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Monday, October 23, 2017 | MANILA, PHILIPPINES
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   banking report
Date posted: Tuesday, August 30, 2016 | Manila, Philippines

2nd Quarter Banking Report (2016)

Discounts point to value play for banks in 2H

THE PHILIPPINE stock index breached the 7,700 level in the second quarter of the year, recovering from the first month’s bloodbath. Given the positive outlook for banks’ third-quarter earnings, investors may consider the sector on their shopping lists.

The barometer Philippine Stock Exchange index (PSEi) gained 7.35% in the second quarter, higher than the 4.46% posted in the first quarter and bouncing back from the 4.74% loss a year ago. Local stocks trekked downwards in the run-up to the May 9 election amid poll uncertainties. The benchmark dipped to 6,991.87 last May 6, the last trading day before polls opened.

Compounding jitters was the United Kingdom’s referendum on the European Union (EU), so-called “Brexit.” When the votes were cast on June 23, the UK decided to exit the EU, pulling down UK stocks and the British pound to their lowest in decades. The PSEi lost 100.06 points or 1.29% on June 24, although this was a smaller decline compared to other Asian markets.



The second quarter saw the financial sub-index gaining 9.68%, the second biggest gainer next to the property sector’s 15.86%. The financial sub-index’s second-quarter gain was more than three times the 3.10% advance in the first quarter and a reversal from the 7.47% loss in the second quarter of last year.

Among the financial sub-index’s component stocks, East West Banking Corp. (EW) recorded the biggest gain for the quarter with 18.34%, following an 18.80% loss in the previous three-month period. It was followed by Union Bank of the Philippines, Inc. (UBP) and Bank of the Philippine Islands (BPI) with 12.60% and 11.84%, respectively.

For the first semester, the financial sector gained 13.07%, higher than the PSEi’s 12.14%. Among listed banks, Security Bank Corp. (SECB) was the biggest gainer with 35.14%. Other double-digit gainers were BPI, UBP, Metropolitan Bank & Trust Co. (MBT), Philippine National Bank (PNB) and China Banking Corp. (CHIB).

INCOME DRIVEN BY LOAN GROWTH
Data from the Bangko Sentral ng Pilipinas (BSP) showed aggregate net income of universal and commercial banks as of June increased 13.90% to P70.52 billion from the P61.92 billion the year before. Net interest margin among banks grew slightly to 3.03% from 3.02% last quarter and 3.01% from the same period in 2015.

On the other hand, data from parent banks’ balance sheets as of June showed a median of 15.13% common equity Tier (CET) 1 ratio for all banks monitored by BusinessWorld, 16.53% Tier 1 ratio, and 17.63% capital adequacy ratio, well above the minimum requirements prescribed under the Basel 3 framework of 6%, 7.5% and 10%, respectively.

Analysts polled by BusinessWorld said that banks’ earnings in the second quarter were driven by sustained loan growth.

Justino B. Calaycay, Jr., head of marketing and research at A&A Securities, Inc., agreed that the “strong recovery” among bank stocks reflected the growth in lending, which in turn stemmed from the pickup in consumption brought about by the summer season.

“Banks’ numbers also indicated that among the major driver in loans were those for automobile, cars. Indeed we have seen more and more people seriously considering making a purchase as interest rates remain low and financing structures have remained accommodating -- including what may be considered as ‘ultra-low’ downpayment requirements,” he said.

Mr. Calaycay said credit card usage of consumers also contributed to the growth in loan demand, which reflects confidence in the outlook for jobs and wages, partly stemming from promises made by candidates during the last elections.

Raul P. Ruiz, first vice-president and head of research at RCBC Securities, Inc., agreed that loan growth drives bank earnings. Add to this their deposit expansion, gapping strategy and investment securities position. Gapping strategy pertains to how a bank manages the interest rate spread between its assets and liabilities.

Mr. Ruiz added that branch expansion and the banks’ success in entering the consumer market would also affect results. Branch expansion usually aids in the bank’s deposit-taking activity as well as the distribution of loans, particularly consumer products.

INVESTMENT SPENDING
Besides consumer demand, investment spending also was driving loan growth, according to Luis A. Limlingan, business development head at Regina Capital Development Corp.

“Corporate capex spend spurred loan growth in the first quarter and traces of these may be felt in [the second quarter]. Key drivers of credit demand include a clearer macro, as well as banks’ willingness to grant long-term business loans at single-digit yields. This makes mid-teens IRR [internal rate of return] projects worthwhile, spurring private investment spend,” he said.

First-quarter investments in durable equipment grew 36.6%, a three-fold increase from the 12.4% a year ago,led by companies’ investments in motor vehicles, industrial machineries, and telecommunications equipment.

A recent survey conducted by the BSP showed a net increase in loan demand amid lenders’ broadly unchanging credit standards. This was the 29th consecutive quarter since the second quarter of 2009 that credit standards remained “broadly unchanged.”

In terms of borrower firm size, banks imposed tighter rules towards large middle-market enterprises and small and medium-sized enterprises. Lenders, however, kept loan standards for top corporations and micro-firms. Lending standards to households also were unchanged.

Last quarter, the central bank also rolled out regulatory reforms, foremost of which was the formalization of an interest rate corridor (IRC) for monetary operations. The BSP introduced the term deposit facility which will serve as the main tool in absorbing liquidity, even as it cut to 3.5% the overnight lending or repurchase (RP) rate from 6% previously, and to 3% the overnight borrowing or reverse repurchase (RRP) rate from 4%. The special deposit account rate, which serves as the IRC’s floor, stayed at 2.5%.

LIQUIDITY, INTEREST RATES
Going forward, analysts see the country’s strong macroeconomic fundamentals, ample liquidity, low interest rates and consumer confidence continuing to drive loan demand, and in turn bank earnings and share prices.

“We expect loans to grow in the mid-teens as consumer confidence remains high, liquidity strong and interest rates relatively low,” said Norman C. Del Carmen, head of investments and trading -- Trust Banking at China Banking Corp.

“Long-term, the liberalization of the industry will keep environment competitive and we expect more consolidation ahead,” he added.

AB Capital Securities, Inc. senior equity analyst Alexander Adrian O. Tiu sees a pick-up in the second half of the year, given the clearer stance by the US Federal Reserve. After ending its ultra-loose monetary policy at end-2014, the Fed has been holding off on additional interest rate hikes pending a clear recovery in the labor market.

“Even over-all economic activity, based on quarterly [gross domestic product] numbers, seem to suggest the [third] quarter is the ‘slowest’ among the four of each year,” said A&A Securities’ Mr. Calaycay.

“So far early [second quarter] numbers are showing up well with BDO (BDO Unibank, Inc.) and MBT posting strong 38% and 25% profit growth, recovering from the sputter in [the first quarter]. While we can’t at the moment peg a number or even a range for [the third quarter], it will be fair to expect a ‘slower’ pace that will still show expansion, year-on-year. The [quarter-on-quarter] numbers may suggest a slide given the high-base effect as [third quarter] onwards will now be ‘devoid’ of ‘election-related’ activities,” he added.

TIME TO BUY?
Given the positive outlook towards banks’ earnings, is it time to own banking stocks this quarter?

“[T]here is no seasonality in buying or not buying bank stocks either,” said RCBC’s Mr. Ruiz. “More relevant question would be whether to buy stocks at all. The answer is always yes if the investment horizon is long run. If short-run, historically stock markets are weakest in August so August would be a good month to buy.”

Joseph James F. Lago, head of research at PCCI Securities Brokers Corp., said many banks’ relative valuations are at a discount to the PSEi’s averages.

Lexter L. Azurin, assistant vice-president and research head at Unicapital Securities, Inc. agreed, citing tier-2 banks -- such as EW, Rizal Commercial Banking Corp. (RCB) and Philippine National Bank (PNB) -- that are trading below their historical and book levels, even as top-tier banks such as BDO and MBT remain attractive.

AB Capital’s Mr. Tiu shared the same view: “Some of the mid-sized banks are now in a deep discount, with some even trading below book value.”

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