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.

Thank you, Eric. Before we open the floor to your questions, please allow us a minute or two to set up at the venue. Just a reminder, if you're joining us via Zoom, there are two functions at the bottom of the Zoom webinar screen, which you may use to queue. One is the raise hand function. The host will then prompt you and unmute your line for you to speak. Alternatively, you may also type your questions in the Q&A box and we will read out your question on your behalf. For those on site, you may use any of the mics available at the floor or you may likewise raise your hand and we will have someone hand a mic to you. Just a reminder, please do 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 as we will refrain from taking questions after we end this call. So joining us here in front with TG and Eric are our senior leaders, Tere Marshall, Head of DTI Wealth, Jin Digo, Head of Consumer Banking, Louis Cruz, Head of Institutional Banking, and finally Dino Guzman, Treasurer and Head of Global Markets. So I guess for our first question, we want to check if anyone from the audience had questions. Okay, we can start off first with questions from our attendees. Actually, let's kick it off with DA Tan of J.P. Morgan. DA, please go ahead.

Hello, can you guys hear me? Hello, can you hear us? Yes, I can hear you.

All right, hi, good afternoon, and thanks again for the briefing.

Just a couple of questions from me. First, can we understand the 7.8 billion provisions in the quarter? Just to confirm, I saw that 2.7 billion is ECL, is that correct? And in the slide, there's also a 2.2 billion. Can you explain what that is? So I just want to understand the composition first.

Yes, so... So you're correct that it's 2.7 billion for the quarter. I'm just looking at the slide that you're referring to. Which is the slide that you're referring to?

Where you talk about the MEV adjustment impact to credit costs directly.

Slide 19. Which one? Slide 19, the higher ECL. 19. Yeah.

Yeah, so it says there are 2.7 billion, right? Yeah. Sorry. So, I see. The 2.02 billion that you're referring to is just for large corporate and credit card ECL impact. 2.7 is for the entire portfolio. But the bulk of it is coming from the corporate and credit card.

Okay, so 2.7 is MEV, I guess the rest is from the bulk and of that around 2 billion is large corp and credit card.

Yeah, so 2.02 is a subset of the 2.7 billion.

I see, I see. Okay, okay.

Everything except 2.02 is every other bulk except corporate and credit card.

Okay, that's clear. So, does it mean that going forward, you're looking at the run rate of closer to 5 to 6, assuming this 2.7 does not recur, 5 to 6 billion provisions per quarter?

So, assuming there's no change in the economic conditions, then roughly around that area is reasonable expectations.

Okay, thank you. Then just a second question on asset quality. I just want to get the better picture of the whole asset quality picture effectively because I see a few things happening. One, there's some segments where NPL is moving up like SME and credit cards. Two, you did mention though that stage two is coming down. And how do I reconcile this with the economy that we're seeing, high oil prices, how that is flowing through? Maybe you can put that together for us.

Yeah, so SME, on the SME side, we are seeing the delinquencies move up, and we are engaging in measures to manage that growth. In credit cards, we did see a spike, but as you'll see on the slide, you'll also see that it's actually leveling off, right? It's actually starting to come down a bit. So I think largely what you saw was you're seeing some dislocation from the recent events, the recent developments in terms of the economy, but overall we're seeing across a number of the books some degree of stability, right? So I'm not sure where, yeah.

Maybe the way to look at this is we look at it per product and maybe what I'll do now is asked to talk a little about the SME book because that's the one that shows a very clear spike in NPL. And while it is a very small portion of our portfolio, 70 billion versus a total portfolio of 2 point whatever, a trillion something, it is something that bears watching because it is an area that we continue to want to grow. So I'll let Okok talk a little about that. So Okok, you might as well come up here. The other thing to note is when you talk about cards and stage 2, we're very deliberate that we showed you on the slide where we are stage 1, stage 2, and stage 3. By definition, stage 3 by BSP definition is MPL. Stage 2 is where there's a significant credit event that makes us think that it's not, that there's a significant credit event that makes it a little riskier than stage 1. And what we're seeing in Thank you very much. and the normal growth rate, and therefore NPL will go up. Ocampo, why don't you talk a little about what we're doing on the, what you're seeing on the SME book, and then maybe Jimmy can talk a little about what we're doing on the consumer book in terms of tightening credit and the collection effort.

Yeah, thanks, Gigi. So, clearly we saw more pressure on asset quality in the business banking book in the last 12 months. By June, our NPL outstanding reached $8.4 billion. or that's a 12.5% NPL ratio. Now this compares to 3.02 billion in NPL outstanding and 7.52 in ratio in June of last year. So year on year, NPL outstanding increased by about 5.3 billion. Since March, we introduced tightening measures on origination and underwriting. And so the book growth has slowed significantly. Month-on-month portfolio growth slowed from customary 5% per month down to about 1.8-1.6% in April and May and then flattish in June. In that sense, the rise in the NPL ratio was amplified by both higher NPL balances and a flatter loan book after the risk control actions. What else did we see in the book? We also saw some changes over the last 12 months in the mix of where the stress is coming from. Construction and related industries are now the largest NPL contributors of 1.66 billion, or 3.5 times bigger than in June last year, and now comprises almost one-fifth of total NPL outstanding as of June. This segment alone accounted for 22% of the year-on-year increase in NPL amounts, and within this segment, Civil engineering projects had the largest NPL increase, growing 4.7 times from benign 240 million last year to 1.1 billion as of June this year. The second largest contributor is sale of non-essential goods with NPL outstanding of 1.5 billion. This is close to three times bigger than last year. and this comprises 18% of the NPL outstanding as of June. Our root cause attribution review helped us better understand the timing of the NPL build-up. Net flows to NPL did not rise in a straight line. In fact, they accelerated in waves from about 550 million in Feb to April 2025 to 1.06 billion in August to October 2025 and then up to 3.95 billion in Feb to June this year. Those waves broadly line up with external shocks that we saw during the period. Trade disruption, flood control controversy, weaker GDP momentum, and then the 2026 oil price and inflation shock. So more importantly, what What the borrowers are telling our collection schemes corroborate our reading. Poor customer collections, sales declines, and receivables delays. So this basically speaks to what I would characterize as borrower resilience in this segment.

On consumer loans, I believe we have gotten it under control recently. And we have seen that the MPLs and the delinquencies are really coming from a few sectors. And I think Eric mentioned this earlier. It came from vintages of 2024 and 2025. When we talk about vintages, these are originations. But just like any credit cycle, normally the first two years of a vintage cycle is where we see rising MPLs because it needs some seasoning. However, because of our recovery and collection efforts, we're able to manage it over time. And you'll see that gradually plateauing in the next 18 to 24 months for a vintage. Having said that, we continue to look at our portfolios and certain credit parameters where we see segments that require more either higher down payments or longer tenure or higher longer tenure. And so we see that for you to bank and you to credit. And these two segments are where we have been able to Thank you very much. Thank you. Credit cards, of course, has been much talked about, but we like the fact that in the recent months, we've been able to manage our collections, particularly on early delinquencies. On personal loans, we have, in fact, tightened parameters even more, and so we will see our growth moderating on personal loans. On housing and auto, these are the secured loans. You can see that our MPLs have actually been quite tempted in terms of growth and really reflective more of the reduced demand, particularly for real estate and for ICE vehicles. Our growth now is really propped up in terms of auto loans by EVs and The EV market is primarily affluent. Our loan growth on the housing loans is driven by internal channels and these are the branch generated accounts. So across both auto and housing, we have a good source of pre-qualified depositors which will allow us to continue to grow those two loan books. So overall consumer book loan growth will moderate Thank you very much.

But as the economy turns, what you have to do is you have to tighten credit and then beef up your collection efforts. And beefing up collection efforts does not only mean that you call them when they're delinquent. You need to call them before they become delinquent by sending them reminders. And that's the way you prevent things from flowing into past due and prevents Lourdes from flowing into stage two. And so if you look at what we've been able to do on the cards business and even the SME business is we've really ramped up the collections effort there and you'll see that our stage two loans there have actually dropped in terms of amount. Once it goes obviously to stage two and it goes into stage three, you just have to try to collect, but it won't flow back. But what you need to do is prevent things moving from stage one into stage two. And I think that's what we've been able to do in the second quarter.

All right. That's very, very helpful. Thank you, guys. I'll go back at you.

Thank you, DA. Okay. Our second question comes from Daniello Picace of AB Capital Securities. Daniello, you are now unmuted. Please go ahead and ask your question.

Hey, guys. Can you hear me clearly? Yes.

Yes.

All right, so I have a few questions here, but let me start with sort of a follow-up question to DA. So on the slide regarding higher MEDs, the Technic Red Cross, I just want to clarify that the 2.7 billion of your 7.8 billion to Q1026 production is macro-overlay, and is the remaining 5.1 billion essentially driven by Stage 2 and Stage 3 migrations?

and Behavioral Score Changes. So the way we look at it is our ECL model, right, the inputs to that are the economic variables which we change once a quarter and then you obviously have to take a look at where your loans are moving in terms of past due, so that's moving from stage one to stage two to stage three, but also we have behavioral scores which will score a borrower or a loan Thank you very much. Uloans coming on, and of course, behavioral scores are changing, either being upgraded or downgraded.

All right, that's clear. Just a quick follow-up to that. How often would you have to update your MEBs?

Yes, MEBs are updated quarterly.

Got it. Okay, that's clear. Second question is essentially on NIMS. The 13-bit sequential improvement... So the rate hike should have a positive impact on NIM over time, right? And so we've started to see

We've started to see the rate hikes come in, but the immediate impact of a rate hike is to first increase the cost of funds, followed by increasing the yield on the assets. That's overall, and so there's a bit of a delay in terms of the positive impact to the NIM. But what we expect to continue to see, having immediate positive impact on the NIM. is the asset mix shift that you're referring to, right? The fact that the non-institutional book continues to grow at a pace that is faster than the institutional book. And because of that, we'll continue to shift the portfolio yield towards this higher yielding portfolio. As I showed earlier, The average yield on the non-institutional side is 12.7% versus 5.7% on the institutional bull.

We got it. Thanks for that, Eric. My last question would essentially be on Circular 1238, and since you've waived Some of these fees. I'm just curious, and it might be a bit crazy, but have you seen any changes in terms of transfer volumes for active users or account balances?

Hard to tell immediately on the active users or the balances, but the volumes have picked up since I think 20%? 30%?

Got it. Thanks for the TV. And just to follow up to that, and you If I'm not mistaken, you have shared these in the past. Can you give us an update on the unit economics for digital versus non-digital, specifically in terms of your acquisition cost or cost to serve? I think we want to provide some revenue for customers, especially in light of circular 2030.

Yeah, the update is still that from an acquisition standpoint, in terms of number of customers that we onboard, more or less we have about 50-50. So 50% of our new customers, new to bank customers, come from the branches. 50% come from digital. And that includes BPI app, through GCash, agency banking, which uses Fidgetals. So that's about 50-50, but the value in terms of balances is really more coming from the branches because the product for our branches require a maintaining balance, whereas for our digital, it's a zero opening account balance. So the ability to upgrade our digital customers into really higher savings customers is one of our major initiatives. and from a transaction count standpoint, about 4% of our transaction count remains in the branches, so 96% would be digital or electronic, but from a transaction value, we're really looking at 89% of the transaction value still at the branches and the balance in digital, which really tells you that we have been able to migrate more and more transactions Thank you. I think it's easy to talk about what the unit economics for acquisition is, right? Because

As we pursue our strategy on our app, we're finding that we're able to bring down our acquisition costs by changing the technology. Today, our KYC is already direct to the PSA, which is actually free today already, whereas before we had to pay for the services of technology providers. That said, also, as Jimmy pointed out, more transactions are being done digitally, and let's not forget also a lot of transactions are still done digitally, not necessarily in the app, But on the partner stores, as Eric pointed out, our partner stores today are already doing this, the volume that 25 branches would be doing. And that, to Jim Lee's point, frees up our branch to do other services. So that kind of revenue lift is not coming from the new digital, but coming from the fact that we have more time in the branches to advise and to sell to existing customers. So I think you need to look at it holistically. All right, that's fair. Thank you.

Thank you, Danielo. Before we proceed with more questions from our online participants, I just wanted to check if our participants here had any questions. If not, we can actually continue. We have some questions in the Q&A box, so I'll go ahead and ask them. The first question is from Tunde Ojo of Harding Lovner. Tunde's question is actually... In relation to our outlook for 2026, specifically in relation to loan growth, credit costs, as well as OPEX growth.

Yeah, so in terms of loan growth, I think previous guidance that we've given is probably still consistent. I mean, kind of at the lower end of that. Now we're looking at something along the lines of about 10%, 10%-ish. for full-year loan growth, which is a little slower than the loan growth, year-on-year loan growth that we're seeing so far this year, but obviously conditions have changed since then. But still something in about that range. NIMS, I think, as mentioned, we think NIMS will be fairly well supported. So at or around this level, maybe a little up from where we are today. and then credit costs you know if you take out the MEV changes as we don't have it in our minds that conditions are going to deteriorate further therefore we're probably not going to see any additional ECL driven by deterioration in market conditions if you take that out it's probably representative of Thank you, Eric. We have another question. This time from Misha Nang of Papa Securities. She's asking, with our LDR now at 93%,

What would we consider a comfortable level going forward?

So no issues really with this 93%. From our perspective we don't really see it as any issues. I think our ability to tap the bond market remains to be very present and therefore what we're really looking at in a sense is how much ability do we have to access funding and this LDR of 93% doesn't really, I think at one time LDR and in some sense this LDR is a bit of a carryover from a time when banks funded themselves primarily through deposits. And even though that continues to be the case, we're no longer limited to that. We're very much able to tap not only the capital markets but also bilateral loan markets as well or syndicated loan markets and therefore, and even other sources, right? So, there's a lot of opportunity for us to do funding and so I don't think this LDR of 93% constrains our ability to continue to grow the loan boat.

Thank you, Eric. Okay, our next question is from Elizabeth Santiago. Elizabeth is of Abaco Securities. Her question is, she wants to give more color on our AI strategy, specifically, what workflows are you using AI in, and how much we are spending in terms of, do we have a sense of how much it could potentially impact our OPEX moving forward?

I think everyone's got to admit that AI will play a larger and larger part in everyone's operations. So today we clearly have a co-pilot where we have OpenAI and Anthropic as two LLMs that's available to a large group of people who can use it for productivity and for analytical tools. We've always said two years ago, we did launch our own internal app for our service staff where we put all our policies, procedures, and products. on an LLM so that they can have consistent answers. We are piloting some workflows, particularly on the lending side where it's more apt for agentic AI to work. We are piloting some on the customer service side, particularly on the operations and the call center and chatbots. We are experimenting with credit decisioning, even on the corporate side, where we're helping our sub-CRECOM and our CRECOM run through figures and data much quicker, allowing us to digest the information much faster.

So there's everything we're doing.

We're experimenting with a lot and as these AI tools become more reliable, we will put them into production. I suspect that we will soon be putting into production A tool that allows us to process auto loans almost instantaneously.

Thank you, TG. Next, we actually have Eric Chan who has a question. Eric Chan is of Buena Vista. Eric, you're now unmuted. Please go ahead and ask your question.

Thank you. TG and Eric, I've got a question on the e-sale assumptions. Given the fact that post Q2 window, we have the collapse of the U.S.-Iran ceasefire and what's going on down at the Red Sea potentially having more impact on the oil supply stability, as well as the El Nino effect seems to have worsened over the June-July period. I was wondering, from your current ECL assumptions, what are the inflation expectations that you have and has meaningful changes happened since Q2 for you to further revise those assumptions to take care of high inflation and possibly low growth?

I think first let's be very clear that the economic assumptions that go into our ECL model are not determined by me or Eric. or Jinder, anyone in front here. It's determined by our in-house economic team independently in consultation with obviously the industry and what he's seeing. That said, my understanding of the economic variables that were used in this last sequence were their views just before the ceasefire. So there was knowledge of El Nino, the severity of El Nino. There was no assumption of a ceasefire. And so I assume, and I hope I'm correct, I assume that these are quite dire projections. And I think we put them on the slide, and you're welcome to take a look and see whether you agree with them or not. So I think if you believe that our economic variables that were used as we present them are too rosy, then obviously if Those are wrong, and the projections turn out to be even worse, and we update, then obviously we will have to put more provisions. If people think that they are too negative, and as we roll back, then there will be the ability to reduce provisioning going forward. And that's why we're being very transparent and putting what economic variables were used in our ECL model.

Thank you. That's very, very clear. If I can have just one quick follow-up. Given the stabilization of the book quality this quarter, but we still have the higher oil price and potentially higher rice price in our second half outlook, how does that impact your I think Eric said it right.

We're looking right now. We're a little bit on the pessimistic side. Eric quoted a figure of 10%. But let me say that a couple of things play into that, right? Obviously, we have throttled our credit parameters, but I'd be a little more comfortable loosening them as we get our collection strategy going. So obviously, prior to this whole crisis, we were loose on the credit, we tightened it, but at the same time, you have to build up your collection effort. That's not something that happens overnight. You've got to hire people, you've got to put in more scripts into your calls, you've got to hire more third-party collection agents to get that into effect. As we get that going, Then we'll be more comfortable loosening credit standards again. The other thing that gives me pause in thinking about whether we are too pessimistic about our 10% loan growth is the fact that my neighbors across the street showed 15% loan growth.

So we've always been very close.

So maybe we were a little too tight on our credit, maybe they were a little too loosely but usually we come very close to each other and that's why maybe in my mind, well, I think we're still looking at 10%. If we're wrong, we're probably wrong on the low side.

Thank you so much. Very clear.

Thank you, Eric. Our next question comes from Priya Iyar of Concilium. Priya, you're now muted. Please go ahead and ask your question.

Hi. Thank you for the opportunity. Two questions. First, the macro one. What is your house view or your outlook on where the interest rates will stabilize? Given that now Philippines has raised rates without waiting for the Fed, where do you think this will stabilize? Or if Fed continues to raise rates, how far do you think the country can follow the path?

Race will never stabilize. That's why this life is exciting. No, our view, I think, I don't have June's here, right? But our view is that the BSP will probably raise rates 25 basis points in the August meeting. There's a potential for a second rate hike in one of the remaining three meetings going to year end. So I think our view is 50 basis points this year. And then everything else depends on what the Fed does and what growth and inflation looks like for us. But When we project our inflation going into the end of this year, it looks like the BSP has to raise rates at least 25 and potentially 50 basis points.

So does your 10% loan growth take into account slightly slower growth in the consumer space because of these higher rates? I just want to understand how much of that you have taken into account in the 10% assumptions.

Yes, that's correct. So this 10% assumption, which was scaled back from at the start of this year, we had a more aggressive assumption, scaled it back through the course of the year, obviously, as the situation evolved. And it takes into account the fact that a deteriorating market conditions, including higher interest rates, greater inflation, slower GDP growth, all those taken into consideration in coming up with this assumption. updated loan growth projection.

So I assume that's also incorporated in the ECL model, the deterioration in the growth, etc. That's also taken into account in the ECL model.

Yes, and in fact, as mentioned, these factors are what drove this significant jump in required ECL.

Preah, when you say the slowness of growth of the loan book or of the economy? Economy. Economy, yes. It's in the ECL.

A more bank-level question. You said the sectors that you saw growth in the institutional side were mainly utilities, transportation and communications. So, you know, given that the GDP growth has been downgraded, you know, in the address to the nation also, there's a lot of focus on utilities. So, I just want to understand if there is a certain split of your lending which is skewed too much in favor of any sector or are you comfortable and is it very broad-based sector-wise?

Thanks, Priya. Okay, for institutional banking, it's spread over and it's diverse to real estate, utilities and energies, and some infrastructure. So, to answer your question, it's something that the portfolio is well diversified. So, especially the announcements regarding the utility companies, it's more muted if ever the effect on the portfolio.

Okay, thank you.

Thank you. Thank you, Priya, for your question. We can now take on some of the questions in the Q&A box. We have a question from Shane Matthews of White Oak Investors. On digital onboarding, GCash was mentioned as a partner. What percentage of our customers are coming through here? Which areas are you collaborating on and which areas are you competing in?

From an acquisition channel standpoint, GCash or GSave for us has been able to contribute 6%. So if you look at the 50-50 branch in digital, part of the digital component is GSave. So it's still not as big. In fact, Most of our digital acquisition is coming through our BPI app and our agency banking channels. So GSafe accounts for 6%. Where we collaborate, certainly on the ability to make payments interoperable. So our payments continue to be interoperable. We use them as acquisition channel. So aside from deposits where we onboard them, we also have G-Invest of Tere under wealth management. We also have G-Insure, which is on the insurance side. So because GCash is a marketplace, so we are able to offer our own products within GCash. We also have our usual marketing promotions or programs, tie-ups, wherein we promote our products through the GCash app. So that is also part of our collaboration. Where we compete, I don't call it competition, it's cooperation, because payment is such a big space. Competition is really not amongst ourselves, but cash. Cash remains to be a big challenge for the industry. And that's why we're willing to bring down our funds transfer fees, our Instapay and Pesonet fees to zero because we are supportive of greater financial inclusion and Payments is really the first product that our kababayans or Filipinos are really doing. So whether that be paying another person or encouraging people to use pay via QR and also paying bills via digital. So there's still a lot of opportunities. Cash is the real competition here.

Just to add, GCash is an important driver of growth in customer count for our wealth management business. In fact, out of about 1.5 million DPI wealth customers, I would say around 1.3 million, which is also 6% of our total customer base. So about 1.3 million is our clients invested in our products through G-Invest. There might be... Duplicates, like they may have G-Save, they may also have G-Invest. So there could be a double count in customers. And then in terms of AUM, so it's also an area that's growing and we continue to add new solutions, especially the launch of the new Peso Class Global Funds. So when we launched the Peso Class Global Funds through our BPI channels, The response was very strong. And if we're able to do this soon with G-Funds, we believe that the growth potential is also going to be very strong.

There's a lot of cooperation between RSLs and GCash. As Jimmy said, G-Save is an important source of new accounts for us. Our G-Funds and G-Invest has delivered 1.3 million customers to us. We do sell our accident insurance on G-Insurance. As well as on the corporate banking side, as you know, the regulations require that an EMI, a wallet, needs to keep half the wallet funds and trust accounts, so we do that for them, as well as their lending business is significantly funded by us.

Thank you, T.G. We have another, well, a different, more in terms of our I guess our outlook. The question is from Alex Short of Fiera Capital. He was just wondering if we've modeled or do our economic forecast capture the impact of a strong El Nino?

Yes, the El Nino is already built into the ECL calculation through the MEDs. Thank you, Eric.

We have another... Actually, Priya has actually raised her hand again to ask a question. Priya of Concealing Capital. Priya, you're now unmuted. Please go ahead and ask your question.

Hi. Quick follow-up question. I just wanted your outlook on the OPEX because, you know, for the last two years, we've seen a steady decline, you know, in the CIR and the OPEX. Are we at a level, you know, wherein this is here to stay? and also with growth tempering, are we likely to see some hike in the expenses? So what is your view on it?

No, we believe that the cost-to-income ratio can continue to gradually move downwards. I think this year will probably be a challenge to see further tightening in the cost-to-income ratio, but moving forward, we continue to see opportunities Thank you very much. Thank you. Thank you. Thank you Priya for your question. Going back, we have another

Question that was sent in is actually again from Tunde Ojo of Harding Lovner. Going back to the discussion on the waiver of the P2P transfer fees, he wanted to get a sense of how that will impact our overall outlook for non-interest income growth this year.

Maybe the quick way to answer that is really to take a look at what that's costing us. In the first six months, it costs a billion. 1.1 billion pesos. So that's completely disappearing. And for us, what's our fee income for the first six months? 18% of the fee income. But what's the total figure?

The total figure is 21.

So 21. So we're losing about 4, 3 to 4% of our Our three incomes because of this waiver.

Thank you, TG. Wanted to check if anyone from the audience had questions.

Please go ahead. Hi, TG. I just saw a video on stablecoins that you're going to be launching. I think that's a great point.

You know, one of the things that when we look at the industry, particularly the payments industry, there is a large flow that is coming from people remitting via crypto. And from that crypto, it is coming in and being sent out by Instapay, right? And that is a very inefficient way because the people who are doing it need to be actually quite conversant in the way you handle crypto or if you want to do it stablecoin. Our vision here is that we're using stablecoin merely as a rail. Our customers will never own the crypto, will never own the stablecoin. We're using it as a rail so that our clients will be automatically onboarded and off-boarded by our partners. They never will touch the crypto, they will never own the crypto, but it will allow us to make the remittance almost instantaneously at a very significantly lower cost. So our vision is as P2P revenues disappear for the whole industry, not just us, this is a way to replace that because if we can find a way for others to do their remittances through routes that are cheaper and faster, and more convenience because in the end it has to end up in a bank or a wallet. We believe we can capture that at scale and we just have to launch it very quickly.

Thank you for your question.

Another question was sent in this time from Josh Generoso of AXA PH. The first half dividend declared was actually a positive surprise.

We wanted to check if we had an outlook for the second half dividend.

The second semester dividend will be declared in November. Still a lot can happen between now and November. But it was our intention, specific intention to return a little more capital to investors this year with limited, I guess maybe a little more muted loan growth expectations for this year would support our ability to return a little more capital this year to investors. But of course we have to take all these Things that may happen between now and November into account before making that decision.

Thank you, Josh, for your question. So actually we've gone through all our questions from our online participants. I wanted to check again if any of the audience participating here on site had any questions. If not, we've actually gone through all the questions. Again, thank you for all your questions. Again, we at BPI always welcome your feedback and take them into careful consideration. Before we end the call, maybe we can call on T.G. for some final thoughts.

Thanks again, Haj, and thanks to everyone who participated in this call. A couple of points I do want to make is that, number one, every time we do this call, it's in the spirit of trying to explain what we're doing, trying to be very transparent, and the figures we give you We hope to help you understand the thinking behind our strategy, the thinking behind our outlook. The second point is that banking will always go through economic cycles, and in particular where we have decided to grow a consumer business, we will need to ride those cycles through. We will hold back a little as the cycle turns down, but we will never surrender it. Thank you very much. I guess with that, my message is that we continue on this journey, our strategy remains firm in our minds, and I thank my team here for continuing and executing as we see fit. So thanks everyone for attending, and thank you to my colleagues for joining us today. Thank you.

Thank you, TG, Eric, and the rest of the DPI senior leadership. Ladies and gentlemen, that concludes today's earnings call. Again, thank you for your participation. To those joining us online, you may now disconnect. And to those with us on-site, please do join us for some refreshment. Thank you.