Simon Hughes of International Banker interviews Mr. Edwin R. Bautista, president and COO of Union Bank of the Philippines.
Today International Banker is joined by Mr. Edwin R. Bautista, president and COO of the Union Bank of the Philippines, to discuss the bank’s strong performance in one of the world’s fastest-growing economies. Edwin, very good to see you. Now, you’ve managed to record net income growth of 30 percent for the first half of this year, 2016. What have been some of the main underlying factors for such strong growth?
Well, we really focused on increasing our loan book. We had a 29, 30 percent increase in our total volumes. We used to be a bank highly dependent on proprietary trading, but we changed our model two years ago, and we’ve been able to successfully do that. And so with that 30 percent growth in loan volumes, we were able to recognize a 30-percent growth in income. But that’s old news because as of yesterday, we released our third-quarter results, and as of 3Q, our net income was already higher than the full year 2015 net income.
So a significant improvement.
A significant improvement.
That’s great. Remarkable success. One of those areas of success is your retail-banking operation. How do you differentiate yourself, at UnionBank, from your competitors in your approach to that?
Well, our approach has never been to go directly to get the customers to walk into the bank, but rather we help institutions, big companies. We started out as a corporate bank. We built a lot of products around the supply chain of these big customers. So we sought out their suppliers, their distributors, their employees, their own customers and built a whole ecosystem around it as providing both the payment, the collection and the credit part of it. And that’s how we got those corporate customers. So in a sense we got them wholesale instead of, you know, getting them to walk in one by one. And that’s what made us unique. We also found out that this way the relationship was very sticky because unless you left the company you worked for, you would always be with a bank.
And you’ve also got the branding in place, Smart Banking. What are some of the key instances of Smart Banking being put into practice?
Well, we’ve been able to come up with really unique solutions to institutions. Like, for example, you know we gave a proposal 15…no, no 10 years ago to the government service insurance system—this is, all the government employees are part, are members of this—where we gave them a card that served as both their ID card with biochip, biometrics. Remember 10 years ago, this was high technology, which could also be used in ATMs, in POS terminals. So it was both an ID and at the same time an ATM card. A bank account essentially. So we were able to give that to the 1.8 million workers in government. And we had to bid against other banks, and our solution was what was eventually accepted.
And thinking about that purpose, you also have this great phrase, “Make the diff in the lives of others”. How is this practically being achieved?
Well, make the diff is make a difference. And so these days we don’t look at banking services as the end effect. We look at what it can do. Like, for example, if it’s a payment and collection, what does it do for the corporate entity? It will do, it improves their collection ratios. For individuals, what does it mean to have a bank account with UnionBank? So we say, “Well, for most of them, they’ll be able to get a house, a car.” So fulfilling dreams.
And thinking about the big-picture objectives, what do you hope to achieve from UnionBank’s digital-banking strategy?
Digital is a must. If we don’t transform digitally, we probably will be irrelevant in the next few years. We’ve sort of defined that as three things. First, that we must be able to operate on a 24/7 basis. Six sigma reliability. And to process transactions instantaneously, instantly. What we term inside the organization as “deal plus zero”, transaction plus zero. Now, the second piece is digital marketing. So we need to revamp the way we think about products. In the old days when we talk of a market, the first thing we ask is what products are we going to deploy against this market. The world doesn’t work like that anymore. So a large part of it is simply providing the bank functionalities to your customers, and they do whatever they want to do. So we provide a platform for them to operate. As they say, the platform location of banking. The third one is part of the digital-transformation strategy, it is organizational and cultural transformation, which is probably the most difficult piece of it. I mean, how do we transform the organization to be relevant for the future?
It’s a kind of hardware, software question.
Oh yeah, hardware, software, and software is probably the more difficult thing to do.
Right. Now, as I understand it, much of UnionBank’s digital transformation involves forming partnerships with fintech companies.
Do you see collaboration as being the key to the future health of the Philippines’ banking industry, or do you see banks ever having to compete rather than collaborate with fintechs?
With fintechs. Well, I can only speak for us. And I know some of the banks are lobbying against fintechs. Some of the banks are talking about lobbying for more regulations on the fintech side. In our particular case, well in the case of the Philippines, we have a large unbanked population. Only 20, 25 percent of the population has access to banking. And that’s because as a country we’re made up of 7,100 islands, and to get them to provide banking service using the traditional tools, meaning branch banking, it’s not cost-efficient. But with fintechs coming in, and Filipinos, you know there are more cell phones in the Philippines than there are Filipinos. And practically everyone is into smartphones. If you can provide banking services through that phone then you will be able to provide banking services in the most cost-efficient way. So we look at fintechs actually as helping expand the market. And from a practical standpoint, we’re not the largest player. We don’t have the largest branches. So if the market gets disrupted, and it moves digital, I mean this can only be a good thing for us. There will be a realignment of market shares, and the bank that is most digitally transformed is going to grab the market share. And we want that to be us.
According to last year’s annual report, UnionBank’s Ureka Forum is the biggest e-commerce mass-conversion program for business in the Philippines.
So what aspects of the forum’s success have been the most satisfying for you and the bank?
Well, most satisfying because when we started, I actually handled a slot, you know I was a speaker, and we saw a lot, we’ve been around the Philippines, and we saw small businesses actually go online. Part of the promise was within four hours of being there, if you had all the documents ready, we can help you build a website, provide you with a payment solution, and all you need to do is put your products online. And we’ve seen a number of customers who started from nothing who are now online retailers, and when you see that, because you know, after we did it in the first. With the second, we invited a few successful ones, and to hear them speak of, you know, what it has done to their business, how it has transformed their lives, it’s heartwarming. It’s like you really are fulfilling the dreams of these people.
And that kind of innovation appears to lie at the heart of your business impulse at UnionBank. How does the bank ensure that this innovative spirit is demonstrated consistently by its employees, by the software if you like, of your organization?
Well, first we believe in storytelling. And it comes from the top. We like to tell stories of how we early in our history did a lot of these innovative things. We were the first to go with Internet banking in the whole Philippines. We were the first to do debit cards online and all of these things. So we tell people, you hate to…this is your heritage. This is who we are. We’ve gone here because of what we did, and part of our DNA is a culture of innovation.
And kind of moving forward, you recently teamed up with the Swiss private bank Lombard Odier for a new global wealth-management fund. What would you say are some of the benefits to UnionBank of forming this partnership?
Well, you know in the Philippines, many of the businesses from large conglomerates to medium-sized businesses are family owned. Our own conglomerate’s parent is a family, was a family-owned company before it went public. And so you, we understand the traditional issues of a family-corporation succession, family governance, and all of that stuff. And Lombard Odier is an expert in this sort of thing, providing family services, family-wealth services. And so that will only help us. We want, you know, many of the banks just simply approach that particular high-net-worth market in terms of products. We want a holistic approach, meaning we want to help you set up a governance structure for your family business.
Now, thinking about the kind of story, or the storyline, you yourself have had a long and illustrious career within the financial-services industry. How would you say your time with UnionBank is different from previous roles you’ve had in the industry?
Well, I’ve worked, I’ve always worked for multinational companies. Proctor & Gamble, American Express at the bank. And I learned a lot from those institutions. The discipline, access, I mean the thinking that, the mindset that you can be world class. But I guess the difference was in those companies, the strategies were often driven down from head office, and all we had to do was execute. In UnionBank, there was over the years really a genuine opportunity to craft strategy. So even when I was just running the businesses, you know, the different businesses assigned to me, there was always an opportunity to drive strategy to the businesses. And now obviously, obviously now a strategy for the whole organization. And not just strategy for today. What we’re talking about is how to be relevant to customers down the road. You know, with this digital thing going on. So there’s a very real possible contribution.
I mentioned at the very beginning that the Philippines is one of the world’s fastest-growing economies, and it’s expected to continue growing at a healthy rate in the future. Do you think UnionBank is sufficiently well-positioned to capitalize on that growth?
Oh yes, we have a young population. The Philippines has one of the fastest growth rates in the country. And it is young. The rate of adoption for digital technology is quite fast. And that’s why we’re positioning heavily on the digital front. We are looking at the Millennials of today as the customers of the future. And they’re the first ones who will adopt.
And you mentioned your parent company just now. In terms of achieving your goals over the next few years, do you receive much support directly from Aboitiz? If so, in what ways?
Well, very much. First is, they always tell us, “If you need more capital, we’ll be here to back you up. We’re happy with the rate of return that you’ve given us as shareholders.” But at the same time, the Aboitiz family, the Aboitiz conglomerate is big on leadership development. And they’re sort of the older brother egging us along. First, they bought into the digital-transformation strategy. But they’re also there to always remind us that we need to develop the leaders of the future that will run this digitally transformed organization. The other thing is that Aboitiz is a conglomerate that has been here for close to a hundred years, and it intends to be around for the next 100 years. And that’s a big thing for them, you know, it’s like the thing that we’re here as a custodian for the next generation. We don’t want to lose it while this is our watch. And that’s a big thing. And since the banking industry is faced with this possible disruption, it becomes more meaningful. And the other one is they think big in terms of a balance between short-term results and the long-term. They never are forcing us to unduly maximize short-term earnings, sacrificing long-term. So it’s always a balance between the two. Although now is a perfect time for us to invest in digital transformation, because that will cost money. It’s easier to do it now that our ROE is north of 15, and so is theirs. And, you know, some people say, “We don’t have to do it now. We’re doing so well.” But the response is, you do it now when you don’t really have to. Because the worst time to do it is when you’re forced to do it.
If you could narrow it down, what would be the one area of the bank’s performance with which you are most satisfied? And the flip side of that, what would be the one area which you would most like to see improve going forward?
Well, for the last several years, we said we wanted to be a great retail bank. And the path to being a great retail bank is through building communities, leveraging on our corporate relationships. And we looked at our last six months’ results, and 60 percent of our net-interest margins came from consumers, individuals, consumer accounts. And among the top 10 banks in the country, we probably have one of the highest compositions of consumer loans to the total. And so in that sense, we have achieved what we set out to do. And part and parcel of that was the transformation of the business model from one that was one, as I said, very heavily dependent on proprietary trading into more of customer revenues. So we not only fixed that, but we also got it from consumers, which is what we wanted to do to start with, because the margins are still rich. And it’s also the market of the future. Philippines, young, you know where we are going to reap what they call the demographic dividend, young population. The country is starting to move up as the boat is, as the tide floats all the boats, you’re going to float the largest section, which is the consumer section. So we’re happy with that. On the other hand, as you said, what I feel needs to be done much faster is digital transformation. Although our suppliers and our friends tell us we are in many areas of the digital transformation. I heard the word pierce. I’m not about to say yet that I’m already happy. We’re not because we want to get more things done. We want to speed up development of the new ID and operations architecture that we laid out. And we start, we want to start showing our shareholders that there are some early wins and early results coming from the investments that have already been made.
Edwin, thank you for your time today, and good luck with your plans for the future.
Thank you very much.