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The Union Bank of the Philippines, which bought rival International Exchange Bank last year, plans to increase profit by more than 25 percent this year by cutting costs and diversifying its investment portfolio.

“We remained a low-cost producer as we continued streamlining our processes,’’ Union Bank president Victor Valdepeñas  said during the recent annual stockholders’ meeting. Union Bank will complete the consolidation of its operations with International Exchange by the middle of this year, he said.

The bank has generated cost savings of P300 million to date, Valdepeñas said, without citing the period. The company plans to increase cost savings from streamlining to P700 million by 2008, he said.

Philippine banks are merging to cut costs and increase lending while complying with more stringent capital rules set by the central bank, in line with the Basel II global accord, which governs how much money banks and investment firms need to set aside to cover potential losses. The rules are known as Basel II because they update the 1988 Basel Capital Accord.

The Manila-based lender had a profit of P2.5 billion last year, down nine percent from the previous year. It bought International Exchange Bank in June last year.

Net income in the three months ended March 31 rose to P1.63 billion from P800 million.

The lender may also sell bonds or use internal cash to pay a $125-million debt maturing in September, Valdepeñas said.

“Whether we again go back to the market and refinance that debt, it all depends on conditions at that time,’’ he said. “We will decide two months before’’ the maturity of the debt.

Union Bank may also acquire another bank to meet its goal of becoming the country’s third-largest lender by assets by 2010. “Our strategy is not limited to organic growth. If there’s an opportunity for inorganic growth, an add-on, why not,’’ he said. Valdepeñas defined inorganic growth as a “merger or acquisition.”

“Our asset base expanded by P207.6 billion as of end March,” Valdepeñas said. “Capital adequeacy ratio (CAR) stood at 16.9 percent and it is expected to improve to 19.5 percent after the full imposition of Basel II framework,” Valdepeñas said.