U.S. Markets closed

Edited Transcript of BPI.PS earnings conference call or presentation 31-Jan-20 8:00am GMT

Q4 2019 Bank of the Philippine Islands Earnings Call

Makati City Feb 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Bank of the Philippine Islands earnings conference call or presentation Friday, January 31, 2020 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Cezar Peralta Consing

Bank of the Philippine Islands - President, CEO & Director

* Josenia Jessica D. Nemeño

Bank of the Philippine Islands - IR Officer & Assistant Corporate Secretary

* Maria Theresa Marcial-Javier

Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development

================================================================================

Conference Call Participants

================================================================================

* Danielo Picache

Crédit Suisse AG, Research Division - Research Analyst

* Gilbert Lopez

Macquarie Research - Head of Research

* Haidee Chiu

Tahan Capital Management Pte Ltd - Research Analyst

* John Te

Philippine Equity Partners, Inc., Research Division - Analyst

* Karthik Chellappa

Buena Vista Fund Management, LLC - Investment Analyst

* Robert P Kong

Citigroup Inc, Research Division - Director and Deputy Head of Regional Financial Institutions

* Selvie Jusman

Morgan Stanley, Research Division - Research Associate

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to BPI's Fourth Quarter 2019 Earnings Call.

From the BPI side, we have President and CEO Bong Consing and CFO Tere Marcial. We will start a few words with Mr. Consing on the fourth quarter results, and Ms. Marcial will briefly go through the presentation deck that was sent out earlier. Thereafter, we will have a Q&A.

Mr. Consing, please begin.

--------------------------------------------------------------------------------

Cezar Peralta Consing, Bank of the Philippine Islands - President, CEO & Director [2]

--------------------------------------------------------------------------------

Okay. Good afternoon or good morning for wherever you may be calling from.

Our fourth quarter really represented a continuation of the momentum that we registered early in the year. That momentum was in both the interest-earning side of the business of core intermediation and in the fee and commission side of the business. The year was also marked by reasonably good trading results; and a continued shift between the corporate segment in terms of loan assets and everything else, to include SME, retail, microfinance. The results for the year, we think, were robust. We believe we go into 2020 in reasonably good shape to continue this momentum. We do have to replace trading gains, but we think we are well positioned to do that this year, so I think I would characterize our mood as cautiously optimistic.

So let me stop there.

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [3]

--------------------------------------------------------------------------------

On that note, let me now proceed with our presentation for the fourth quarter 2019.

Let me start briefly with an update on the macroeconomic landscape for the Philippines. For 2019, the Philippine economy registered 5.9% GDP growth. We've seen a moderation compared to prior years, if you compare it with the 6.7% and 6.2% registered in the prior 2 years, but on that -- but that said, compared to the first 2 quarters of 2019, the second half of 2019 actually exhibit resurgence of growth with fourth quarter GDP at 6.4%, which is good news. If you remember, part of the weakness in the first 2 quarters was because of the delay in the passage of the budget, which delayed some of the government programs and projects. At the same time, there was a brief El Niño and election ban, which also slowed down some spending, but going forward we think we will exhibit stronger growth that is probably north of 6% in 2020.

Looking at the profile of debt-to-GDP. What we see in '20 -- what we saw in 2019 is still low level of consumer debt-to-GDP, which presents a significant upside and opportunity in line with the strategy of the bank to continue to shift our loan book from what has predominantly been corporate to what is going to be more consumer and SME. In terms of investment spending, what we saw in 2019 is still a resurgence of investment spending which is actually at par with regional average. We registered about 25% to 26% investment spending as a percentage to GDP. And this is not far from the 27% average of regional peers, particularly Indonesia, Thailand, Vietnam and Malaysia.

And then finally, we continue to see the movement in the peso which is a reflection of improvement in capital spending, although this has been slightly muted in 2019. In 2018, it was negative [2.4] current account balance as a result of continued government spending. It slowed down a bit in 2019, but we think this will recover in 2020, as the 2020 national budget has already been passed.

So that's for the macroeconomic overview. Let me now briefly look at -- show you a summary of what transpired in the banking industry but first, starting with the interest rate environment.

What we saw in 2019 was a reduction in inflation rates coming from peak levels in 2018 such that average inflation was at 2.5% for 2019. And this is -- this was around 2.5% in December. And as a result of that, we saw the central bank being able to loosen monetary policy such that we saw successive reduction in reserve requirement ratio from what was 18% in the beginning of the period to 14% by the end of 2019. We also saw successive policy rate cuts of about 75 basis points from 4.75% to 4%. And this is a reflection of lower interest rates -- lower inflation rates, which allowed the central bank to exercise a more expansionary monetary policy.

Moving on to some banking industry highlights in terms of balance sheet growth. Loan growth for the industry continues to moderate. Based on the latest numbers that we have, it was about 8.7%. Deposit growth for the industry also continues to be on a down trend. It was about 6.5% as of November 2019. And this is underpinned by slower M3 growth, which was only 9.8% as of November 2019, coming from much higher levels in 2018, 2017 and even high 20s and even high 30s back in around 2013, 2014. So it's a moderation in growth in monetary aggregates that's driving the growth in loans and deposits for the banking industry. With loans growing slightly faster than deposit for the industry, we're seeing rising LDRs, which is close to about 80% on average as of the third quarter of 2019.

So that's it for our brief macroeconomic updates. Let me now move on to the highlights of our financials for the fourth quarter of 2019 as well as full year 2019.

Let me start off with a summary of our profitability, just to highlight that for the full year 2019 we registered net income of PHP 28.8 billion. This is 25% higher than the previous year, and this brings us to an ROE level that is close to 11%. This is driven by strong revenues on solid core income. Our revenue is up 20%, and this is on the back of higher net interest margins, which is up by 24 basis points. For the period, we also registered a strong performance in terms of noninterest income with a significant increase in trading income given the -- our ability to take advantage of the interest rate environment. At the same time, we saw a steady growth in our fee-based income across various businesses, which I will discuss in further detail in the next few slides.

As a result of the strong revenue

(technical difficulty)

we're showing better profitability and efficiency metrics all across. I mentioned higher NIMs at 3.35%. We're also showing higher ROA at 3 -- 1.38%. In terms of efficiency metrics, we're showing a much improved cost-to-income ratio of 53% coming from 55.5% the previous year. In terms of operating expenses, it's total expense for the period was up 14.8%. This is well within our guidance to our investors for through -- for the year. And then finally, our provisions are higher by 18%, which is a reflection of management's conservative stance with respect to taking on provisionings, at the same time as we seek to achieve higher loss cover and NPL cover for the bank.

So moving on to balance sheet. We are reporting moderate growth in our balance sheet with about 8.9% increase in loan level and a 6.9% increase in deposits. We're showing a strong liquidity coverage ratio and net stable funding ratio. These are levels that are well above regulatory requirements. And our LDRs -- LDR increased from 85.4% to 87% as a result of faster growth in our loan book relative to deposits.

For the period, we also continued to tap the capital markets for alternative sources of funding, and this replaced some of the bilateral loans and syndicated loans that matured during the period. We issued a total of PHP 9.6 billion in peso borrowings and about CHF 100 million and $300 million Swiss franc and U.S. dollar borrowings, respectively, to supplement our

(technical difficulty)

particularly to fund green projects. And that was undertaken in the fourth -- in the third quarter of 2019.

Our CASA ratio fell just slightly from about 71.9% to 69%. And borrowings as a percentage of total liabilities declined from 9% to only 7.8%, which gives us more room to still lever up our balance sheet.

In terms of capital position, we end the year with strong capital position with CET 1 ratio, this is still an estimate, CET 1 of 15.11% and capital adequacy ratio of 16.01%.

Moving on to the next page, we report some details of our revenue performance. I mentioned that we show a strong revenue growth of 20%, and this is comprised of a 18% increase in net interest income coming from the strength in our core business of corporate and consumer lending coming from higher loan yields, slightly offset by higher cost of deposits. And we are also reporting a strong noninterest income, which was up 25.2% for the full year. You'll see here that as we shift to high-margin loans, which is supporting -- which is supported by higher loan yields, despite policy rate cuts, we're showing that -- across all credit products we're showing higher yields

(technical difficulty)

mortgage, auto, credit cards as well as personal loans and microfinance loans.

Overall, for the period, our asset yield was 5.16%, which is higher than 4.47% compared to prior year, while our cost of funds increased to 2.04% from 1.52% in the prior year. All told, we report a 24 basis points increase in our net interest margin.

Moving on to loan growth. We're showing a moderate loan growth of about 8.9%, but underneath this loan growth is a strong growth in our consumer loan business which was up 13.4%, while we're showing a more moderate growth in our corporate loan business, as we seek to focus on stability

(technical difficulty)

as opposed to mere expansion in the balance sheet. We also show here how we have been progressing in our strategy to shift the loan mix of the bank's book. So you'll see here that, back in 2017, our consumer book was only 21.1% of our loan book. As we successfully increased the share of mortgage, also credit cards, microfinance and SME, we are now at a combined share of 23.6%. Our goal is to bring this closer to 30% in the next 3 to 4 years.

I also show here, just to highlight, how we have been progressing in the growth of our high-margin businesses as we continue to sustain the strong performance across our retail loans business, our credit cards business as well as our microfinance business. And for all the loans, we're showing an increase in outstanding loan balance. It is up close to 5%, and this is despite the weakness in auto sales for the period. For mortgage, it's up 12%. And we're showing both for auto and mortgage greater than 1 replacement ratios; much higher for mortgage, which is now at 1.47, which means that we're able to significantly increase the release -- to show growth in releases, which is faster than the paydowns in maturities and amortizations.

For credit cards, we continue to show a very strong performance in credit card loans. This is now up at PHP 75 billion in loan book, up 22% compared to the previous year. Along with the increase in our credit card loans business is a strong performance in fee business related to credit cards. That's up almost 60% for the period. And finally, for microfinance loans, we doubled the loan book for the period. It's now at PHP 4.3 billion. And for our SME business, it's now showing a pickup in low levels. It's up 6% for the period compared to a flat performance in the prior year.

Next slide, we show our funding franchise. We continue to sustain strong growth in our retail and corporate deposits. This is up 7%, which is almost in line with the deposits industry growth for the period. Here we show a higher growth in our time deposits, which is up 17%, while our CASA increase was about 3%. And this is on account on some of the shift in our high-value depositors from deposit placements to investments in the capital markets as we actively tapped the capital markets for some bond issuances both on the peso and foreign currency side.

I'd also like to note that -- to reiterate what we reported earlier in the year where for the first time we were assigned a credit rating by S&P. This week, we gained a BBB+ credit rating, which is at par with the Philippine sovereign rating also BBB+. This is the first -- BPI becomes the first private commercial bank in the Philippines to achieve investment-grade credit rating from S&P.

Underpinning our strong funding franchise is the core of our deposit source, which is 90% of our total funding. And of this amount, about 61% is accounted for by our broad retail clients. This is roughly just under 88% compared to about 92% of total funding about 3 years ago.

The bottom part of the slide just shows you some of the details of the funding exercises that we implemented in 2019.

Let me now move on to noninterest income. Our noninterest income continues to sustain an uptrend, while we show strong performance in trading gains, which was up to about PHP 6 billion for the full year. We are happy to report the sustained performance in our fee-based income, which is up about 12% for the period. And this is coming from diversified sources of income across different businesses; as well as new fee-based income coming from new revenue streams, specifically the new service charges that we implemented across our branches; and at the same time some of the new fee revenue streams that are coming from our digital channels, specifically some of the new payments products that we have implemented in 2019.

And then finally, securities trading income was one of the big wins for 2019. Bulk of this was really generated in the third quarter, taking advantage of the interest rates decline during the period; and in the prior 2 quarters before that as we actively traded our securities book during the period.

Next, we talk about our costs and operational efficiency. As I mentioned, we are showing a significant improvement in our cost-to-income ratio, which is down to 53.1% coming from 55.5% the prior year. And this is on effective cost management, continued initiatives around cost discipline. And this is despite the continued investments that we are making across our microfinance branches as well as the digital transformation initiatives that we have started about 3 years ago. All told, expense was higher by 14.8%, and this is well within the guidance that we provided to our investors.

Let me move on to asset quality. For 2019, we are reporting lower NPLs and both in terms of absolute amount and in terms of NPL ratio. Coming from 1.81% in the third quarter, it is now down to 1.66% as of the end of 2019. With continued higher provisions, we were able to increase our NPL cover to 102%; and total loss cover, which includes provisions for contingent exposures, up at around 105%, coming from only 91% the end of 2018. You will -- we note here also that our NPL cover of 102%, at least as of the third quarter, is well above industry average.

As we continued to increase provisioning, which was reported at PHP 5.8 billion for the full year 2019, we were able to hold steady our credit costs, which is as we guided, which should be around 40 to 50 basis points. We reported at 43 basis points for the full year 2019.

Next, we talk about our capital position. For the period, we're reporting just almost the same level just about 2 basis points of capital burn, more or less, if we compare our indicative CET 1 and CAR ratios as of the end of 2019 compared to the end of 2018. And this is on sustained internal capital generation as we show strong net profit of PHP 28.8 billion, and this is net of the dividends that we paid for the period amounting to PHP 8.1 billion. With this capital level, we reiterate our projection that we don't need to raise capital in the near future to support our future growth.

Our financial leverage remains modest at about 8.2x, and this allows us to continue to lever our balance sheet, potentially improving and diversifying our sources of funding going forward. Our ROE of close to 11% remains above industry average, which as of the third quarter was only about 10.2% for the industry.

And I mentioned that, for the period, we declared PHP 8.1 billion in cash dividends. And this is a reflection of a continued resolve of management to show consistent earnings and consistent payout going forward.

And then finally, we talk about our branch and digital channels. One of the centerpiece of our branch rollout is really to focus on our microfinance branches. And as of the end of 2019, we achieved our target of 300 microfinance branches, with 100 opened just in 2019 alone. At the same time, we just continued to moderately build out regular BPI branches to continue to support our sales and service operations as well as our deposit generation. Our average deposit per branch remains to be well above industry average. It's about close to PHP 2 billion per branch.

Moving on to our digital channels. Our digital penetration, which we now report based on active users, which is defined to be those who use our or log in our online and mobile channels over the past 3 months, is more than 20%. It represents a growth of 8% in terms of number of active users for our online and mobile platform. This is for our individual clients. And for our corporate clients which -- for the platform that we call BizLink, we were able to sustain about 23%, 24% penetration, and this is just slightly up compared to the same period last year. Our goal is to continue to increase this penetration to about 50% over the medium term.

And then finally, in terms of resource allocation, as we started to embark on aggressive growth in our consumer and SME business since about 3 years ago, we continued to reflect this strategy in terms of shift in resource allocation. And if you look at how much manpower we have reallocated for SME, consumer, microfinance business as well as our sales and service channels through our traditional branches, this is higher by about 44% compared to 2 years ago, so much higher than the total head count increase for the whole bank; and also a reflection of the shift away from other businesses, towards businesses of SME, consumer and microfinance.

So that wraps up our 2019 performance. In summary, we're quite delighted to report strong earnings, strong revenue, better cost management and better cost-to-income ratios. We are on track to shift our loan book to a higher share of consumer and SME over the next 2 to 4 years. And as we are success -- as we do this successfully, we think we are on track to achieving higher ROE trajectory from what is 11% today to what is closer to about 15% over the next 3 to 4 years.

I end the presentation now, and we open the floor to questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question, Karthik from Buena Vista Fund Management.

--------------------------------------------------------------------------------

Karthik Chellappa, Buena Vista Fund Management, LLC - Investment Analyst [2]

--------------------------------------------------------------------------------

This is Karthik here. I have 3 quick questions. If we were to look at our loan mix. Year-end, I mean, we are at about 23.6% for consumer, SME. And if I were to just compare this to the third quarter, the share of corporate has risen marginally; and the share of consumer, SME has come down. And if I were to look at the fourth quarter sequential loan growth as well, which is almost 8% Q-on-Q which is quite strong. So have there been any quarter-end large sanctions towards corporates that you have done which drove this mix change?

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [3]

--------------------------------------------------------------------------------

Yes. Well, just -- maybe just a general comment on that is we look at the long-term trend in terms of our shift from corporate to consumer and which is why we are really more focused on the year-on-year trend rather than the quarterly trend. But that said, what happened in the fourth quarter is really the seasonal [availments], the seasonal large availments for corporate, which is not really an unusual trend. So this is an observation that we have seen almost every fourth quarter, and this is really because of the usual heavy corporate requirements that happen during the year-end and the fourth quarter. This is in line with the usual mobilization of CapEx spending that typically is observed among Philippine corporates.

--------------------------------------------------------------------------------

Karthik Chellappa, Buena Vista Fund Management, LLC - Investment Analyst [4]

--------------------------------------------------------------------------------

Okay, got it. If we just look at the credit card loans specifically, right. In the third quarter, we had a growth of about 25-odd percent. And that's kind of moderated to 22%, so that's like a 2%, 3%. That's fine, but if I look at the fee income, for the 9 months, the fee income from credit card loans grew at about 27%. That has moderated to 16% for the full year, so why is there such a steep moderation in fee income in 1 quarter, when the moderation in the credit card loan is only like a few percentage points?

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [5]

--------------------------------------------------------------------------------

The real run rate is really something that is closer to, I'd say, maybe about high teens, maybe 15% to 18%. What happened in the fourth quarter is a onetime adjustment that will be reflected in the financial statements with respect to the recognition of revenue for credit card income in relation to the standards pertaining to PFRS 15. So that has -- and that has the effect of reducing the December fee income from the credit card business, as opposed to the run rate which is in -- which should be in the high teens. Specifically, this has to do with how we recognize revenue from credit cards as we net out the costs related to the rewards points. So that was adjusted back in December of 2019. So the amount is somewhere in the area of about PHP 200 million on a net basis. So without that, overall fee-based income -- or noninterest income, which you will see there as Q4 2019 versus Q4 2018, is a decline, but if we restate that, it should be positive 5% for the entire noninterest income, if we are to adjust the -- if we are to net out the adjustment related to this PFRS 15 on the recognition of credit card points, the rewards points.

--------------------------------------------------------------------------------

Karthik Chellappa, Buena Vista Fund Management, LLC - Investment Analyst [6]

--------------------------------------------------------------------------------

And on a sustainable basis, going into 2020, we should expect some kind of a mid-teens growth, is it, as far as the fee income pool is concerned.

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [7]

--------------------------------------------------------------------------------

Yes, for credit cards, mid- to high teens, but for fees, I would say mid-teens, total fees, with credit cards being a strong driver.

--------------------------------------------------------------------------------

Karthik Chellappa, Buena Vista Fund Management, LLC - Investment Analyst [8]

--------------------------------------------------------------------------------

Got it, got it. My next question is basically on our funding mix. So we are growing our loans at about, let's say, 8% to 9%, but if I were to look at our CASA, that's growing at about 3-odd percent, which means majority of the growth for the funding is still coming from time deposits and probably even some nondeposit sources. How much of this mix change do you think will take away some of the benefits that we are getting on the loan mix side? Because our loan mix is going to be NIM accretive, but some of this can potentially be taken away because of the funding mix. So how do you see this mix playing out in 2020?

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [9]

--------------------------------------------------------------------------------

The fourth quarter of 2019 is also -- there is

(technical difficulty)

there with respect to the higher trend in time deposits growth, which we don't expect to continue for 2020. What we expect to happen is actually.

(technical difficulty)

change in terms of how we manage our funding mix because of a recent regulation that will allow us to take cheaper funding from the bond markets compared to the high-cost time deposits. And that's because of the lower reserve requirement for bond issuances for banks. So the reserve requirements for issuance of peso bond is only 3%, as opposed to a time deposit liability which is subject to reserves of 14%. And this is why we have to take a different look at how we analyze the funding mix such that, while we will be relying less on time deposits and shifting to peso bonds, this will actually have a positive impact with respect to an expected reduction in our costs of borrowing, therefore total cost of funding. But that said because of this fundamental shift, we would expect that -- not just us but banks in general, to rely more on bond issuances as opposed to the expensive time deposits.

--------------------------------------------------------------------------------

Karthik Chellappa, Buena Vista Fund Management, LLC - Investment Analyst [10]

--------------------------------------------------------------------------------

Got it, got it. Okay, perfect. Well, my last question is basically on Slide 16. If you were to refer to Slide 16, what we have seen is that in the fourth quarter we have effectively added about 56-odd BanKo branches, which I think is the highest level of branch additions that we have done in any quarter. And if we look at the number of employees at the branches level, the 9-7-6-1, that has actually gone up almost 20% quarter-on-quarter, which means there has been a lot of manpower additions towards the end of the quarter. In 2020, all this will anniversarize, so given that we had, let's say, a 14-, 15-odd-percent OpEx increase this year and a lot of the branch additions and employee additions have happened in the fourth quarter of last year, what kind of OpEx growth will you be expecting when all these actually anniversarize in 2020?

--------------------------------------------------------------------------------

Cezar Peralta Consing, Bank of the Philippine Islands - President, CEO & Director [11]

--------------------------------------------------------------------------------

The high watermark is really -- was really at the end of the year. And you properly note that we put on a lot of BanKo branches at the end of the year. We put on a lot of head count in BanKo at the end of the year, but also we've put on a lot of head count in our main branches and in family bank branches at the end of the year. But we are managing our expense base this year in such a way that, when you look at the growth rate -- at least what we expect to achieve is -- when you look at the growth rate of expenses this year and you compare it to the 14%, 15% growth rate of expenses in 2019, we expect this year's growth rate in expenses to be lower, lower. So notwithstanding, call it, the high exit rates produced by the fourth quarter hirings, we still expect the growth rate this year to be lower than last year, as far as OpEx is concerned.

--------------------------------------------------------------------------------

Karthik Chellappa, Buena Vista Fund Management, LLC - Investment Analyst [12]

--------------------------------------------------------------------------------

Okay, got it. Got it, okay. The rate of -- growth rate is going to be slower than the 14%, 15% that we saw last year, right? To understand you correctly...

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [13]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Cezar Peralta Consing, Bank of the Philippine Islands - President, CEO & Director [14]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Our next question, Robert Kong from Citi Research.

--------------------------------------------------------------------------------

Robert P Kong, Citigroup Inc, Research Division - Director and Deputy Head of Regional Financial Institutions [16]

--------------------------------------------------------------------------------

I have 3 broad questions, if that's okay. The first one is could you just give some broad targets for 2020, particularly NIMs. We're interested in where you think you can bring NIMs, also loan growth, fees, credit costs. So the usual kind of targets that you might guide. Second of all, I'd like to understand your strategy around the capital. You -- roughly, if you look at the burn rate for 2019 at this kind of growth level, you were roughly capital neutral because your CET 1 stayed around 15%, well above the regulatory minimum. I just wondered how you look at how that will be utilized over the next few years, whether there is room for a higher actual dividend. I think you've been paying relatively stable dividends of PHP 1.80, I think it is, per share for the last couple of years. And I'm wondering whether you'd -- we would reconsider that. And then just the final question is just on what do you think the optimal medium-term branch network level looks like, whether it's your main bank, whether it's family bank, whether it's BanKo. Where are we headed sort of on a 3-, 4-, 5-year view on that? Because obviously you've got a dual strategy between building out your microfinance, but you're also rapidly growing your digital as well. So those are the 3 questions.

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [17]

--------------------------------------------------------------------------------

Yes. Just some growth targets for 2020. What we're seeing in terms of deposit and loan growth targets is going to be slightly higher than 2019. For both loans and deposits, we're looking at about 10% to 12%. We actually are seeing an increase in the M3 levels, at least that's our base case projection, from what was high single digit in 2019. For 2020, we expect M3 to grow also at around 10% to 12%, and that supports our loans end deposit targets of 10% to 12%. As to margins, loan yields and cost of funds, our expectation for 2020 is really for maybe one more policy rate cut. And with inflation well within control, although it's -- on average it might be slightly higher than the average of 2019, we still expect a generally low interest rates environment such that we expect a slight decline in loan yields, but we also expect cost of funding to decline faster than loan yields such that we expect some NIM expansion in the area of about 10 basis points. And finally, on capital and dividends, right, for 2019, we're basically showing almost 0 capital burn with flat CET 1 and CAR. With the projections of about 10% to 12% in loans for 2020, we expect around 50 basis points capital burn for both CET 1 and CAR. That's our -- that's on the back of RWA growth target of about 12%.

And in terms of dividends, we are definitely looking at a review in our dividend policy since over the years we have maintained a fixed dividend payment of PHP 1.80 per year. And because that has remained flat, our dividend payout ratio has gone down over the years, which provides some room to review this to increase dividend payout. And this is something that we're going to look at for 2020. Given our level of comfort in the -- our ability to generate internal capital, we are quite positive that we might be able to sustain a higher dividend payout from 2020 onwards.

--------------------------------------------------------------------------------

Cezar Peralta Consing, Bank of the Philippine Islands - President, CEO & Director [18]

--------------------------------------------------------------------------------

On your question, Robert, on medium-term branch network. In the next 2 or 3 years, we see the combined growth in the BPI, parent, and BPI family bank branches in the aggregate to be in the order of 10 to 20 branches per year. So that's not very different from what we've been registering over the last few years. However, in the case of BanKo, at least for the next couple of years, we're still targeting 100 new branches a year. Now one, you very rightly point out the dual tranche between branches and digital. We're getting to the point with digital gains, we'll eventually, and we think we'll see this towards the end of the year, produce capacity at our branches. At the rate at which we are digitalizing our processes, at the rate at which we are making changes to our high counter and low counter transaction processes, we think we can create capacity in our branch network something in the order of 10% to 20% at the end of this year. So we are carefully managing this balance between digital and brick-and-mortar.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Our next question, John from Philippine Equity Partners.

--------------------------------------------------------------------------------

John Te, Philippine Equity Partners, Inc., Research Division - Analyst [20]

--------------------------------------------------------------------------------

I just have a few questions. So I'll take it one by one. One is I just want to clarify loan growth in 2019. What elements do you think are sort of holding back the corporates in borrowing from you guys? And I understand that still a majority of the loan book is top tier, so I think I reckon that there is more to it than just the delays in budget -- the budget that is driving sort of a moderate top tier growth. And I understand that the outlook for 2020 is slightly better, 10% to 12%, so I guess it would be great if you could explain the reasons behind 2019 and what would probably change in 2020.

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [21]

--------------------------------------------------------------------------------

Well, 2019 was really a year where we focused on profitability and defending our net interest margins such that it allowed us flexibility to [price ourselves] out of these loans, particularly on the top tier where we think it will not provide us incremental benefit to price loans lower, especially given the tightness in the deposits and funding especially in the beginning of the year. So that is probably the prevailing theme for the -- most of our corporate business throughout 2019. 2020 is different because we do expect -- compared to the slowdown in the -- particularly in the first half of 2019 because of the overall slowdown resulting from the budget impasse, we're not going to expect that in 2020. So that gives us reason to believe that we can see a better picture in terms of a gradual loan growth for corporate for the -- most of the year. And this usually happens in the latter part of the second quarter to the beginning of third quarter. Again it's all about seasonality. So that's on the corporate. And we -- on the overall loan growth, while -- as we expect 10% to 12% for the whole bank, for 2020 we do expect an acceleration in the growth of our credit cards, mortgage loan business as well as our SME business in terms of loan growth.

--------------------------------------------------------------------------------

John Te, Philippine Equity Partners, Inc., Research Division - Analyst [22]

--------------------------------------------------------------------------------

Second is on NIM. I think, 4Q alone, if we isolate that, that is sort of up 12 basis points quarter-on-quarter. And I recall, during the last analysts call, that you guys mentioned something about the -- a delayed sort of response in terms of deposit pricing. So I wonder if a lot of the 4 -- the Q4 gains in NIMs would -- can be attributed to the repricing in deposits. And second, if you could sort of explain how you see loan -- the competition in loans and deposit pricing as of December or probably into early January. And I also believe that you guys mentioned something about more deposit rate cuts into next year. So I wonder what's driving that. Is it largely a function of your view of more RRR cuts, or is there anything else?

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [23]

--------------------------------------------------------------------------------

First, for the

(technical difficulty)

loan yields and NIM for the third quarter versus the fourth quarter. We, in fact, saw a sharp decline in our cost of funds in the fourth quarter compared to the third quarter of 2019. That's probably more than 30 basis points in terms of decline in cost of funds. And while we saw asset yields falling during that same period, this decline in cost of funds, which was more than 30 basis points, allowed us to show better NIM for the fourth quarter compared to the third quarter of 2019. And as we had anticipated, this was the impact of our repricing of high-cost deposits that happened well into the fourth quarter, which in the beginning of the year was not as evident. So that's for NIM. In terms of loan -- deposit pricing for the first quarter, given the current expected trajectory of inflation, plus some of the weakness in the -- not just in -- with all of this uncertainty in the global macro environment, we do feel that the central bank will actually make that 25 basis points policy cut in Feb. That's our view. In terms of RRR cut, our expectation on a base case is another 200 basis points RRR cut. So those two together allows us an expectation of a continued decline in cost of deposits as well as total cost of funds, while on the asset side it's really the growth in our SME and consumer business that will allow us better yields overall even if we have to reprice corporate loans downwards given the current interest rate trajectory.

--------------------------------------------------------------------------------

John Te, Philippine Equity Partners, Inc., Research Division - Analyst [24]

--------------------------------------------------------------------------------

My last question, I guess, is on the trading side. It seems like you guys held back in Q4. Any particular reason for that? And I think Bong mentioned earlier that you guys will need to replace trading gains. I think that was what he mentioned. So I just want to understand what that exactly means. And I think I still recall that your view into 2020 is still -- that your house view is still moderating interest rates. So I just want to try to understand what's going on in that side and...

--------------------------------------------------------------------------------

Cezar Peralta Consing, Bank of the Philippine Islands - President, CEO & Director [25]

--------------------------------------------------------------------------------

John, if you look at the market environment last year, the optimal time to take gains was probably sometime in the third quarter, which is when we took gains. So we started building up our securities book, I think, towards the end, if I recall, right, towards the end of the first quarter; built it up throughout the second quarter; and then took gains sometime in the third quarter. And the way I look at it, we timed it pretty well. Now the fact is, relative to some of our competitors, we tend to run smaller securities positions. So in terms of capital at risk and return on capital at risk, I think our global markets team did a pretty good job. Now going into 2020, who knows what the market environment is going to look like? Who knows what kind -- what volatility is going to look like? I will say that, from the looks of it, volatility this year might be higher than last year. So -- that will create some trading opportunities, but the markets looks like it will be choppier this year than it was last year. But at the same time, when you factor in the interest rate, whatever the BSP does, whatever monetary policymakers around the world do with interest rates, I think locally we are looking at a yield curve that will be steeper. So basically lower rates at the short end, higher rates at the longer end. And that's significant basically for all Philippine banks because, in the last year or 2, the yield curve has been pretty flat. And if anything, the yield curve shifted up and down but really hasn't done much to steepen. We think that this year you will see a steepening of the yield curve, probably not by much but certainly by more than what we've seen in the recent past. And I think that is positive for banks in general.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Our next question, Selvie from Morgan Stanley.

--------------------------------------------------------------------------------

Selvie Jusman, Morgan Stanley, Research Division - Research Associate [27]

--------------------------------------------------------------------------------

I just have a question. What will be your credit cost guidance for 2020?

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [28]

--------------------------------------------------------------------------------

We're looking at about 40 basis points for 2020.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

There are currently no questions in queue. (Operator Instructions) Next question, Haidee from Tahan Capital.

--------------------------------------------------------------------------------

Haidee Chiu, Tahan Capital Management Pte Ltd - Research Analyst [30]

--------------------------------------------------------------------------------

One quick question. Can you explain what drove the improvement in NPL in the last quarter? Was it Hanjin recovery related? And what sector trends are you seeing?

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [31]

--------------------------------------------------------------------------------

For the year, I can tell you that we saw a significant decline in NPL for our SME book. We -- as we were able to basically capture the benefit of the curing. Remember that under the new BSP regulation certain NPLs will have to stay current for 6 months before they are taking -- taken out of the NPL book. So we saw a lot of that from our middle market and SME and corporate exposures. And at the same time, the sharp increase in the loan level for the fourth quarter allowed us a much higher denominator so that -- with the combined reduction in NPL amounts to PHP 24.8 billion but combined with higher-end loan level, outstanding loan level, which ended at about PHP 1.5 trillion. So that brought us to 1.66%.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Our next question, [Anubar from Wealth Management].

--------------------------------------------------------------------------------

Unidentified Analyst, [33]

--------------------------------------------------------------------------------

This is [Anubar] from (inaudible). Two questions from my side. The first is that -- what is your medium-term guidance for growth of the microfinance business? When you say consumer or retail will be 30% of total loans in 3 to 4 years, how large do you envisage the microfinance book will be within that? And the second question is, can you help me understand the unit economics for consumer and SME loans and how they are different from the corporate business at the ROA level?

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [34]

--------------------------------------------------------------------------------

In terms of microfinance loan book, we're actually forecasting it to be around PHP 15 billion or thereabouts by 2023. So that's for the microfinance book. If we combine it with our projected expansion in the balance sheet, that will probably still be small. We're estimating it at about 1% of our loan book but large in terms of revenue contribution and net income impact. So that's for microfinance.

For comparison of our -- I don't have the ROA comparison across the different segments of our loan book, but I can give you an indication on the yields. For consumer, on average it's actually twice the loan yields that we're getting on corporate. On Slide 9, you'll see here the average loan yield per credit product, with the highest coming from -- at least on the significant loan book sizes, the highest coming from credit cards and personal loans, which is on average about 20%. Mortgage and auto is between 7% to 10%, while corporate is only about 5% to 6%. Bulk of our costs is really on the retail side, which is about 50% of our OpEx, particularly our sales and service channel which houses all of our entire branch network which we use for deposit generation as well as cross-selling on loans and other fee-based products.

--------------------------------------------------------------------------------

Unidentified Analyst, [35]

--------------------------------------------------------------------------------

Understood. Perhaps a follow-on question on that. How is the credit cost for your consumer and SME loans different compared to your corporate loans?

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [36]

--------------------------------------------------------------------------------

Well, significantly higher. The biggest user of our provisions is our credit card business, but it also has the highest risk-adjusted return. I'd say maybe about 4% in the credit costs for our credit card business, with a yield of about 20%...

--------------------------------------------------------------------------------

Unidentified Company Representative, [37]

--------------------------------------------------------------------------------

(inaudible).

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [38]

--------------------------------------------------------------------------------

Yes. And then, well, it's really credit cards and personal loans that's really using up bulk of our provision expense. For corporate it's really very modest, especially right now under the ECL models where the probability of default of our corporate book is quite low. And with the expectation of faster growth in consumer and SME, that utilization of provisions heavily weights towards consumer will continue going forward, but that's already incorporated in our 40 basis points credit cost estimate for 2020.

--------------------------------------------------------------------------------

Unidentified Analyst, [39]

--------------------------------------------------------------------------------

Got it. If you'll allow me one more follow-on question, please. So let's assume that your loan mix were to change towards retail and SME accounting for 30% of total loans. Everything else being equal, what do you think that will imply for your ROA?

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [40]

--------------------------------------------------------------------------------

Well, our goal is about 1.5%, which is probably another 12 basis points away from where we are today. That's actually what will drive -- our estimate is we could actually potentially double our profitability from now till about 4 years from now, when we'll hope to achieve the 15% ROE. So that's call it maybe 12 to 15 basis points away from the target ROA compared to where we are today. And most of that will come from our consumer and SME. The accretion in NIM coming from higher yields will be from that segment, which is why as a management team we are really consciously tracking all the metrics around our consumer and SME business. Not just the outstanding loan book as a result, but we also measure all the other metrics around our ability to turn around application to approval, our ability to show significant growth in loan releases. That's all being tracked almost on a monthly basis by the management team.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Our next question, Gilbert Lopez from Macquarie.

--------------------------------------------------------------------------------

Gilbert Lopez, Macquarie Research - Head of Research [42]

--------------------------------------------------------------------------------

Tere, I just wanted to clarify. Your NIMs, how much did it move in the fourth quarter Q-on-Q? And might as well give us also -- because you mentioned around funding costs 30 basis points, and also asset yields.

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [43]

--------------------------------------------------------------------------------

You mean third quarter to fourth quarter.

--------------------------------------------------------------------------------

Gilbert Lopez, Macquarie Research - Head of Research [44]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [45]

--------------------------------------------------------------------------------

Yes. About -- 3.28 to 3.46, so that's almost 20 basis points. And that's because of a significant decline in cost of deposits and cost of funds.

--------------------------------------------------------------------------------

Gilbert Lopez, Macquarie Research - Head of Research [46]

--------------------------------------------------------------------------------

So something like 18 bps. And then that includes 30 bps decline in funding costs.

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [47]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Gilbert Lopez, Macquarie Research - Head of Research [48]

--------------------------------------------------------------------------------

And then asset yields, how did it move?

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [49]

--------------------------------------------------------------------------------

Slightly lower, about 10 basis points, but that's technically because of the decline in overall interest rates environment. We were actually really lucky to delay that lower pricing.

--------------------------------------------------------------------------------

Cezar Peralta Consing, Bank of the Philippine Islands - President, CEO & Director [50]

--------------------------------------------------------------------------------

(inaudible).

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [51]

--------------------------------------------------------------------------------

And (inaudible).

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

Our next question, [Weldon] from Citi.

--------------------------------------------------------------------------------

Unidentified Analyst, [53]

--------------------------------------------------------------------------------

Can I just get a quick clarification on the NIM expansion? I think you said 10 basis points, which includes 200 basis points of RRR cut and one rate cut. Does it also include the impact of the repricing of the loan book shift?

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [54]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [55]

--------------------------------------------------------------------------------

Okay. And that is -- it means from the full year NIM of 3.35%. So you are guiding initially 3.45% in 2020.

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [56]

--------------------------------------------------------------------------------

Yes, that's our target.

--------------------------------------------------------------------------------

Unidentified Analyst, [57]

--------------------------------------------------------------------------------

Okay. Is there also ROE guidance for 2020?

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [58]

--------------------------------------------------------------------------------

Higher than 11%.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

There are currently no questions in queue. (Operator Instructions) Our next question, [Seronso from SP Equities].

--------------------------------------------------------------------------------

Unidentified Analyst, [60]

--------------------------------------------------------------------------------

Just I know it's a bit early, but can you please give us any guidance if the Taal Volcano explosion had any impact on any loan growth in the South Luzon? That's all.

--------------------------------------------------------------------------------

Cezar Peralta Consing, Bank of the Philippine Islands - President, CEO & Director [61]

--------------------------------------------------------------------------------

Very -- well, very, very small. It's actually negligible.

--------------------------------------------------------------------------------

Operator [62]

--------------------------------------------------------------------------------

Our next question, Danielo from Crédit Suisse.

--------------------------------------------------------------------------------

Danielo Picache, Crédit Suisse AG, Research Division - Research Analyst [63]

--------------------------------------------------------------------------------

Just a quick question. Can you help us put into context the recent comments from Secretary Dominguez about the potential resolution of the Hanjin case? I think you said something like a deal is expected soon, but he furthered that it is better than nothing for the banks. It sounds like there will be haircuts, but at least for BPI, any additional color on the potential financial impact?

--------------------------------------------------------------------------------

Cezar Peralta Consing, Bank of the Philippine Islands - President, CEO & Director [64]

--------------------------------------------------------------------------------

Well, right now

(technical difficulty)

we're at the fourth quarter in terms of negotiations. The numbers we're looking at, they basically still are showing a wide range of outcomes, but I think we are well -- BPI is well covered regardless of where the -- this thing finally lands. So we're looking at doing a deal. The negotiations are underway. The range is still pretty wide, and we'll see.

--------------------------------------------------------------------------------

Danielo Picache, Crédit Suisse AG, Research Division - Research Analyst [65]

--------------------------------------------------------------------------------

Okay. So just to clarify. There won't be any additional provisioning for Hanjin in 2020.

--------------------------------------------------------------------------------

Cezar Peralta Consing, Bank of the Philippine Islands - President, CEO & Director [66]

--------------------------------------------------------------------------------

I think we've got more than enough provisioning already, so this is simply a matter of getting the best deal for all the banks.

--------------------------------------------------------------------------------

Maria Theresa Marcial-Javier, Bank of the Philippine Islands - Executive VP, CFO and Head of Strategy & Development [67]

--------------------------------------------------------------------------------

In our estimates, the kind of reserves that we have provided already more than cover for the potential worst-case scenario in terms of final deal to be had. That's our expectation.

--------------------------------------------------------------------------------

Cezar Peralta Consing, Bank of the Philippine Islands - President, CEO & Director [68]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [69]

--------------------------------------------------------------------------------

There are currently no questions in queue. (Operator Instructions) As there's no further questions, I will now hand the session over to the speaker. Please go ahead.

--------------------------------------------------------------------------------

Josenia Jessica D. Nemeño, Bank of the Philippine Islands - IR Officer & Assistant Corporate Secretary [70]

--------------------------------------------------------------------------------

Yes. We thank everyone for joining us on the call this afternoon. If you'd like to -- yes, if you'd like to send any additional questions, you may reach the investor relations team through e-mail, and we'll gladly respond to you. Thank you very much for joining us today.

--------------------------------------------------------------------------------

Operator [71]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

--------------------------------------------------------------------------------

Cezar Peralta Consing, Bank of the Philippine Islands - President, CEO & Director [72]

--------------------------------------------------------------------------------

Thank you.