Bank of the Philippine Islands

Okay, good afternoon, ladies and gentlemen, and thank you for joining us today. Welcome to BPI's earnings call as we go through the results of our performance for the second quarter and first half of 2026. I'm Hajner Baez. I'll be your moderator for today's session. 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. while many of our participants are also joining us remotely. I am pleased to introduce you to our speakers and panelists for this afternoon. T.J. Limcaoco, President and CEO. Eric Luchangco, CFO and CSO. They will be joined in the panel for the Q&A session by Tere Marshall, Head of DTI Wealth Jin Di Ko, Head of Consumer Banking Louis Cruz, Head of Institutional Banking Dino Gassman, Treasurer and Head of Global Markets We are also joined by the rest of the VPI leadership team in this call. This afternoon's agenda will begin with opening remarks from our President and CEO, T.J. Limcaoco, followed by our CFO and CSO, Eric Luchangco, who will walk you through the second quarter and first half performance highlights, as well as updates on our digital platforms and strategic initiatives. The floor will then be open to questions from the audience. Please note that this call is being recorded and that legal disclaimers apply. Now let me turn you over to DG for his opening remarks.

Thank you very much, Haji, and a nice afternoon to everyone joining us today here in person or online. Again, as usual, we will present our detailed results of our second quarter in our first half. Our CFO, Eric Luchangco, will do that. But allow me to make a couple of points about our performance. Our performance for the first half was basically flat versus last year. Personally, a bit surprising for me, given the severity of the additional provisions we had to take due to new economic variables. As Eric will point out, really NPL did not trend up, but really this is a factor of our model Thank you very much. Thank you. Our loan growth was at 12% basically demonstrating some of the credit tightening that we told you about and the fact that our NPL on the consumer book you'll see we took a rising in some of the products that's basically a function for some of real some pressures in the smaller portfolios but on the larger portfolios it's less inflow of new loans coming in. with that I think also Eric will go through some of the things that we are doing our new initiatives particularly our agency banking and the fact that we now have over a thousand stores or agency partners who can take deposits and withdrawals and that is gaining real traction and showing us that these agency doors are actually doing the transactions that are equivalent to quite a number of branches just in the first month alone and we're looking forward to that so with that I'm sure we'll take a lot of questions later on particularly on asset quality, the trajectory of our loan book, and what we continue to believe is our strategy going forward. With that, I'll turn you over to Eric. Eric?

Okay, TG, thank you for that. So, good afternoon. Thank you to everybody joining us here today, for those that are here in person despite the rain. We're here to present our results for the second quarter and the first half of the year, which we believe reflect actually strong ongoing performance and continue to validate our strategy moving forward. For the first half, the bank generated record pre-provision operating income up 11% from last year. with robust revenue growth across all businesses supported by loan expansion and continued NIM improvement versus lower NIMs that are seen across most industry players. While earnings were moderated by higher provisions, these were driven by forward-looking preemptive measures amid a softer economic environment rather than a crystallization of credit stress. This approach enabled us to deliver net income of $32.8 billion and ROE of 13.8% and a 24% increase in our cash dividend to 2.58 pesos per share for the first half of the year. The bank maintains strong balance sheet growth with loans increasing by 12.4% year-on-year and deposits rising 9.2%. Capitalization remains strong despite the higher dividend with CET1 ratio at 14% and CAR at 14.8%. Asset quality remains stable despite challenging conditions. While provisions increased, these included adjustments following updates to macroeconomic variables in our ECL model, reflecting a more conservative outlook to be shown in greater detail in the coming slides. It's also important to note that the additional provisions taken due to the MEV changes will not recur in succeeding quarters unless conditions deteriorate further from where they are today. On the flip side, if conditions improve, we could potentially see a reversal in the ECL requirements. NPL ratio remains stable at 2.42%, quarter on quarter, while the NPL coverage ratio improved to 93%, with collateral providing additional buffer. The bank also further strengthened its customer franchise, expanding its customer base to 19.2 million. Agency Banking continued to support scalable growth and financial inclusion while BPI Wealth strengthened its leadership as the country's largest trusted institution by assets under management based on the latest data provided by the BSP. Looking at our first half performance, we ended the first semester with net income of 32.83 billion, broadly stable year on year. These results included net interest income increasing to 80 billion, or 12.5%, supported by a robust loan growth and a continued improvement in NIMH. Trading income moderated against the high base recorded last year, but fee income rose by 18% due to increases in the customer base, volume, and deal activity. driving total non-interest income up 12% and total revenues up 12.4% to reach $104 billion. Operating expenses rose 13.8% to $48.6 billion driven by manpower, technology and business volume related costs. Pre-provision income was at $55.4 billion up 11.2%. Provisions rose 84% to $13.3 billion on higher ECL reserves requirement, including the impact of the updated economic outlook. Our quarter-on-quarter performance mirrored the year-to-date trend with revenue-driven growth and strong PPOP offset by macroeconomic overlays. For the quarter, revenue was at 4.3% to was up 4.3% to 53.1 billion. Net interest income was up 4.4% to 40.9 billion, driven by continued loan growth of 2.1% and the 13th basis point expansion in NIM. Strong revenue was partly moderated by higher operating expenses, up by 6.9% to 25.1 billion, and provisioning up 42.5% to 7.84 billion. All these resulted in second quarter net income of 15.9 billion, lower by 6% from the previous quarter. Profitability remained robust with annualized return on assets of 1.8% and return on equity of 13.8% in the first half, despite a more challenging operating environment. Earnings per share stood at 6.2 pesos per share. Moving to dividends, strong earnings supported a sharp increase in capital returns since the bank adopted a variable dividend payout policy in 2022. In June, the bank paid dividends of 2.58 pesos per share, up 24% year on year, and almost three times the fixed amount of dividend paid until 2021. Turning to the balance sheet, the bank continued to deliver healthy growth. Total assets reached 3.73 trillion, up 0.6% quarter-and-quarter and 9.6% year-on-year, driven by sustained loan growth alongside increases in investment securities and liquidity assets. Gross loans stood at 2.67 trillion, up 2.1% quarter-and-quarter and 12.4% year-on-year, with expansion recorded across all segments. Deposits increased to 2.85 trillion, of 0.3% quarter-and-quarter and 9.2% year-on-year, driven by continued customer flows and a stable funding base. As loan growth continued to outpace deposit growth, loan-to-deposit ratio improved to 93.6%, while the CASA ratio stood at 60.5%. On loans, quarterly loan growth rebounded to $2.67 trillion Up 2.1%, reversing the contraction recorded in the previous quarter. Gross loans grew 12.4% year-on-year, with continued strength across all segments. The deceleration in loan growth is primarily a product of tighter credit underwriting in the personal, microfinance, and SME space. Institutional loans increased to $1.81 trillion. Up 8.7% year-on-year on growth in CAPEX-related loans and robust demand from the utilities, storage, transportation, and communications space. Non-institutional loans increased to $855 billion, up 21.2% year-on-year. The year-on-year increase in non-institutional loans was led by SME loans up 74.5%, credit card loans up 28.9%, personal loans up 21.4%, which includes the $19.5 billion in teachers loans that grew by 59%. Auto loans was up 12.9% and this includes the $6 billion in motorcycle loans which increased by 23% year-on-year. Microfinance loans was up 16.9% and mortgage loans up 11.5%. The continued shift in the loan mix towards higher yielding non-institutional loans remains a key driver of NIM expansion. Non-institutional loans now account for 32% of total loans from 29.7% a year ago, a gain of 232 basis points, which is supportive of NIM. In the second quarter, NIM reached 4.7%, up 13 basis points quarter and quarter and three basis points year on year, supported by improved asset yields and lower funding costs. NIM netting out NPL formation, improved by 75 basis points to 4.14%, driven by significantly lower NPL formation this quarter versus the previous quarter. As we discussed last quarter, there were a couple of large institutional accounts that moved into NPL status last quarter that drove the growth in NPL. Meanwhile, this quarter, we saw the expected transition back into current status of two different accounts that were previously in NPL status but have now completed their seasoning period to turn current. NIMS net of provisions declined to 3.8% due to elevated provisioning. On funding, total funding reached 3.31 trillion, up 10.7% year-on-year and 0.6% quarter-on-quarter. Deposits remain the primary source of funding complemented by faster growth in borrowings, particularly sustainability-linked issuances which provide a cost efficient source of funding. Our funding profile remains strong with loan to deposit ratio of 93.6% and loans to deposit and borrowed funds at 88.1%. Deposit growth was broad based across customer segments with institutional deposits rising 18% as a key growth driver. Mass market delivered the strongest class of growth at 72.5% year on year and maintained a 96% CASA ratio, supporting the stable and low-cost funding base. Non-institutional clients continue to anchor our deposit base representing 77% of total CASA deposits. Fee income stood at 11.3 billion, up 22% year-on-year and 7.6% quarter-and-quarter. In the first half of 2026, Thank you very much. Thank you. Notably, we emerged as the country's largest trust institution by AUM in the first quarter of this year. Transaction banking was up 18.2% due to stronger supplier finance activity supported by higher transaction volumes and larger invoice values from key clients. Fees from corporate and SME increased 53% on business growth driven by late payment charges, one-off collections of prior year service fees, Higher loan bookings and stronger miscellaneous income. Securities brokerage and investment banking increased 83.1% supported by stronger transaction volumes including some large project finance deals. These were partially offset by a decline in asset sales due to a large one-off sale last year. Rental income also declined slightly. Starting July, we waived fees for P2P transaction transfer fees via Pesonet and Instapay in line with BSP circular 1238, which mandates parity between on us and off us fees for P2P electronic fund transfers. While BPI ranked fourth with a 9% market share in terms of outgoing P2P transactions by count, and second with a 13% market share in terms of Outgoing P2P Transactions by Amount for the first half of 2026. The impact of this on revenue is partly mitigated by the fact that P2P transfers for select BPI account holders representing about 13% of the transaction count was already done on a free of charge basis. Our outgoing P2P transaction count totaled 144 million in the first half of 2026. and we charged 10 pesos per Instapay transfer during that period up to the start of July 2026. And this generated 1.1 billion in fee income this year from P2P transfers. This accounts for 5% of our total fee income and 1% of our total revenue in the first half of 2026. We believe that the waiver for fees for outgoing P2P transfers will yield benefits for the bank moving forward. We believe that it will increase digital usage, thereby decreasing the velocity of lower value cash transactions in the branches and ATMs to deliver OPEC savings. It will also allow us to deepen our relationship with clients and increase usage of our digital platforms. The free transfers should also spur client acquisition which is now made easier for national ID holders through quick selfie verifications in our mobile app, pulling details straight from your national ID records. And finally, the free P2P transfers complement our agency banking partner stores where clients can do deposits and withdrawals for free. Moving on to our operating expenses, total operating expenses for the second quarter amounted to 25.1 billion Thank you for joining us. Thank you very much. Customer count more than doubling to 19.2 million since 2022 and strong business volumes through digital platforms and tech-enabled channels, including agency banking stores. Our cost-to-income ratio for the first half is 46.8%. Capital level remains solid with CET1 capital at $407 billion, up 0.9% from last quarter and 6.2% from last year. supported by earnings accretion. The TET-1 ratio stood at 13.97% and CAR at 14.78%, well above internal and regulatory thresholds. Turning to asset quality, while NPL level increased modestly by 2% quarter-and-quarter to $64.2 billion, the NPL ratio remained stable at 2.42%. The quarter-and-quarter increase in NPL was primarily driven by the SME, credit card, and mortgage portfolios, which was partly offset by a decline in the institutional portfolio, which is consistent with what I mentioned earlier about the curing of two key accounts. Total credit write-off for the year was $3.3 billion, driven mainly by cards, corporate, and microfinance. While the NPL level remains stable, Provisions for the quarter rose to $7.84 billion to account for the higher ECL. Total ECL increased by $6.5 billion, 97% of which is from loan ECL and attributed primarily to the refresh of the macroeconomic variables and by the portfolio staging changes. The increase in provisions quarter on quarter includes adjustments for a more conservative economic outlook, rather than a deterioration in underlying credit performance. These were partially offset by the impact of $3.3 billion in write-offs recognized during the quarter. Given the higher provisioning requirements, year-to-date credit costs increased to 104 basis points, slightly above the 90 to 100 basis points adjusted credit cost guidance, although we don't expect the MEV adjustments to be recurring. NPL reserves stood at 59.65 billion, lifting the NPL coverage ratio to 92.98% from 87.15% in March. Including surplus reserves allocated for GLPP and interbank exposures under BSP circular 941, NPL coverage stood at 115.85%. On this slide, we're highlighting the impact of the updated macroeconomic variable forecast on our ECL requirement. The upper left table compares the forecast used in the first quarter with the updated forecast used in the second quarter in the lower left table. The second quarter outlook was formed shortly before the ceasefire before the U.S. and Iran was announced. It reflects significantly weaker economic conditions across key indicators Thank you. Thank you very much. of the additional ECL in the coming quarters. Overall, asset quality remained manageable despite pockets of stress in select segments. NPL ratio for institutional loans improved by 32 basis points quarter-in-quarter to 0.88%, driven by the curing of two client exposures, which we were expecting as we shared during our last earnings call. Within the non-institutional portfolio, SME delinquencies increased by 420 basis points quarter and quarter, largely driven by recent vintages. The increase was also influenced by the deliberate tightening of credit parameters, which moderated SME loan growth to 3.5% quarter and quarter, well below the 18.6% average growth recorded over the prior four quarters. It's worth noting though, that SME loans account for only 2.8% of the total loan book, limiting the overall impact to asset quality. On personal loans, it increased 85 basis points quarter-in-quarter with delinquencies observed primarily from the first-time loan availors and core mass clients. Microfinance was up 40 basis points quarter-in-quarter, mainly driven by the Mindanao region following a recent calamity that hit the area. Although credit cards rose to Thank you. Thank you very much. due to unsecured nature of these products and their higher loss absorption capacity being factored into the pricing. Notwithstanding this, these portfolios represent only a small share of the loan book. Beyond NPLs, loan staging provides a more forward-looking view of credit quality. From a staging perspective, credit quality improved during the quarter with loans migrating from stage two to stage one. Stage 1 loans increased to 87.9% of the book from 86.9%, while Stage 2 loans declined to 9.9% from 10.8% during the quarter. Stage 3 loans remained stable at 2.3%, indicating that the reduction in Stage 2 accounts was not accompanied by higher defaults. While overall portfolio quality improved, We observed pockets of migration in certain segments offset by continued strength in the larger portfolios. Overall portfolio risk remained well contained despite the continued growth in our loan book. This slide highlights the strength of our reserve position. NPL coverage stands at 93%. However, when general loan loss reserves from surplus are included, coverage increases to 116%. Collateral provides an additional layer of protection, further increasing NPL coverage to 143%. On ECL coverage, reserves and overlay sufficiently covers ECL. Unlike NPL coverage, ECL captures both performing and underperforming loans, allowing earlier recognition of potential losses, including GLLP further strengthens the coverage to 125% of ECL. Our strategic shift towards the non-institutional loans continues to enhance overall portfolio returns. Non-institutional loan gross yield remains stable at 12.7% in the first half, more than double the 5.8% yield of the institutional portfolio. Even after accounting for higher NPL formation, the non-institutional loans delivered a net yield of 8.7% compared with the 5.7% for the institutional loans. This wide margin differential provides a strong buffer against NPL formation while supporting growth with the non-institutional loans expanding 1.5 times since 2024 versus the 1.2 times expansion for institutional loans. In line with our commitment to digital leadership, the bank continued to enhance our seven client engagement platforms Starting from the left, we have the BPI app, our main operating app for retail clients. The app's core functionalities are in place with ongoing enhancements focused on improving user experience. We recently added a feature to hide account balances and account numbers, real-time electric bill payments, and deposits to partner stores. The app has 9.8 million enrolled users, of which 6.2 million are considered active users. For our Vibe eWallet, signups have reached 2.8 million, 20% of which are new to bank. The BPI BizLink facility for corporate clients introduced key upgrades such as Interbank, ADA, account maintenance notifications, and pop-up notifications for applicable third-party sites to provide ease of transaction approval. BizLink has 79,500 enrolled clients, up 32% year-on-year. VPI BizCo app for SME clients maintains over 30,000 SME users with transaction volume rising 43% to 39,000 supported by the continued platform enhancements. The Banco app remains central to financial inclusion as it continues to empower our everyday Masang Filipino by making financial services more accessible, convenient, and secure, which enable the growing trust and engagement of our clients. BPI Wealth Online, serving high net worth individuals, maintained its active users at 2.8 thousand, up 82% year-on-year through sustained activation initiatives. BPI Trade is migrating to a non-setup facility which simplifies account opening, accelerates processing, and supports future real-time funding. Platform volumes continue to grow over last year, despite the performance of the market at times. Across all platforms, we continue to expand capabilities in open banking and improve the UI UX for a more seamless experience. As of June 2026, we have 135 API partners supporting over 10,000 brands. Our agency banking partnerships enable us to broaden our franchise in a scalable and cost-efficient manner. Building on our strong momentum established in 2024, We expanded our agency banking network to 34 partners and over 7,000 partner stores nationwide. Of these, about 1,350 stores offer cash-in, cash-out transaction capabilities, significantly extending our banking network reach. Product sales reached 310,000 in the second quarter, up 1.5% year-on-year and more than 25 times from two years ago. with deposits and insurance as primary products sold. Our network includes 19 partners with 1,350 transaction-enabled stores, which service nearly 124,000 cash-in, cash-out transactions during the quarter, equivalent to the activity of 25 branches. Notably, the average cash-in ticket size remains 1.5 times larger than the cash-outs. highlighting agency banking's growing role in deposit generation and funding growth. Beyond driving growth, agency banking enhances operating efficiency. Deposit and withdrawal transactions of the branch that are below 50,000 can be redirected to partner stores, enabling branches to focus on higher value sales and advisory. PPI Wealth further strengthened its leadership position Thank you very much. Its client base has grown to 1.5 million as of May this year, with 92% digitally serviced, including customers onboarded through partner ecosystems such as Maya and GCash. To further democratize investing, UPI Wealth recently launched Peso Denominated Share Class for two of its global investment funds. As one of the first major Philippine wealth institutions to offer Peso Class shares for global funds, BPI Wealth provides investors access to international markets without the need for foreign currency conversion or offshore accounts, reinforcing BPI Wealth's leadership in product innovation. BPI further boosted its sustainability efforts in the second quarter of 2026, where we were the first bank to waive the Instapay and TeslaNet transfer fees on a permanent basis for person-to-person interbank fund transfers through the VPI app, online banking, VIBE, Banco and Disco. In addition, the bank is providing free cash deposits and withdrawals through its partner stores nationwide. We also expanded the number of bank branches powered by 100% renewable energy to reach 100 branches. Our annual Sustainability Awareness Month engaged over 117 participants across 52 events, including financial wellness lectures, technical capability building, ESG forums, fitness run, and environmental stewardship activities. The bank also financed two sustainability-focused deals, a $6.2 billion financing for a 166-megawatt peak Solar Farm integrated with an 80 megawatt hour battery energy storage system and a 2.3 billion financing for a 60 megawatt peak ground mounted solar power project. Lastly, we're the first bank to launch a battery powered EV bus allowing the bank to reach underserved and unbanked Filipinos. Beyond ESG, we compiled a list of institutional awards and recognitions received by BPI both globally and domestically. We're honored to receive these recognitions which reflect BPI's commitment to excellence and further details on these awards can be seen on our website. In summary, let me close with a few takeaways. On profitability, revenue momentum remains strong, driven not just by scale but by our strategic execution. Our first half earnings were tempered by forward-looking provisions. On the balance sheet, our robust capitalization provides capacity for growth and increasing shareholder returns. Asset quality was stable, supported by higher NPL coverage. Finally, our franchise expansion accelerated through agency banking and wealth management. Thank you and we'll shortly open the floor to questions after we get set up. Thank you.