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Thursday, August 17, 2017 | MANILA, PHILIPPINES
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   banking report
Date posted: Monday, November 28, 2016 | Manila, Philippines

3rd Quarter Banking Report (2016)

Infra push seen benefiting lenders’ share prices

BANKING stocks remain good buys given the positive outlook for lenders’ full-year earnings.

For the third quarter, the financial sub-index gained 85.01 points or 4.85% to lead all other sectors. In contrast, the benchmark Philippine Stock Exchange index (PSEi) lost 166.52 points or 2.1% to settle at the 7,600 territory, snapping two consecutive quarters of gains.

Among the financial sub-index’s component stocks, Security Bank Corp. (SECB) recorded the biggest gain for the quarter with 25.9%. It was followed by Union Bank of the Philippines, Inc. (UBP) and Rizal Commercial Banking Corp. (RCBC), with gains of 13.19% and 12.36%, respectively.

SELL-OFF, FED RATE HIKE
The PSEi breached the 8,100 level in the third quarter, driven by positive sentiment following President Rodrigo R. Duterte’s first State of the Nation Address (SONA).

A few days ahead of the SONA, the local bourse peaked at 8,102.30, up by 16.54% from end-2015 to reach its highest since the main index finished at 8,127.48 on April 10, 2015.

However, foreigners continued dumping local equities in the latter part of the third quarter, sending the PSEi to 7,629.73 by the end of the period. The bellwether index had lost 5.83% since hitting its peak on July 21 when it became one of the most expensive markets in Asia.

"Amidst the [third quarter] sell-off of the Philippine market, the financial sector was one of the hardest hit sectors despite a majority of banks post[ing] positive [first semester] earnings reports," Ram D. Badiola, equity trader at Meridian Securities, Inc., said.



The pending interest rate hike of the Fed, according to Mr. Badiola, can bring about a significant impact on the peso, as the rate increase can result in foreign capital outflows, which can pull down the local currency.

"This will likely put Bangko Sentral ng Pilipinas (BSP) on a defensive stance through imposing similar restrictive monetary policy. This move might bring about a negative effect on banks’ lending operations because of the low interest income spread," Mr. Badiola said.

Cristina S. Ulang, head of research at First Metro Investment Corp. (FMIC), agreed, "The Fed rate hike has been a well-anticipated event. Banks have lightened up and defined the business models for their securities portfolio in a defensive move against rising rates."

"Higher rates need not necessarily mean famine in the Treasury business as we’ve seen some banks made handsome one-off gains on their held-to-maturity (HTM) portfolios with proper regulatory approvals such as BPI and Union Bank," she added.

INFLATION, WEAK PESO
Manuel Antonio G. Lisbona, president of PNB Securities, Inc. noted that the rate hike is a double-edged sword.

"Bank profits should be expected to increase since their cash reserves will benefit from higher rates. Also, banks do not immediately adjust their deposit rates thus allowing them to pocket the spread on what they earn versus what they pay in interest to depositors," he said.

Last Sept. 26, the peso sank to its lowest against the dollar in more than seven years, closing the day at P48.25 to the greenback, 2.5% weaker than end-2015’s P47.06 close and its weakest finish since the P48.34 recorded on Sept. 15, 2009.

"Since we are net importers, overall goods should become more expensive so long as the peso trades at a more depreciated price relative to the dollar," said Mr. Luis A. Limlingan, business development head at Regina Capital Development Corp.

"Consumer lending may not be as affected since this is denominated in local currencies. What is more worrisome is corporate lending as some companies borrow in US dollars, so their debt payments will be higher," he added.

Data from BSP as of August showed that consumer lending went up by 20.3% for that month. Individual credits came mostly in the form of salary loans, credit card dues, and car financing.

EXPANDED INFRA BUDGET
Alleviating the fears among investors is the current administration’s planned boost to its infrastructure budget at P860.7 billion in 2017.

"This would be beneficial for the banks as the projects are driven by the government, so they are more sustainable and the likelihood of a default is smaller [versus] other projects," Mr. Limlingan said.

A runaway winner could be state-owned Development Bank of the Philippines, according to PCCI Securities Brokers Corp. Head of Research Joseph James F. Lago.

"KBs and EKBs do not normally do long-term lending (beyond 10 years) given their demand liabilities’ profile/duration so Development Bank of the Philippines (DBP) will really be the forefront of this," he said.

"If domestic banks become creative and be willing [to] increase their loan portfolios’ duration slightly in exchange for better net interest margins, then the overall banking sector loan growth should be in the high teens again for 2017," he added.

FAIRLY VALUED
"Many banking stocks are fully valued at this point," said Regina Capital’s Mr. Limlingan, "but the closest one to our target price is SECB, which we valued at 216..."

For the first nine months of the year, the financial sector gained 18.56%, almost twice the PSEi’s 9.75%. Among listed banks, SECB was the biggest gainer with 70.14%. Other double-digit gainers were UBP, Bank of the Philippine Islands (BPI), Philippine National Bank (PNB) and China Banking Corp. (CHIB).

For PCCI Securities’ Mr. Lago, BPI and SECB are the only banks whose 2016 leading price-to-equity ratio are more or less in line with the PSEi’s average, with the rest trading at a discount. In terms of price-to-book value, all banking stocks are trading at a discount to the market’s 2016 leading average.

FMIC’s Ms. Ulang said BPI would be fairly valued, noting that the bank has a high price-to-equity and price-to-book ratio, which is well-deserved.

Metropolitan Bank & Trust Co. (MBT), on the other hand, is ripe for rerating, as it was "hugely mispriced" after the sell-off, she said.

Mr. Lago said banks’ profits are on track to improve in the mid- to high-teens, citing the first nine months results, but is not discounting the possibility of a few banks that might use the recently lousy equity environment to clean books.

In terms of loan growth, he said that it "should still be above 10% or low-teens on the average."

Regina Capital’s Mr. Limlingan expects banks’ profits to average 12%-14% this year, adding, "Base effects from treasury gains have subsided, and corporate capex-driven credit growth is making a comeback after almost two decades."

"Loan growth may continue to rebound much better than 2015, but at the same pace as 2016. We are of the view that banks are more willing to grant long-term business loans at single-digit yields," he said.

In this regard, bank profits will be relying on "traditional businesses moving forward" for more "dependable income. Depending on when the BSP raises rates, this may affect profitabvility for 2017," he added.

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