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Monday, October 23, 2017 | MANILA, PHILIPPINES
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   banking report
Date posted: Tuesday, February 28, 2017 | Manila, Philippines

4th Quarter Banking Report (2016)

These bargain stocks are ripe for the picking

FOR INVESTORS looking to load up on bank stocks this year, the sector is seen riding on the government’s aggressive push for infrastructure spending, an interest rate hike notwithstanding.

The benchmark Philippine Stock Exchange index (PSEi) extended its ​loss by 10.34% in the final three months of 2016, from a 2.14% decline in the third quarter. For the full year 2016, however, the PSEi narrowed its loss to 1.60% from the previous year’s 3.85%.

The financials index shed 9.95% in the fourth quarter 2016, more than wiping out the 4.85% gain in the third quarter. For the full year, the counter rose 6.76%, but not enough to regain the 8.58% loss in 2015.

Among the sector’s component stocks, Security Bank Corp. (SECB) dropped the most in the fourth quarter (-21.36%), nearly wiping out the third quarter’s 25.90% gain. Bank of the Philippine Islands (BPI) and Metropolitan Bank & Trust Co. (MBT) trailed, with declines of 15.43% and 14.89%, respectively.

For the full year, however, SECB gained 33.80%, leading other listed banks. It was followed by Union Bank of the Philippines (UBP) and China Banking Corp. (CHIB), which rose by 30.76% and 10.34%, respectively.

Charles William O. Ang, deputy head of research at COL Financial Group, Inc., said the financials index merely performed in line with the PSEi during the final three months of 2016, adding that investors did not see anything particularly risky for banks relative to the whole market.

As rising interest rates may have resulted in some trading losses in the fourth quarter, “potential losses are not expected to be substantial given that banks in the past few years have already reduced their exposure in bonds held for trading in favor of bonds that are held to maturity (buy and hold strategy),” Mr. Ang said.

In December last year, the US Federal Reserve increased its rates by a quarter of a basis point. Save for last June’s procedural cuts accompanying its shift to an interest-rate corridor, the Bangko Sentral ng Pilipinas (BSP) has kept its policy rates steady for the 19th straight month in January.

NET INTEREST MARGIN NARROWS
BSP data show that aggregate net income of universal and commercial banks increased by 13.87% to P136.96 billion at end-2016 from the P120.28 billion recorded the year before. Net interest margin of 2.92% in the fourth quarter last year narrowed from 3.02% in the third quarter, and 2.94% in the fourth quarter 2015.

According to analysts polled by BusinessWorld, banks’ earnings in the fourth quarter were driven by higher net interest incomes on the back of loan growth, and despite a strengthening dollar, the Fed rate hike, lower trading gains, flat net interest margins, and political noise.

“Loan growth remains strong domestically, particularly in infrastructure-related segments,” said Luis A. Limlingan, head of sales at Regina Capital Development Corp. “Banks are a beneficiary of the recent pickup in infrastructure project activity as they are a key funding source for infrastructure spending at better lending yields.”

Justino B. Calaycay, Jr., head of marketing and research at A&A Securities, Inc., agreed, saying the banking industry is well-positioned to finance the government’s “build-build-build” strategy.

Norman C. Del Carmen, head of investments and trading at the trust banking unit of China Banking Corp., said loan growth continued into the fourth quarter and will carry over this year due to strong fundamentals.

“Despite expected rise in interest rates, we see demand to continue as consumer and business confidence remains high and unemployment low,” he added.

Although the BSP did not signal any change in monetary policy, analysts expect the central bank to hike its benchmark rate this year by 25 to 50 basis points. Still, they see government’s push for higher infrastructure spending to sustain loan growth this year.

INFLECTION POINT
“We expect 2017 to be the inflection point for most banks’ earnings on the back of: consistent loan growth from infrastructure-related projects, diminishing net interest income drag from securities portfolio repositioning and better cost control,” said Regina Capital’s Mr. Limlingan.



China Bank’s Mr. Del Carmen said “continued loan growth [would] drive earnings,” adding that “given that the rise in rates have been expected for some time now, the industry has generally lessened their focus on trading and more on fees and interest income.”

“For banks that are well-positioned to a rising interest rate environment, we expect some improvements in interest margin and less earnings volatility coming from trading,” he added.

A&A Securities’ Mr. Calaycay agreed that higher interest rates “may impact on the demand side [but] may not be much of a problem... if the economy is able to sustain its trajectory and momentum over the last six years.”

“Consumer loans, which form a big chunk of banks’ lending activity -- particularly the recent surge in car/vehicle ownership under financing -- will probably slow if and when the government’s ‘tax plan on vehicles’ is implemented,” he said.

“Demand from the commercial and industrial side, boosted by public spending and a favorable investment climate (if such is achieved) should temper its impact, however,” he added.

COL Financial’s Mr. Ang said the investors should focus on the ability of the banks to deliver loan growth this year, as well as potential increase in net interest margins due to higher interest rates.

“These will be the drivers of earnings growth not only for [first quarter] 2017 but also for the full year. We expect the share price of banks that successfully deliver strong profits from rapid loan growth and improving margins to perform well,” he added.

BIG THREE
Of the Big Three, MBT enjoys a buy recommendation this quarter among analysts polled by BusinessWorld. The two others comprising the country’s biggest three publicly listed lenders are BDO and BPI.

Raul P. Ruiz, first vice-president and head of Research at RCBC Securities, Inc., said that MBT is trading at a higher-than-usual discount to peers BDO and BPI.

Nisha S. Alicer, chief equity strategist at DA Market Securities, Inc., considers MBT as “the most undervalued,” but is not counting out BDO and BPI, both of which, like MBT, are “well-capitalized and best poised to take advantage of favorable economic prospects and continued shift/expansion towards growing core operations (particularly consumer loan portfolio) amid possible decline in trading gains.”

Ms. Alicer cited BDO’s P60-billion stock rights offering last December and completed last month in support of the Henry Sy family-controlled bank’s medium-term growth.

COL Financial’s Mr. Ang agreed that MBT has an “attractive valuation” relative to BPI and BDO, adding that the weak earnings performance in the nine months to September of the George Ty family-controlled bank are only “temporary” as the market sell-off was “overdone.”

Mr. Ang also pointed to insider buying as another positive for MBT.

NEXT THREE
Among the Next Three (SECB, CHIB and PNB), analysts polled by BusinessWorld cite Philippine National Bank (PNB) and SECB as worth looking into.

RCBC Securities’ Mr. Ruiz said PNB is trading at a higher-than-usual discount to its book value.

As for SECB, DA Market’s Ms. Alicer said the Frederick Dy family-led bank is well-capitalized, citing last year’s capital infusion by Bank of Tokyo-Mitsubishi UFJ Ltd. to support the aggressive growth strategy of the Philippine lender.

MAGNIFICENT SEVEN
Of the Magnificent Seven (RCB, UBP, AUB, EW, PBB, PSB, PBC), analysts polled by BusinessWorld recommend UBP and East West Banking Corp. (EW) as buys.

COL Financial’s Mr. Ang said EW has an attractive valuation, as it is trading below its book value, adding that the Gotianun family-led bank’s profit is on an uptrend after years of disappointment as the period of rapid expansion is already finished and as new branches start to bear fruit.

Mr. Ang also noted EW’s exposure to higher margin consumer loans, as well as insider buying.

As for UBP, Mr. Ang said the Aboitiz family-led bank also has an attractive valuation, noting its successful shift in focus from trading to lending, growing exposure to higher margin consumer loans, and above-average efficiency and profitability.

“UBP and EW would be the very best choice if you’re looking for banking stocks that have potential in terms of upside potential and growth,” said Ramon Emmanuel B. Badiola, equity analyst at Meridian Securities, Inc.

He said both lenders also posted growth in terms of deposit base and lending.

“EW increased its EPS (earnings per share) significantly at 59.79% higher versus the same period last year from 0.97 in 2015 to 1.55 in the third quarter of 2016, while UBP registered an EPS of 10.25 from 4.62 same period last year. This translates to 121% up,” Mr. Badiola said.

DA Market’s Ms. Alicer is also looking at UBP, which is undervalued and like its bigger peers, is well-capitalized and positioned to benefit from the economy’s upturn as well as from the importance of consumer lending.

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