After a difficult stretch, Union Bank of the Philippines has rediscovered the pleasures of spread income. But bond-market losses and a weakening deposit mix show that the recovery still comes with strings attached.
In banking, good quarters often arrive quietly. There is no factory line to inspect, no cargo ship to count, no mall foot traffic to observe. Instead, the evidence appears in basis points, provisioning lines, and the stubborn arithmetic of funding costs. By that measure, Union Bank of the Philippines had a conspicuously better first quarter in 2026.
UBP reported net income of ₱3.83bn for the three months ended March 31st, 2026, up 167% from ₱1.43bn a year earlier. Net revenues—net interest income plus other income—rose to ₱21.73bn, around 12% higher year on year. For a bank that has spent recent years digesting expansion, digital investment, and higher credit costs, the quarter looked less like a sudden windfall than a demonstration of operating leverage finally working in its favor.
The heart of the story was the net interest margin. UBP’s NIM rose to 6.7%, from 6.3% in the first quarter of 2025, helped by lower funding costs and growth in earning assets. Interest income increased by only 2%, to ₱21.21bn, but interest expense fell by nearly 18%, to ₱4.45bn. That is the sort of asymmetry bankers like: assets continue to earn, liabilities become cheaper, and the difference drops into income.
The improvement in profitability was even more striking below the revenue line. UBP’s net profit margin on net revenues improved from roughly 7.4% in Q1 2025 to about 17.6% in Q1 2026. That was not merely because revenues rose. Operating expenses increased by about 8%, to ₱12.48bn, slower than revenue growth, while provisions for credit losses fell by roughly 18%, to ₱4.50bn. In effect, UBP earned more, spent proportionately less, and set aside less for bad loans. The result was a sharp lift in pre-tax profit, which nearly doubled to ₱4.75bn.
There was also a useful boost from other income. Fees and commissions rose modestly to ₱3.92bn, while miscellaneous income surged to ₱1.19bn, mainly because of foreign-exchange-related gains. That helped offset a less-flattering line: trading and investment securities resulted in a ₱136m loss, compared with a ₱213m gain a year earlier. The lesson is that UBP’s headline earnings were strong, but not all of the improvement was equally repeatable. Recurring spread income improved; some non-interest income was more market-sensitive.
The balance sheet tells a more nuanced tale. Total resources rose to ₱ 1.18 trillion, up about 2% from year-end 2025, while net loans increased to ₱553.6 billion, up about 3%. Deposits also grew, reaching ₱751.7bn, from ₱734.0bn at the end of 2025. But the composition of those deposits shifted in a less benign direction. Demand deposits declined, savings deposits were nearly flat, and time deposits jumped by about 12%. As a result, UBP’s CASA ratio fell to 65.1%, from 68.1% at year-end 2025.
That matters. CASA deposits—current and savings accounts—are the cheap fuel of banking. Time deposits are stickier, but typically cost more. A bank can enjoy lower funding costs for a while due to rate cuts, repricing lags, or portfolio effects. But if customers continue moving into higher-cost deposits, the funding advantage can fade. UBP’s NIM trend is positive for now; the question is whether the balance-sheet mix will allow it to remain so. If time deposits continue to grow faster than demand and savings balances, future NIM may need support from higher asset yields, further rate cuts, or stronger loan pricing.
The other blemish appeared not in net income, but in comprehensive income. UBP recorded other comprehensive loss of ₱1.18bn, largely because of a ₱1.28bn unrealized mark-to-market loss on investment securities at FVOCI. The bank still produced a total comprehensive income of ₱2.65bn, but that was well below the reported net profit because bond values moved against it.
The likely culprit was the bond market. UBP’s FVOCI portfolio was overwhelmingly composed of debt securities, with FVOCI securities totaling ₱41.64bn as of March 31st, 2026. When market yields rise, the prices of existing fixed-rate bonds fall; under FVOCI accounting, those unrealized losses are recorded in equity through other comprehensive income rather than immediately in profit or loss. This is not a cash loss in the same way a loan write-off is. But it is not meaningless either. It reduces comprehensive income and can weigh on capital.
The wider market backdrop supports that interpretation. AsianBondsOnline, maintained by the Asian Development Bank, reported that Philippine local-currency government bond yields shifted upward in 2026, with yields rising by an average of 120 basis points across maturities between February 2nd and May 29th. The move was attributed to a more hawkish monetary policy stance, inflationary pressures, fiscal concerns, and worries about rating outlooks. Although that period extends beyond UBP’s March quarter-end, it captures the direction of travel: bond investors demanded higher yields, and portfolios carrying fixed-rate securities took valuation pain.
Capital ratios, accordingly, deserve attention. UBP’s CET1 ratio fell to 13.8%, from 15.0% at year-end 2025, while its capital adequacy ratio declined to 14.6%, from 15.9%. These remain serviceable levels, but the direction is worth watching. A bank can absorb temporary FVOCI losses if earnings are strong and capital generation is steady. But if loan growth accelerates, dividend payouts remain high, or market losses deepen, capital flexibility narrows.
For shareholders, then, Q1 2026 offered a cleaner earnings story than UBP has shown in some time—but not a simple one. The core banking engine is running better. NIM expanded. Profit margins improved markedly. Provisions declined. Efficiency improved, with the cost-to-income ratio falling to 57.4%, from 59.3% a year earlier. Return on equity rose to 7.5%, from 2.9%, and return on assets improved to 1.3%, from 0.5%.
Yet the quarter also exposed the two forces that could complicate the recovery. The first is funding: the shift from CASA deposits to time deposits could eventually erode the margin gains that made the quarter look so attractive. The second is duration: rising yields can damage the fair value of securities portfolios, and those losses, even when unrealized, flow through equity and comprehensive income.
UBP’s first quarter was therefore not a victory lap. It was more like a repricing of the investment case. The bank showed that it can produce stronger earnings when funding costs ease, credit costs moderate, and scale begins to count. But it also reminded investors that banks are leveraged institutions living under the rule of rates. Lower funding costs gave UBP its spring; higher market yields took something back through FVOCI.
For now, the spread machine is humming. The next test is whether it can keep humming when depositors ask for more, bond markets demand more, and shareholders expect more.
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Disclaimer: This is for informational purposes and is not investment advice. Figures are taken from company disclosures and exchange data; valuation ratios include the author’s calculations based on cited inputs.
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