Annual Stockholders' Meeting: Message of the President / COO
Message of the President and Chief Operating Officer - Edwin R. Bautista
Annual Stockholders' Meeting
May 27, 2016
For the first time in more than two decades, high volatility significantly reduced returns across all major asset classes around the globe. This was driven by the falling oil prices, divergent monetary policies among major central banks, and subdued economic growth prospects worldwide. Within these global headwinds, the Philippine economy expanded by 5.8% in 2015, anchored on strong consumption fueled by favorable labor conditions here and abroad. This continued into the first quarter. As you know we grew 6.9%, making the country the fastest growing in Asia.
However,Despite the country’s strong macroeconomic climate, the Philippine banking industry’s total net income continued to decline for the second consecutive year, falling to Php 135.3 billion in 2015, as the growth in bank lending was not able to compensate for lower trading opportunities.
FINANCIAL PERFORMANCE – SHIFT IN BUSINESS MODEL
The decline in trading gains across the industry, also adversely affected UnionBank’s financial performance in 2015:
- Net income dropped to Php6.0 billion.
- ROE and ROA at 10.9% and 1.6%, respectively. Comparable to top tier banks.
- As part of our strategy, Our revenue base continue to shift from proprietary trading to recurring income.
- Non-trading income amounted to Php19.9 billion in 2015, equivalent to 98.6% of net revenues
- When we crafted the FOCUS 2020 strategic objectives in 2009, one of the imperatives was to shift from proprietary trading to a more diversified revenue stream. Now that we are at the midpoint of FOCUS 2020, the change in business model evidenced by the re-balancing of our asset and liability mix became more apparent.
- UnionBank was among those who adopted early the Philippine Financial Reporting Standards (PFRS) 9 accounting standards in 2014. In the process, the Bank shifted its securities portfolio to “investment securities at amortized cost”. These investments provide a recurring interest income stream, and removed mark-to-market swings in our capital. Securities at amortized cost as a proportion of total investment securities increased to 95.9% in 2015 from 60.8% in 2014.
- UnionBank posted its highest loan growth in its 32-year history, expanding by 29.0% to Php179.6 billion, outpacing industry’s already robust growth of 13.5%. We have a healthy balance of customer loans with consumer loans to total loan portfolio at 45.8%, or close to 3x as much as industry’s 16.1%.
- While total deposits remained stable at Php311.6 billion, low-cost CASA expanded by 11.3%.
- The growth in customer businesses, propelled the growth of our top-line revenues.
- Net interest income increased by 12.7% to Php12.2 billion, with net interest margins further improving to 4.0% compared to banking industry’s 3.3%.
- Service fees, increased by 12.9% to Php3.7 billion, driven by the retail segment.
- The growth in recurring income was able to curb the effects of lower trading gains that resulted for net revenues to decline by only 0.9% to Php20.2 billion.
- Total expenses grew by 15.7% to Php11.4 billion, principally due to CitySavings’ network expansion. CitySavings recently opened its 100th office, which provided UnionBank the footprint and access to the unbanked sector in the rural areas.
- On the side of the parent bank, operating expenses were kept in check despite the robust growth in loans and deposits. Our cost-to-income ratio at 56.0%, remained among the best in the banking industry.
- Asset quality was maintained with Non-Performing Loans (NPL) ratio, net of specific allowance for credit losses, at 0.8%. Capital Adequacy Ratio (CAR) and Common Equity Tier 1 (CET1) Ratio at 16.2% and 13.1% remained solid, exceeding regulatory requirements.
The same business model, supported by the growing core earning asset base, shall provide the Bank the recurring income stream for 2016 and beyond.
- As mentioned by our Chairman, as of end-April 2016, the Bank’s net income has increased by 28.0% to Php2.4 billion from Php1.9 billion in the same period last year. This translates to annualized ROE and ROA of 12.1% and 1.6%, respectively.
JOURNEY TOWARDS DIGITAL TRANSFORMATION
Together with the shift in our business model, we are expanding our digital capabilities. In fact, we are going all in. While the Bank has always been at the forefront of the digital revolution, as early as the late 90’s, digital technology back then offered more of a promise. Today, the revolution is a stark reality.
More advanced financial technology has led to instantaneous information flows. These trends have altered customer expectations. As cash flow processes become more automated, corporations now prefer to electronically link their supply chain – from suppliers to their offices to their dealers and down to their retail customers.
Retail customers have also become more Internet savvy, as they are now used to buying goods and paying their bills online. With the ultimate objective of customer centricity, our mandate is to transform into a Digital Bank in order to adapt to these shifts in customer behavior. Digital transformation is essential to the accomplishment of our FOCUS 2020 objectives. It aims to increase customer revenue while at the same time manage the cost of customer acquisition and servicing. More importantly, it provides us the channel and platform to further cultivate the relationships we have already established with our customers.
Ultimately, we arrived at a conclusion that digital transformation for us would mean the following:
1. Six-Sigma reliability – our banking system should be up and running 100% since customers are depending on us for their financial transactions;
2. 24x7 – banking transactions should not be limited to traditional branch banking hours; and
3. Straight-Through Processing (STP) – customers cannot wait for the flow of funds to be cleared and batching of transactions should not be an option.
In 2015, we upgraded our core banking and Internet banking systems to support the execution of our digital strategy. The upgrade gave us the foundation required to provide the desired digital experience. The next phase is to enhance our processes surrounding the technology upgrade in order to graduate into seamless transaction flow so that our customers will have the same user-experience, regardless of the channel they choose to transact in.
The Bank has similarly migrated our treasury and trust core systems to increase capacity as well as strengthen risk monitoring and report generation capabilities. Digitization has likewise been adopted in the subsidiary level. CitySavings has developed several in-house systems that automates processes and improve service quality. These include a web-based management information system and digitization of loan processing.
We have accomplished much in the last year, but it is no question that there is still a lot of work to be done in our journey towards digital transformation. I know that UnionBankers, the management and the Board of Directors are fully committed to this endeavor. I am honored to lead UnionBank in embarking on this digital strategy mandate.
On behalf of the Board and all of the Bank’s stakeholders, I would like to thank former UnionBank President Victor Valdepeñas for the leadership he has provided in taking the bank to greater heights through the last 22 years. I would also like to extend our appreciation to Vice Chairman Vicente Ayllon, and Directors Eliza Bettina Antonino and Mayo Ongsingco for their most valuable insights and guidance.At the same time, we welcome new Directors Michael Victor Alimurung, Nina Aguas and Mona Lisa de la Cruz to the Board.
We sincerely express our appreciation and gratitude to all stakeholders who have, all these years, supported UnionBank, Our Bank, Our Future.
Thank you very much.