate on our pricing, and we do very targeted pricing offers. We don't open it to all. It's about relationship building.
I think also, Rafa, at year-end, a lot of banks were worried about showing smaller market share or actually fall in deposit levels.
I think we're still seeing it in the quarter end. Just normally year-end I understand, the quarter end is a little bit. We were getting offers at quarter end, so like that's odd to have a quarter-
I think first quarter is kind of particular because people get worried about the tax season, which is like two weeks later, and reserve periods are two weeks, right? People are worried about that. Everyone plays first quarter safe.
Got it. Okay. Just quickly, on the asset quality side, I appreciate that the asset quality is improving or at least not deteriorating, at least in the first quarter. Any early signs, on the consumer side, specifically of stress, from rising interest rates, both consumer and on the corporate side?
None.
Rafa, from our end, we have seen our NPLs to be quite stable, if not further improving. We don't see any pricing impact yet because we have also been very deliberate in making sure that our interest rates remain affordable. That's why we have not so much interest rates, but actually monthly amortization. We do have some lending programs that allow us to manage affordability despite high rates. We've also been very strategic in our pricing strategies. We haven't seen NPLs affect housing or auto loans for that matter.
If I may also, despite the aggressive growth on credit cards and personal loans, our NPLs have remained in fact best in class in credit cards and are surprisingly even below pre-pandemic levels. In fact, my challenge every day is TG's telling me we should take on more risk to generate more growth. To that point, one of the reasons why our growth in loans has been that way is also because we have started doing credit tests using non-traditional metrics besides the usual credit score that is largely depositor-based, deposit balance-based.
Awesome. Thanks.
Thanks, Rafa. We'll take some questions in the chat box from Rachelleen Rodriguez of Maybank. Can you give us an update on the Robinsons Bank merger? Can you share the status of your agency banking initiatives? Are you seeing pricing pressure from digital banks' high deposit rates?
Yeah. On the Robinsons Bank merger, I mean, so far, we are progressing in terms of obtaining regulatory approval. We're not yet there, but we are making progress. I believe that what we've communicated is that we expect to secure regulatory approval by either the third or fourth quarter of this year, which would lead to a merger date of either October 1 of this year or January 1 of next year. Things are progressing on that front. As well, we're already starting to think about our plan of merger as we come together. We're seeing good progress on that.
In terms of the agency banking initiatives, we have already been working actively with a number of organizations or institutions that are acting or that are going to act as agents for us. We've launched a number of initiatives. One of the, I guess, more active or generative agents that we've been working with has been with Lazada. We offer products through Lazada and that's been quite successful for us. We're also reaching out to others that will allow us to expand our physical reach as well.
We can tell them that by end of June, the plan is to really have agents active both on Generika, Seaoil, as well as Robinsons Retail outlets.
Okay. One last question from Rachelleen . Are you seeing pricing pressure from digital banks' high deposit rates?
Yeah. On that, I think not really. I mean, the digital banks have been offering high deposit rates ever since they entered the market. That really hasn't affected our deposit strategy. It's really more competition from traditional banks that has really been moving the market on the deposit side.
The best indicator of that is the amount of bank transfers from us to the digital banks is quite negligible.
Even on the acquisition side, we've seen a very strong acquisition. On a daily basis, we get about 700-800 of new accounts coming from our GSave and BPI SaveUp.
Okay. Thanks, Ginbee and Eric. We have a follow-up question from Yong Hong Tan. Where do you see cost-to-income ratio trending towards now that your branch rationalization is largely done and also IT projects are also getting implemented? Any target this year or in the medium or long term for cost-to-income ratio?
I think in the immediate term, we're pretty happy with the cost-income ratio that we're showing in the first quarter. Our longer term target to 2026 was to have this come in at kind of the mid-40s level.
That's correct. I just pulled up our cheat sheet. Our target for mid-2025 is 45-46%. I guess, but just Yong Hong, I don't think we're done with our branch rationalization. We ended the year at 752. I think Ginbee's target is 600.
600 by 2026, by end of this year, about 703. We are also using this as a means to update and upgrade our branch formats to be more relevant to the change in our consumer behavior. We have come up with phygital formats, and we are looking at 25 new phygital branches this year.
Yeah. I think that's about it for our questions. I don't see any more hands raised and questions in our chat box. With that, ladies and gentlemen, thank you for your questions. Before we end the call, maybe some final thoughts from TG. TG, go ahead.
Thanks, Ginbee, and thanks to everyone for being on this call. I think we remain pretty upbeat about the future, the next couple of quarters. As Eric and Jojo just said, the first quarter did not even reflect any of the increased rates on our credit card portfolio which the central bank allowed us to raise rates from 24%-36%. I think we are raising banking branch fees on certain products to encourage people to move to the Digital Channels. That said, we should see a lift in branch fees starting May 1st, I think, Ginbee, right? We expect-
May 8.
May 8 , sorry. We expect the BSP to raise rates at least one more time, at the very minimum, and go lockstep with the Fed if the Fed continues to raise rates. The BSP Governor has started talking about potentially rewarding the banks if we cut fees by lowering reserve requirements. That should provide a lift for us, maybe just to offset the fees we might lose from bank transfers. Certainly in conversations with the governor also, he seems fairly committed to lower reserve requirements as he and his predecessor had committed to sync to 10%. That said, we remain guarded. Inflation continues to remain something that we watch.
As I mentioned, the thing that keeps me up at night is whether the troubles of the U.S., where people begin to look very closely at the balance sheets and the figures of banks in the U.S., comes here. You know, I think we need to be careful about that. I think that's why some banks are being very careful also and trying to shore up liquidity. I don't know if any of my colleagues want to put any points out there that we may have missed on this call. Otherwise, thanks to everyone for being on this call.
Thank you, TG, Eric, and the BPI team. Ladies and gentlemen, this concludes today's earnings call. Should you have additional questions, please direct them to our Investor Relations mailbox at investorrelations@bpi.com.ph and we'll be happy to respond to your queries. Thank you again for your participation. You may now disconnect.