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Thursday, August 17, 2017 | MANILA, PHILIPPINES
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   banking report
Date posted: Monday, May 29, 2017 | Manila, Philippines

1st Quarter Banking Report (2017)

Fed move buoys broker calls to a ‘buy, buy, buy’

THE country’s sound macroeconomic fundamentals remain the selling point for market punters.

Another selling point would be the government’s aggressive push for infrastructure spending wherein the administration plans to roll out around P8.4 trillion for infrastructure over a six-year span.

For Regina Capital Development Corp. head of sales Luis A. Limlingan, the dawn of a resilient economy gives rise to other contributing factors to the profitability of banks.

“One, the improving economy led to higher consumer spending, higher disposable income, and manageable default. Two, the anticipated record-high infrastructure rollout is expected to fuel corporate expenditures and borrowings that banks can earn from,” he said.

Data by the Bangko Sentral ng Pilipinas (BSP) show a slight dip in the net incomes from universal and commercial banks during the first quarter. Net interest margin of 2.98% during the period was a tad higher than the previous quarter.

The relative strength of the banking sector is backed by its performance in the stock market. The Philippine Stock Exchange (PSE) financials index -- which included the banks -- went up by 10% for the first three months, a turnaround from a 9.9% decline from the fourth quarter of 2016, beating the performance of the benchmark index, the PSEi. Notable performers were banks whose stock price gains in the first quarter marked a reversal of the previous quarter’s contractions.

For instance, Rizal Commercial Banking Corp. (RCB) posted a 14.46% stock price increase during the quarter, a turnaround from the fourth quarter’s 6.55% decline. Not far behind were Bank of the Philippine Islands (BPI), East West Banking Corp. (EW) and Metropolitan Bank & Trust Co. (MBT) with first quarter gains of 13.96%, 11.11% an 10.19% respectively.



In terms of market capitalization, which is equal to the stock’s share price at a point in time multiplied by the number of shares outstanding, bank stocks -- which numbered 11 -- were up 9.7% during the quarter as compared to the 8.5% decline during the fourth quarter of 2016. Banks that outperformed the sector average were RCB (14.5%), BPI (14%), EW (11.1%), MBT (10.2%) and BDO Unibank, Inc. (9.8%).

Analysts said that the net selling of Philippine equities as a result of a confluence of uncertainties weighed on bank stocks’ performance during the quarter.

Nevertheless, they remain attractive prospects for those looking to add in their portfolios, with analysts polled by BusinessWorld pointing to improving net interest margins, robust loan and deposit growth and controlled operating expenses as factors in driving the banks’ profitability.

“Banks are expected to be among the other major beneficiaries of a slowly rising interest rate environment as this would potentially allow them to charge higher lending rates and earn higher net interest margins,” said Charles William O. Ang, deputy head of research at COL Financial Group, Inc.

Justino B. Calaycay, Jr., senior analyst of Philstocks.ph was of the same opinion, saying that present economic conditions such as low and stable borrowing rates; and rising investment opportunities in line with the government’s programs, among others -- “should fodder bank lending activities.”

“Over the last several years, trading and investments have greatly contributed to the banks’ bottom lines. We should see a discernible shift to its core activity of lending -- both commercial and retail. This positive outlook on bank profitability should be the main driver for its share prices to move higher,” he said.

For Regina Capital’s Mr. Limlingan, the “debacle of investments” in 2015 taught banks an invaluable lesson that the “market is never stable.”

“The absence of forex and trading gains in that period dragged the sector down, with the buffer in other income sources not enough to cushion the loss. Given the weaker performance and the lessons learned from previous period, banks are making a comeback in 2017,” he said.

Furthermore, the sector was trading at a discount relative to its historic price to book value and that “strong loan growth” last year will “carry over this year as consumer spending remains strong,” according to Norman C. Del Carmen, head of investments and trading at China Banking Corp.

The period saw some big banks grow by double-digits in their respective bottom lines mostly on the back of increasing asset yields and loan volumes. Among these, EW profited the most during the period, reporting a 53.7% year-on-year growth.

Union Bank of the Philippines (UBP) followed suit, posting a net income growth at 37.2%. Rounding up the double-digit earners include BPI (25.6%), Asia United Bank Corp. (AUB, 14.8%) and MBT (close at 9.7%).

Decliners during the period were Philippine National Bank (PNB, -52.9%), Rizal Banking Commercial Corp. (RCB, -44.3%), Security Bank Corp. (SecB, -6.37%), and Philippine Business Bank (PBB, -1.4%)

2H OUTLOOK
Looking forward, COL Financial’s Mr. Ang expected the banks’ upward earnings to be sustained with strong demand for loans and potentially higher net interest margins driving growth.

Furthermore, foreign buying will continue to play an essential role in the anticipation of better earnings, according to Joseph James F. Lago, research head of PCCI Securities Brokers Corp.

Raul P. Ruiz, first vice-president and head of research at RCBC Securities, Inc., cited two possibilities -- one, wherein there is a “positive earnings surprise” if the banks can deliver through foreign exchange gains or higher-than-expected trading gains on investment securities and the other, on renewed speculation on acquisitions.

For China Bank’s Mr. del Carmen, banks would indirectly benefit from holding companies that have been very active in public-private partnerships.

Of the “Big Three,” MBT enjoys the most number of “buy” recommendations. The two others comprising the country’s biggest three publicly-listed lenders are BDO and BPI.

Regina Capital’s Mr. Limlingan said that while MBT “might have been the laggard of the big three before,” the Bank has “recently jumpstarted its road to recovery.”

“It has cut down large allocations in SDA facilities to return to more reliable interest-earning assets, dropping reliance to one-off’s that lifted bottom-line, and improving branch and corporate banking as well,” he said.

For COL Financial’s Mr. Ang, MBT has an “attractive valuation,” which puts the Bank in a good position to capitalize on the expected pick up in infrastructure and investment spending in the country. RCBC’s Mr. Ruiz likewise cited the Bank’s “cheap valuation.”

Meanwhile, brokerage UBS Securities Pte. Ltd sees BPI’s potential for faster growth in the consumer segment this year.

NEXT THREE
For the “Next Three,” (PNB, SECB and CHIB), PNB got the most number of “buy’ recommendations (3), followed by UBP (2) and SECB and CHIB at one apiece.

Commenting on his “buy” recommendation on SECB, RCBC’s Mr. Ruiz noted that the Bank has already come down from its high of P257 per share last year. For CHIB, he noted a “possible price downside” after its stock rights offering from April 24 to May 5, in which China Bank has raised P15 billion as planned.

Lastly, for the remaining “Magnificent Seven” roster of banks, analysts pointed to UBP, EW, Philippine Savings Bank and Philippine Bank of Communications as buys while RCB, AUB and PBB get a “hold” rating.

COL Financial’s Mr. Ang noted on EW’s “attractive valuation” as it focused on consumer lending, which led to its profitability status after recording losses the past few years due to its aggressive expansion program of setting up branches.

On the other hand, RCBC Securities’ Mr. Ruiz said that EW’s plans for capital raising “could dilute earnings.”

For UBP, COL Financial’s Mr. Ang noted the Bank’s shift to being more dependent on lending and fee-based income from trading income.

Regina Capital’s Mr. Limlingan likewise likes UBP, citing its “surprising comeback” as it registered the highest equity returns while being able to move to less volatile assets and expanded their net interest income to reach 48% of their top line.

Mr. Limlingan also notes on AUB’s laggard status in terms of loan growth in the industry, which is “a symptom of an operational issue more than a management decision.”

“AUB’s loan growth -- amidst branch network expansion -- only registered 5% in 2016. It can be seen as the result of a rebalancing undertaken by the bank, but historically, banks only tinker with less significant items in their resources (between AFS or HTM) and not the crown jewel,” he said. -- with a report from Lourdes O. Pilar

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