BDO expects loan growth, asset quality hit from war-driven inflation spike

BDO UNIBANK, Inc. expects its loan growth to stay strong this year, but the risk that inflation will stay elevated for long due to the Middle East conflict could dent credit demand and asset quality.

“So, in a nutshell, what we’d like to emphasize is that while the environment has been volatile and difficult to predict, our balance sheet continues to show good growth… We hope that we can continue with the loan growth, although we recognize that if inflation persists longer, there is the risk that we may see growth slowing down at some point. That could also translate into potential challenges for asset quality,” BDO Executive Vice-President and Investor Relations and Corporate Planning Head Luis S. Reyes, Jr. said at the virtual PSE STAR: Investor Day event on Thursday.

“But at this stage, we are not seeing that yet.”

BDO’s gross loans rose by 16% year on year to P3.77 trillion at end-March from P3.26 trillion amid double-digit growth across all market segments, it said last month.

The bank also hopes to sustain the fast growth in its low-cost current account, savings account (CASA) deposits seen in the first quarter. Total deposits rose by 15% to P4.429 trillion as of March from P3.847 trillion. Of this, P2.906 trillion were CASA deposits, up from P2.704 trillion in the prior year.

“Historically, we were seeing CASA growing in the mid-single digits. What we’re seeing now is a slightly better growth trajectory. We’re hoping that this is something we can continue with, given our strategy of opening more branches, complemented by our digital capabilities,” Mr. Reyes said.

Meanwhile, the second half of the year could be “a bit more difficult to predict” as forecasts will depend largely on developments in the Middle East and their impact on global oil prices that could stoke Philippine inflation and hit consumer spending.

“So far, the good news is that consumption… will show positive growth, even though it’s at a decelerated trend.”

Mr. Reyes added the bank has enough provisions for an expected increase in nonperforming loans due to the conflict, as they already saw an uptick in bad debt in the first quarter as its consumer business continued to grow.

“We are focusing more on cross-selling our consumer lending to existing bank clients, which we believe is also what is helping us sustain our asset quality where they are today,” he said. “Using our data analytics capabilities, we are mining our depositor base, checking how our depositors are actually showing capacity to pay, and therefore could be eligible for additional consumer products.”

BDO will also increase its loan loss provisioning if inflation stays red-hot.

“Given how we see things developing, that may move us to continue strengthening this buffer until we feel that it may be sufficient to cover our potential losses going forward. So, it really depends on how we see our clients behaving over the next few months.”

Loan loss provisioning stood at P6.1 billion in the first quarter, more than double the P3 billion a year ago.

Meanwhile, the bank also wants its loan book to be equally spread among institutional, consumer, and the middle market segments. At present, 25% of their portfolio is made up of consumer loans, Mr. Reyes said.

“Our ambition is to have an equal split of the loan book among the three sectors: large corporates, middle market, and consumer. The consumer book has been steadily increasing its share of the pie — maybe somewhere between 80 to 100 basis points a year. At that pace, it’s going to be a slow growth towards our target share of one third of the total.”

The lender also expects to finish the overhaul of its IT system within two to three years as it looks to improve its digital services, he said.

BDO’s net profit grew by 2% to P20.1 billion in the first quarter from P19.7 billion in the same period last year.

Its shares dropped by P2 or P1.64 to end at P120 each on Thursday. — Aaron Michael C. Sy