BPHLY (BPHLY) Q3 2026 Earnings Report, Transcript and Summary

Okay. Good afternoon, ladies and gentlemen, and thank you for joining us today. Welcome to BPI's earnings call, where we're going to discuss the results of our performance for the third quarter as well as the first 9 months of 2026. I'm Haj Narvaez. I'll be your moderator for today's session. Just note, we are conducting this briefing in a hybrid format with our BPI speakers and panelists joining us from our headquarters at Ayala Triangle Gardens Tower 2 in Makati City, with also some participants joining us remotely. I am pleased to introduce you to our speakers and panelists this afternoon. First, TG Limcaoco, our President and CEO; Eric Luchangco, our CFO and CSO. They will be joined in the panel for the Q&A by Tere Marcial, Head of BPI Wealth; Ginbee Go, Head of Consumer Banking; Louie Cruz, Head of Institutional Banking; and Jethro Sorra, our Treasurer. We are also joined by the rest of the BPI leadership team in this call. This afternoon's agenda will begin with opening remarks from our President and CEO, TG Limcaoco, followed by our CFO and CSO, Eric Luchangco, who will walk you through the third quarter and the first 9 months' performance highlights, as well as provide updates on our digital platforms and strategic initiatives. The floor will then be open to questions from the audience. Please note, the call is being recorded and legal disclaimers apply. Let me now turn you over to TG for his opening remarks.

Thank you. Thank you very much, Haj, and a wonderful afternoon to all of you. Again, thank you for joining us in this briefing. This is our -- after 5.5 years, I think we're kind of used to this briefing. So after a rather uneventful week last week, welcome to this briefing. I'd really like to start by talking about our earnings. I think the earnings were spot on in what we were expecting. We had -- we reported earnings that are about 3% down versus last year's 9 months. Our loan growth continues to be strong at 13.6%, and we did continue to provide additional provisions higher than last year, but certainly the third quarter's provisions were lower than the second quarter as we see, I guess, what we hope is some light at the end of the tunnel. That said, the economy continues to be, in my view, fairly weak, and there are some, I guess, humps that we have to get over. But let's leave that for the Q&A and other stuff. I'll turn it over to our CFO, Eric, who will walk us through the numbers, and then we'll turn it over to Q&A, where we can discuss a lot of the excitement last week. Thanks.

Okay. Thanks for that, TG, and good afternoon to everybody joining us today, both in person and virtually. We're pleased to present our results for our third quarter, and these demonstrate strong business performance despite the challenging macroeconomic environment and reinforce our confidence in the bank's strategic direction. For the first 9 months, the bank delivered net income of PHP 48.9 billion, supported by robust loan growth and resilient NIMs, up 1 basis point year-on-year, reflecting the strength of the business model. Fee income rose 15.5%, driven by healthy business activity across key segments. Return on equity and return on assets of 13.6% and 1.8%, respectively, continued to compare favorably with that of peers despite higher provisions. The bank sustained strong balance sheet momentum with double-digit loan and deposit growth of 13.6% and 11%, respectively, backed by solid capitalization and liquidity. The indicative CET1 ratio stood at 13.9%, with the CAR at 14.7%. On asset quality, the NPL ratio increased to 2.5% amid macroeconomic headwinds and slower loan growth in select segments, although this was partly mitigated by lower net NPL formation in the non-institutional segment. Provisions declined quarter-on-quarter, resulting in a year-to-date credit cost of 101 basis points and an NPL cover of 89.6%. Meanwhile, our customer franchise continued to strengthen, with our client base expanding to 19.8 million, accelerated growth in agency banking transactions and the merger of BPI BanKo and Legazpi Savings Bank further enhancing our presence in the microfinance and teachers' loan segments. For our first 9 months, we delivered net income of PHP 48.9 billion. While net income declined by 3.1% year-on-year, primarily due to higher provisions, underlying revenue momentum and operating profitability remained strong. Revenue reached PHP 156.3 billion, up 9.8% year-on-year. Net interest income increased 11% to PHP 121.1 billion, supported by robust loan growth and a resilient NIM. Fee income rose 15.5%, driven by an expanded customer base, higher transaction volume and increased deal activity, more than offsetting the decline in trading income and rising yields. Operating expenses rose 12.5% to PHP 73.7 billion, reflecting continued investments in manpower, technology and franchise expansion. As a result, pre-provision operating profit reached a record PHP 82.6 billion, up 7.5%. Provisions rose PHP 69.2 billion (sic) [ 69.2% ] to PHP 19.9 billion, reflecting our forward-looking risk management approach amid a more challenging environment. Versus the second quarter, net interest income for the third quarter was up 0.4% to PHP 41 billion, driven by continued loan growth of 2.9%. OpEx was kept in check at just over PHP 25 billion, down 0.4%, and provisions declined to PHP 6.5 billion, down 16.5%. Credit cost improved to 96 basis points, down 24 basis points from last quarter. All of these factors resulted in third quarter net income of PHP 16.1 billion, up 1% from the previous quarter. For the first 9 months of 2026, profitability remained robust with annualized return on assets of 1.8% and return on equity of 13.6%. Earnings per share stood at PHP 9.23 per share. Turning to the balance sheet, the bank continued to sustain strong growth momentum. Strong assets reached PHP 3.85 trillion, up 3.2% quarter-on-quarter and 10.8% year-on-year, driven by sustained loan growth alongside increases in investment securities. Gross loans stood at PHP 2.75 trillion, up 2.9% quarter-on-quarter and 13.6% year-on-year, with expansion recorded across all segments. Deposits increased to PHP 2.97 trillion, up 4.3% quarter-on-quarter and 11% year-on-year, mostly from time deposits, leading to a CASA ratio of 57.8%. Loan-to-deposit ratio stood at 93.4% (sic) [ 92.4% ] on strong loan growth and a modest shift in borrowings as a funding source. Looking at loans by segment, loans grew 13.6% year-on-year, with continued strength across all segments. Institutional loans increased by PHP 1.86 trillion, up 11.3% year-on-year, supported by both working capital and long-term financing requirements. Non-institutional loans increased to PHP 885 billion, up 18.9% year-on-year. While this represents a moderation from the 27.2% growth posted last year, expansion remained robust and continues to drive a shift in loan mix towards higher-yielding segments. Within non-institutional loans, SME grew 46.7% to PHP 74 billion. While growth normalized from the 72.3% increase recorded last year, demand remained strong, highlighting the potential for further growth in this segment. On a sequential quarter basis, volume was flattish, up just 0.3% in the third quarter, demonstrating our calibrated approach of balancing growth and asset quality following 2 years of rapid portfolio buildup. Mortgage loans increased 10.8% to PHP 322 billion, while credit card loans increased 27.2% to PHP 277 billion. Personal loans increased 21.7% to PHP 53 billion, including PHP 23.9 billion in teachers' loans, which grew 67.8% (sic) [ 67.9% ] year-on-year. Auto loans up 12% to PHP 142 billion, including PHP 6.1 billion in motorcycle loans, which increased by 19.1%, and microfinance loans up 11.5% to reach PHP 18 billion. Overall, growth rates have moderated. Loan expansion remains healthy, broad-based and above industry trends. NIM for the quarter stood at 4.6%, down 14 basis points quarter-on-quarter and 6 basis points year-on-year. The quarter-on-quarter NIM compression was primarily driven by higher funding costs, which increased to 2.5%, driven by tighter system liquidity. Since deposits reprice faster than loans, following the BSP policy rate hikes in April, June, August and most recently in October, the impact on funding costs will be more immediate. As our loan book continues to reprice, however, we expect to see asset yields catch up. The expansion of earning assets, led by loan growth of 2.9% quarter-on-quarter, together with the ongoing shift in the loan mix, helped offset the impact of higher funding costs and supports the continued expansion in net interest income. On funding, total funding expanded to PHP 3.2 billion, up 12.3% year-on-year and 3.6% quarter-on-quarter, broadly keeping pace with the strong loan growth. Strong and broad-based deposit growth across customer segments continued to underpin our funding base. Growth was led by the core mass segment, which also continued to deliver the strongest CASA growth, reinforcing a stable and low-cost funding base. Non-institutional clients continued to anchor our deposit base, accounting for 77% of total CASA deposits. Deposits remained our primary source of funding, complemented by sustainability-related borrowings. Funding metrics remained healthy, with a loan-to-deposit ratio of 92.4% and loan to total deposits and borrowed funds of 87.5%. Fee income stood at PHP 10.6 billion, up 10.7% year-on-year, while down 6.7% quarter-on-quarter. The decline in the third quarter was primarily driven by lower revenues from investment banking, for which revenues are naturally lumpy, but we are still on track to break last year's performance. Meanwhile, the full quarter effect of the waiver on person-to-person interbank fund transfer fees and lower equity earnings from our insurance subsidiaries, as well as higher interest rates weighing down on asset valuations, more than offset the higher insurance sales commissions. Looking at the 9-month results, fee income grew 15.5% year-on-year on strong contributions from our core fee-generating businesses. Cards grew 15.6% on higher retail billings, card usage and installment volumes. Wealth management fees increased 13.4%, benefiting from higher assets under management, which increased to PHP 2.16 trillion, up 19% year-on-year. Insurance revenues grew 13.6%, driven by stronger earnings from insurance affiliates. These were partially offset by declines in ATM and digital channels, down 5.7%, and remittance, down 1.5%, following the fee waiver. Asset sales and rental income were also down, but are a very small piece of the fee pie. Moving on to operating expenses, total operating expenses for the quarter amounted to PHP 25 billion, up PHP 2.3 billion or 10.1% higher year-on-year. Manpower costs reached PHP 8.2 billion, up 6.2% or PHP 477 million, driven by salary adjustments linked to the CBA earlier this year and a higher headcount from technology and client-facing roles. Premises rose to PHP 2.7 billion, up PHP 317 million or 13.6% year-on-year, due to branch modernization and higher occupancy-related and utilities expenses. Technology expenses are at PHP 4.7 billion, up PHP 200 million or 4.4% year-on-year, due to higher software maintenance and modernization of our digitalization initiatives. Other operating expenses increased to PHP 9.5 billion, up PHP 1.3 billion or 15.8%, due to increased product-related, operations support and marketing expenses. Our continued investments in technology, digital channels and process transformation have significantly improved efficiency, enabling us to serve more customers and handle substantially higher transaction volumes. Despite the increases, the overall trend is towards increasing greater overall cost efficiency while doing more. Customer count more than doubled since 2022 to 19.8 million. Transaction count has grown nearly threefold since 2020, with 95.6% of transactions now coursed through digital and electronic platforms and only 4.4% done over the counter. This shift has transformed the role of our branches, allowing branch personnel to spend 46% of their time on sales and advisory activities compared to just 30% in 2021. As a result, fees generated by branches from cross-selling loans, insurance and investment products is tracking towards a 5-year CAGR of 21%. This improvement in customer behavior and productivity have enhanced the operating leverage of the bank. Our cost-to-income ratio for the first 9 months of the year stood at 47.1%. Capital levels remained solid, with CET1 capital at PHP 411 billion, up 0.8% from last quarter and 1.9% from last year, supported by earnings accretion. The indicative CET1 ratio stood at 13.9%, with CAR at 14.7%, more than enough to support the requirements of the bank. Turning to asset quality, while the NPL level increased by 6.1% quarter-on-quarter to PHP 68 billion, the NPL ratio remained manageable at 2.5%, and reserves coverage continued to provide substantial protection against expected losses. Provisions for the quarter declined to PHP 6.5 billion. Consequently, year-to-date credit cost improved to 101 basis points. This brought the NPL coverage to 89.5%. Including surplus reserves allocated for GLLP and interbank loans exposure under BSP Circular 941, NPL cover remained adequate at 113%. Expected credit losses, or ECL, remains adequately covered by reserves. Our ECL estimates incorporate profitability -- probability-weighted baseline, upside and downside scenarios using key macroeconomic variables, or MEVs. ECL assumptions remain anchored on relatively conservative MEVs amid continued volatility and uncertainty in the operating environment. For the September 2026 ECL calculation, we continued to use the same MEV assumptions that were embedded in our June calculation. This contributed to a PHP 2.7 billion increase year-to-date in our ECL. Looking to the breakdown of the NPLs, the increase was largely driven by the SME portfolio, which accounts for 2.7% of the total loans. The SME NPL ratio rose 309 basis points quarter-on-quarter to 15.6%, although NPL formation has moderated since June. Some of the increase in the NPL ratio can also be attributed to moderated loan growth, which was up just 0.3% quarter-on-quarter as we recalibrate our approach to balancing growth and asset quality. Again, keeping in mind that SME continues to be just 2.7% of the loan book. Notably, institutional banking continued to show improvement, with the NPL ratios remaining below year-ago levels, supported by stronger credit performance and sustained portfolio growth. Credit quality trend remained contained in the third quarter, with the NPL ratio -- NPL formation increasing to 1.21% from the 0.74% in the second quarter, while remaining below the 1.58% recorded in the first quarter. Credit pressures remained concentrated in SME and microfinance, while credit card, personal loans and mortgage portfolios improved quarter-on-quarter. Notably, SME NPL formation moderated from 16% to 13.2% following adjustments to credit parameters and strengthened collection strategies, including enhanced predelinquency management, risk-based account prioritization and targeted remediation programs. This slide now highlights the strength of our reserve position. NPL coverage stands at 89.6%. However, when general loan loss provisions, or GLLP, from surplus are included, coverage increases to 113%. Collateral provides an additional layer of protection, further increasing NPL coverage to 164%. ECL is sufficiently covered by reserves and overlay. Unlike NPL coverage, ECL captures both performing and underperforming loans, allowing earlier recognition of potential losses. Including GLLP further strengthens the coverage to 127% of ECL. Our strategy remains focused on increasing exposure to higher-yielding noninstitutional loans. While institutional loans continue to underpin the loan book, the noninstitutional portfolios continue to generate superior risk-adjusted returns, supporting the strategic shift toward higher-yielding consumer and SME segments. As shown, the noninstitutional loans deliver risk-adjusted NIMs of 8.7% in the third quarter compared to around 5.9% of institutional loans. Even after accounting for the NPL formation, net risk-adjusted returns of the noninstitutional loans remain significantly higher. Moving off the financial side, following are some of the updates on what BPI has been doing since our last earnings call. We recently made it easier to open a bank account through the launch of the National ID eVerify on the BPI app. The integration with PSA's National ID authentication services removes a key onboarding step by allowing customers to verify their identity through a selfie matched against the PhilSys National ID records, delivering faster, more convenient and more secure digital account opening experience. 2 months after its launch from July to August, this accelerated the digital account opening acquisition, driving 32% growth in account opening and boosted National ID applications from 47% to 83% of the total digital applications. Effective October 1, the merger between BPI Direct BanKo and Legazpi Savings Bank took effect, with BanKo as the surviving entity. Over the last 3 years since we acquired the teachers' loan business from the merger with Robinsons Bank, the business has demonstrated strong momentum, with outstanding loan releases posting a 103.5% 3-year compounded annual growth rate. This momentum continued for the 9 months of 2026, with releases reaching PHP 20.9 billion, up 87.4% year-on-year, borrower count increasing to 65,000, up 54.3% year-on-year and outstanding balances rising to PHP 23.6 billion, up 72.3% year-on-year. As a result, BPI's market share of teachers' loans expanded to 10.8%, an increase of 6 percentage points since the business was acquired from the RBC merger. Looking ahead, the BanKo-LSB merger enhances our reach in the teachers' loan segment, leveraging BPI and BanKo's branch network and digital capabilities. This positions us to deepen customer penetration, capture additional market share and sustain healthy growth across a sizable addressable market. Our agency banking partnerships continue to broaden our franchise by bringing banking closer to customers, with our network of 34 brands with over 7,000 partner stores, of which over 1,400 accept cash-in and cash-out transactions, which are the most basic banking transaction. The high growth momentum continued in the third quarter. Cash-in and cash-out transactions grew 433% year-on-year to 259,000 transactions, reflecting strong customer engagement and adoption. Products sold reached 377,000, up 122% year-on-year, driven by expansion of activated partner stores and increased in-store selling activities. On the network side, we have completed the rollout of Deposit Barcode across all Robinsons Supermarkets and Department Stores. Beyond driving growth, agency banking continues to enhance operational efficiency. Transaction volumes generated during the quarter were equivalent to the activity of approximately 76 traditional branches. BPI further strengthened its sustainability leadership in the third quarter of 2026. We became the first Philippine bank to achieve dual ISO certification for both information security and privacy information management. After BPI became the first bank to permanently waive transfer fees for BPI customers, we also permanently waived PESONet transfer fees for BizLink corporate clients through the Pay Non-BPI feature. We supported energy transition through key financing transactions, including Citicore's and ACEN's solar and battery storage facilities. We further strengthened our climate reporting capabilities by becoming a signatory to the Partnership for Carbon Accounting Financials, or PCAF. Through our partnership with Green GSM, we enabled seamless cashless payments for electric vehicle rides directly through BPI accounts. We advanced financial inclusion through expanded banking access in Sultan Kudarat, and we had the launch of the UP Alumni Engineers student loan program and financial literacy and financing initiatives for educators. We've also compiled here a list of our ESG and institutional awards and recognitions received by BPI. We are honored to receive these recognitions, which reflects BPI's commitment to excellence. Further details on these awards are also available on our website. These institutional achievements are complemented by continued recognition as employer of choice, highlighted by awards from Best Workplaces, including being named as one of the Best Workplaces in the Philippines and the only bank recognized among the Best Workplaces in Asia. We were also recognized by TIME as one of Asia-Pacific's Best Companies and by PMAP as Employer of the Year. This strong employee proposition remains a key competitive advantage and driver of sustainable growth. In addition to these employer awards, and not shown here, last week we also won the Five-Arrow Award from the Institute of Corporate Directors, which is their highest level of award for excellence in corporate governance. Oh, here it is. Sorry. So let me close now with a few takeaways. On profitability, revenue momentum remained strong, driven not just by scale, but by our strategic execution, even if tempered by forward-looking provisions. Our balance sheet remained healthy with strong growth and shareholder returns, even as there remains capacity for further growth. On asset quality, credit cost moderated while asset quality remained manageable, reflecting improvements in our proactive risk and collection initiatives. Finally, our customer franchise continued to strengthen, supported by sustained growth momentum in agency banking and further expansion opportunities resulting from the BanKo and LSB merger. Thank you, and we will now open the floor to questions in a couple of minutes after we get set up.

Okay. Thank you, Eric. Before we open the floor to your questions, please allow us a minute or 2 to set up at the venue. [Operator Instructions] Again, just a reminder, please identify yourself by your name and company so we can address you accordingly. For the benefit of everyone attending this call, whether in person or online, we would like to encourage you to ask your questions during this session. We will try to refrain from taking questions after we end this call. Joining us here in front with TG and Eric are our senior leaders: Tere Marcial, Head of BPI Wealth; Ginbee Go, Head of Consumer Banking; Louie Cruz, Head of Institutional Banking and Jethro Sorra, Treasurer of BPI. So I guess we can kick off first with any questions from the audience.

I guess before we take questions from the audience...

Go ahead, TG. Yes.

Allow me just to make a comment, because over the past week, I guess past couple of days, we've received just a number of questions on the leadership transition plan that we announced last Wednesday. I guess to me, it's very clear. An institution like BPI does not survive 175 years if you don't have a clear plan on how you move forward. And the way we look at it is that when I assumed this role in 2021, I laid out a very clear vision to the owners and the Board as to what we wanted to achieve in the next 6 years. And I'm proud to say that when you look at it quite objectively, as the Board did, we did accomplish all those by the end of 2025. We clearly transformed the bank towards digitalization, we revamped the role of the branches, we now have our phygital branches, we have our consumer book now over 30% of our loan book, we're a leader in sustainability and many of the things that we had set out. And therefore, the next question is: what is the next chapter of BPI, and who writes that next chapter? And for those of you who went to high school with me, you know that was a long time ago. And therefore, it's just fair that you ask yourself, are you prepared to write the next chapter and execute it? And frankly, I don't know if I can stay another 6 or 7 years. And therefore, the choice and the decision was made, let's set this motion in place, let's prepare to write the next chapter, which the team has started writing, but let's find the next team to lead it. And therefore, my focus for the next 6 months is to make sure that we set the foundation for that next chapter as it is written. And as all of you know, the Board has approved a plan in which my friend and colleague, Ginbee Go, who heads our Consumer Bank, who I've worked with for over 23 years, will assume the leadership of the bank come April. And so maybe at this point, I'll allow her to say whatever she wants to say, and then we'll go to Q&A. Okay?

Really, all I can say is thank you, TG, and I'm deeply, deeply grateful for the trust that was given to me by the Board and the opportunity to lead BPI in the next era. As you know, as TG mentioned, I've been here for 23 years, quite a long time. It's equal to a Gen Z age, and through those 23 years, I've been very, very fortunate to have been mentored, coached by the best industry leaders, starting with XPL, Gigi, Bong and now TG. So really, we have this next 6 months to transition, and TG and I are fully committed to make sure that we have an effective and smooth transition. And really, the focus now is really to end strong, to finish strong, as TG would say, and deliver on our commitments to our customers and our shareholders. So thank you so much.

Okay. Let's start off. We actually have a question in the Q&A box from Ridge Dantes of Metrobank. He asks for our updated targets on credit costs, loan growth as well as asset growth.

Yes. So thanks, Haj. So obviously, we're in the midst of finalizing our budgets for next year right now, but looking forward, I think we continue to see challenging market conditions, and therefore, as we've had through much of 2026, and I think therefore that we can probably expect more of the same as we've seen through the course of this year. And so as I've mentioned, we're probably expecting credit costs at around the 100 basis point area. We are looking at loan growth roughly at around the 10% area, and then I think the last one was...

Asset growth.

Yes, asset growth. So I guess similar to that, right? I mean, our assets are mostly in loans anyway, so something along the lines of about that. And of course, it is a relatively volatile time, so we do have to remain flexible to evolving market conditions, but for now, that's kind of where we see it.

For me, the perspective really along those lines is we need to understand when this economy turns, right? Obviously, we're in a situation where most people have a bleak outlook on the economy. Inflation continues to rise. We have a BSP that is seems to be set on monetary policy, and therefore, there are questions whether they should continue to be very aggressive on hiking or whether they should be relaxed and allowing the economy to grow. We have a government that is slow in spending. So there are many domestic issues, and not even to mention the international issues that we have no control of. And therefore, next year will really depend on whether some of these things pan out. From my perspective today, we're surprised by the growth in the corporate sector, and we think that's either -- oh, sorry -- that's either infrastructure growth or some of the traditional corporates taking in more working capital. And we have to begin to understand whether that expansion in working capital is a result of them building up their inventories or managing their cash flow because payables are not being paid. So this is the thing that we need to be watchful for. On the consumer sector, it's clear that there is some stress on the consumer sector. We see our credit card PDOs rising a bit, and therefore, we need to step up our collection efforts. As we've said it already for the last 2 quarters, we've tightened our credit standards, and you've seen that as our loan growth on our consumer loans has actually slowed down. So this will continue to be the story next year unless things change dramatically in the Middle East and unless the government begins to start spending, and maybe if global inflation begins to slow down such that the Fed can actually begin and reverse and start messaging that they will lower -- that they will be less hawkish, which will allow our BSP to be less hawkish. So that's the things we're watching out for.

Thank you, Eric and TG. We actually had a question that was sent earlier by DA Tan of JPMorgan. His question was asking for the reason for the movements in NIM on a quarter-on-quarter basis, and likewise asking for the NIM outlook for the rest of the year. I can take on the first question in terms of the quarter-on-quarter NIM movements. If you focus on the slide earlier, it was actually driven by the movements in the cost of funding. Eric, I don't know if you want to take the NIM outlook question.

Yes. So basically on the NIM outlook, I guess as we've mentioned, with rising interest rates, we do expect there to be support for our NIMs, and it just takes a little bit of time. And there was -- if the question is why aren't we seeing immediate rises in the NIM as policy rates have been moving up through the course of this year, starting I think about April, the reason is because the liability side reacts first because of the very short duration of our floating-rate liabilities. And so that reacts first, and that kind of counteracts the gains that we see on the loan side. But over time, we expect that to start to filter into the book, and so this rising interest rate environment will be NIM supportive. And I think the outlook for us is we continue to see further rate rises on the horizon, and therefore, there should continue to be some support for NIMs as we move forward. Just keeping in mind that in previous runs that we've calculated, the impact that we give for NIM impact versus policy rate increases is after 1 year, right? So that takes into account the fact that the deposit liabilities will reprice first and then the loan assets will catch up later on.

Thank you, Eric. Our second question is actually sent in by Elle Jamil of Manulife. He asked about the changes in ECL assumptions. Which changes in ECL assumptions drove the material change in credit costs? Was it default probabilities, LGDs or staging? And how do we reconcile that with stable LTVs?

The primary changes were with regard to staging, and again, this was due to basically re-computations that we made in line with BSP recommended findings in terms of the way that we were classifying staging. So they felt that we were -- our classification was too conservative. We were moving it too quickly into Stage 3 when some of these loans should have only been in Stage 2. And so we made some adjustments for that, and this was, again, driven by the BSP findings.

Okay. Thank you, Eric. We have another question sent in, this time by Joanne Dilig of LandBank. She just wanted to clarify what technology investments contributed to the increase in tech expenses, which I think went up from PHP 13 billion the same point last year to PHP 14.5 billion as of the first 9 months.

There are a few key things driving that. For one thing, some of our tech expenses are tied to transaction volumes, and therefore, as we do more business, we will naturally -- the level of tech expenses will naturally go up. The other thing is that we continue to look at making tech investments. I mean, there are a lot of questions on what are we doing on AI. We do have spendings on AI, and these, first you spend and then you see the returns, right? And so it's not just on AI, right? So across the bank, we're continuing to make investments to improve the customer experience, to improve our ability to respond more quickly to customers, and therefore, you will continue to see that tech spend rise. But we do believe that there have already been returns in terms of improved customer experience, improved turnaround times. One of the things I just mentioned earlier is eVerify, meaning that you can just open an account with a selfie. Those are some examples of returns that we're seeing from the investments that we're making.

Thank you, Eric. We wanted to open the floor to any questions from the audience. Go ahead, Rafa.

Rafa from Regis. Yes. Just, you know, I think just today the 10-year T-bond hit 8.2%. Just wondering what this means for BPI from a funding strategy, treasury strategy and capital management broadly.

Jethro?

Thanks for the question. So yes, like a volatile day today for markets, both on the FX side and on rates. For your question, I think it's actually a timely question since we're out with the SIBOL Bonds that we are looking to raise for December. Given the movement in rates and the shift in the curve where, as you pointed out, the 10-year is now at 8.2% and the 5-year is not too far from 8% as well, at least for us on the funding side of things, the approach will be -- the tenor for the SIBOL Bonds is 1.75-year. We like this part of the curve. And as Eric pointed out, the nature of our funding, which reprices pretty quickly, is mostly on the short-term. So at least for the time being, that's our approach.

Let me add to what Jethro said. I guess when rates are rising, and frankly, I think what's happening now, particularly in the back end, is that there is a, what I would call a withdrawal from the market, right? The banks have basically shied away from the very long end of the market, as we have. We're preferring the very short end, even the belly, for the assets. What this means for our funding is that we're keeping our funding very short. Our outlook is probably rates begin to turn second half next year, and hence the decision to fund at 1.75 years, just coincidentally matches our 175 years, right? But the view is that we need to keep funding rather short today. So even when you look at our TDs, it would be 30, 60 days, and there we will just have to pay whatever the market is because it's rather competitive, right? But what I think people should be aware of is that the banks have, I think, begun to become very gun-shy on the back end of the curve, and that's why you're seeing the rates just go through the roof, because the only people buying there are end investors. If the banks aren't willing to take that in their positions, then you've really dried up, to me, half the market.

What about on the capital side?

I think we have sufficient capital. I mean, our capital ratios are fairly healthy. When we -- actually, at our Risk Committee, they asked where does it -- where do 10-year rates have to go for us to begin thinking about whether our capital ratios are at a level where we need to think about the next 2 years? And we're literally what, still about 300 basis points away.

Thank you, TG and Jethro. Any more questions from the audience?

No questions?

No more questions.

I do want to make a point about, I guess, the technology spend, because I'm rather passionate, and I've worked with Alex -- I don't know if Alex is here -- but how we're looking at technology spend. Technology is something that you just need to keep on investing, and for me, it's like a step function: you need to put capacity in, as you fill that capacity, then it moves up. But what we've been doing on the technology side -- and I think Alex can say a little more, but let me do a thing -- so the first thing we did was we changed out our managed services. That should save us about 40% going forward. The new contract came in, I think, July 1, right, Alex? July 1 or June 1, with the new managed services. We are now negotiating with our second-largest vendor, and they've agreed to cut their charges 30% on manpower and API libraries. We are rationalizing our storage going forward. We just redid all our contracts for our network, where now all our branches are completely redundant, and with the help of our sister company, Globe, who now cover most of our branches together with other vendors, we're actually redundant across all our branches for network at a lower cost than when it was not redundant. So a lot of things, but it does take a while. The reason it goes up is because as you build a bank and you build projects, you don't expense it, and then when it comes on, you then have to start amortizing the cost together with the licenses that you have to pay for it. And as Eric said, a lot of it is also transaction-related, and clearly transaction volumes have gone up, particularly, let's say, on payment flows. Those things, we pay Euronet for every transaction that goes through.

I'm [ Hannah ] from MUFG. Just on the AI adoption, which has been accelerating across the financial sector, my question is: how is BPI approaching the balance between leveraging AI for productivity and also customer experience and satisfaction, while also, of course, addressing risks from the rising cyber fraud and also operational risks associated with these technologies?

It sounds like she was at our ManCom this morning. No, we have a lot of AI projects ongoing. As you said, the first thing we're doing is on the productivity side -- I guess personal productivity, right? So that one's rolled out. Like most institutions who are willing to pay the fees, we do have Copilot for most people, and most people are using it already in some way. We did have a project about what, 2 years ago already, Ginbee, on...

Yes. On BAI, at the branch level.

Branch level. So that one, we have a tool for all of them so that policies, products and procedures are all on some app where people can query it. We've now rolled out the same thing, as I found out, on the wealth side, right? And obviously, we are working on other things. So we have piloted an auto agent for AI that we have opened with one dealer already, that we're testing with one dealer. It shows that we are able to cut down our application from what would have been like a day or 2 days to 27 minutes. So that one's been piloted with one branch dealer, now we just need to roll it out --sorry, one dealer, now roll it out with more dealers. And on the governance, we do have a framework that we discussed at length this morning about how you keep the rails in and how you rate the risk and who has to approve these things and all the rest of it. So all the usual good practices.

Okay. We have a few more questions that came in. First, from Julian Roxas of Philippine Equity Partners: could you provide more color on the NPL ratio improvements at the personal and microfinance loan books?

Let me take that, Haj. We've really been working on focusing our efforts on asset quality these past months. So on personal loans, what we've done for both personal loans and microfinance, first on the underwriting side, we've tightened parameters so that the flow of accounts would really be focused more on the higher-quality, lower-risk accounts, so to speak. So we've improved and tightened parameters there. And then on the recovery side, so the back end, we have really been very aggressive in our recovery efforts. So even predelinquency, we've been calling customers for reminders, and then also making sure that we are able to repackage loans even before they become NPL. And if they are already NPL, we continue to look at how we can further repackage that, and then, of course, cleaning up and writing off those that are really no longer collectible. So those are the things that we're doing. We've ramped up our collection efforts, added people, more collectors on that, and also did quite a tweak on our scoring.

Thank you, Ginbee. We have another question, this time back to actually Elle Jamil of Manulife. Elle asks for more details on the spike in SME NPLs.

That's easy to explain. Obviously, SME is very focused on -- for us, it's retail and construction. And those, when we look at it, have been really hit hard by the slowdown in government contracts and spending, right? So the NPL levels have gone up, and it's compounded by the fact that together with our credit team and the business headed by Ococ, we've actually slowed down the business. We've been very deliberate, we've really tightened it up. So if you look at the growth of our, what we call our business banking book, our SME book, it's flat, right? And if we maintain the same level, which I suspect we will all the way to year-end, our year-on-year growth by year-end will only be 13%. This was a business that was growing 70% a year, so we've been very deliberate about this. And as you know, the loan book, if you don't grow it, all that remains in it will be the bad loans, right? So if you don't grow your loan book, eventually your NPL will go to 100%, unless you write it off. I'm not saying it will go to 100%, but that's just the pure math. So it's rising for 2 reasons: we had that spike when the economy turned sour, and then we're not growing, and as the good loans roll off, that thing will continue to rise. So not something I'm worried about. It's PHP 70 billion -- PHP 74 billion. That's 3% of our portfolio. But obviously, when 3% of your book rises 3% in NPL, that's an 8 or 9 basis point in your NPL, right? And that's what we rose quarter-on-quarter.

Thank you, TG. This question's actually for Louie. It's actually from Abigail Chiw of BDO Securities. She is asking what were the sectors that drove insti loan growth, and what is the outlook for growth in the near term?

Thanks, Haj. Okay. For institutional banking, there's no specific industry that drove growth, but the thing that we saw in our portfolio, it's the usual: the energy, renewables, that's one. And you have some construction areas and real estate, but not in Metro Manila or NCR. We've seen growth outside Metro Manila, outside NCR, especially those provinces wherein they have new cities. So we get good growth from real estate in those areas. The industries that we monitor across now is really on the consumer space, distributors and trading. That's something that we need to see, because we're seeing, as TG mentioned a while ago, the use -- utilization of our working capital used to be an average about 25%, 27%. Now it went up to 28%. And the reason there is that inventories they get -- inventory is more expensive, credit term is longer and these are the things that they have to manage. And it's more expensive as a whole, given the gas and transportation costs. So there's no specific industries; it's really cutting across opportunities that are depending on certain areas.

Thank you, Abigail from BDO. JJ from BPI will ask the same question at the BDO briefing.

Okay. Sticking to, I think, loan outlook, we have a question from Katrine Dolatre of Security Bank. Her question is actually on the consumer share of our loan mix. Do we look to continue to expand that? And a question still on loans, but in terms of delinquencies: how much is coming from new accounts?

Well, I think there's still quite an opportunity to continue to grow on the consumer side, but we do need to be very prudent in our growth opportunities and be very selective. So what we mean by that: number one, we need to be very deliberate on the quality of customers that we are onboarding. We are very biased on our depositor base, so we continue on our lending programs. All our analytics tell us that our depositors are of better quality. Number two, we look at per product and really segment it properly. We see still strong source of growth from auto loans on EV financing. 30% of our releases are coming from EV financing already. In fact, lately, the last month, it was already 35%. And yet we've managed lower NPLs on auto loans, which tells you that the ones that we attract are the really good-quality ones. We've also shifted the mix of our auto loans sourcing to more branch-generated accounts than dealer-generated accounts. So that's why we've been able to grow the auto loans with quality. Third is on real estate. We have deliberately dialed down on CTS financing and really focused, again, on our existing depositor base, where we see still continued growth because these are the ones who are looking for an investment for their own home, eventually moving, because it's a good bargain. So we see that as a strong growth for us in housing loans. And also, horizontal development is also a good source of growth. For credit cards, we see a shift in essential spend rather than discretionary spend. We see a shift on -- from revolve to installment, which really tells you that people are getting to be more disciplined in their spending. So these are the areas that will continue to be our focus and will continue to be a source of quality growth for us moving forward.

Thank you, Ginbee. We have a question from Norman Cruz of China Bank. He's asking about the consumer -- well, the noninstitutional book again. He noted softer growth for SME, microfinance and mortgage. I think we talked a bit about the mortgage, but he wanted, I guess, an overall outlook for growth on these segments.

Is it SME first, or...

Yes, I think I already spoke about SME, but given our tightening, but maybe Ococ -- I don't know if Ococ's here.

Ococ's there.

Ococ, do you want to talk a little bit about what you're thinking about the SME book into year-end and maybe the next year?

Yes. On the SME book, having slowed down since March, April because of the tightening on credit, we're looking to exit this year with a growth of probably low 20s year-on-year.

So on microfinance, of course, this is a segment that we need to be very prudent in our approach. And I'm glad to see that when I go to the BanKo areas, the real strength of our BanKo people is that they really go down to the communities and they really try to understand [Audio Gap] the ones themselves. Our loan assistants are really the ones who try to understand the business, count the inventories and stay there and observe sales. Because when you talk about microfinance, you can't be doing it from afar. You really have to go down. And so we've seen some stresses or pressures on the really small retail businesses, and for that, we have been more prudent. And our loan assistants and our collectors have been really focused on ensuring that we're able to help those who are in a stressed situation. But you know what, the businesses really are the ones also disciplining themselves, and that's something to look forward to moving forward. There is hope among these small businesses. So this is a temporary thing. When things improve, I think the microfinance segment will really be another strong source of growth, and it's a good source of financial inclusion. Just imagine what we can unlock if we do that.

Thank you, Ginbee. We have another question, this time from Abhijit Desai. With the recent weakening in the peso, does foreign currency, specifically U.S. dollar, borrowing followed by a swap into pesos for local lending remain economically attractive for Philippine banks compared with direct PHP funding, even after factoring in swap costs?

Jethro?

Happy to take this one. So the quick answer to this question is yes, so -- and I think even more so given the policy rate hike, the 50-bip rate hike from the peso side just last week. This is an opportunity that is there. So just looking at broad 10-year rates, you're close to 5% on the U.S. 10s, and then on the local 10s, as pointed out earlier, we're at 8.2%. So with the IRD roughly at around 1%, this opportunity still exists for funding the peso book. That said, when the treasury side does take such an approach, at least from our standpoint, it's always hedged until towards the close. So it's not an open position. So I just want to clarify that when we embark on such opportunities.

Thank you, Jethro. Wanted to check in again if anyone in the audience had questions. Okay. If none, we've actually -- I believe we've gone through all of our questions. So we wanted to thank the audience, those who have dialed in and those on-site, for your questions. Of course, we always welcome your feedback and take them into careful consideration. So before we end this call, I'd like to call on TG for some final thoughts.

Again, thank you to everyone who's participated in today's call. Thank you to my colleagues for being here. I think a couple of things that I do want to point out that we need to look at going to the future that many, I think, many of our investors, many of our analysts seem to pass over and not see the significance. One, clearly our consumer book continues to grow. Clearly, we are very diligent about the credit situation, the tightening, the conservatism that we do in terms of provisioning, so I'm personally very comfortable with that. I am surprised at the strength of our institutional book. That's something that, while we're happy, we need to continue to watch. But then I think some of the things that people are not seeing in terms of the potential of BPI, for example, is Eric talked about our agency banking. As of September, the deposit-withdrawal partner stores, which number over 1,000, are already doing the work of the equivalent of 79 branches in his presentation. I know as of October, that will be closer to 90 branches already, because the volumes continue to pick up dramatically every month. The other thing that people don't seem to recognize is the strength of our wealth franchise. When you look at the size of our asset management and our wealth business, it is significantly larger than what it was a year ago, and now clearly the market leader as we continue to open new markets, a Singapore, Hong Kong office, the things that we're doing, the products that we're launching, particularly not only on the retail side that we're doing through the branches, but now we have a strong emphasis on the corporate side, not only targeting pensions, we're working with these corporate pensions so that their payroll comes to us: the pension, the payroll and the PERA all come together under one offering. So a lot of things that we're doing, and we're happy to talk about that maybe after or at the next briefing. So again, thank you to everyone for participating, and again, thanks to my colleagues for being here. Thank you.

Thank you, TG, Eric and the rest of the management team. So ladies and gentlemen, that concludes today's earnings call. Thank you again for your participation. And to those joining online, you may now disconnect. And for those on-site, please do join us for some refreshments.