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‘Buy’ for bank stocks following Q1 sell-off

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By Christine Joyce S. Castañeda, Senior Researcher

THE GROWTH of banking stocks slowed during the quarter as market volatility sent investors into profit-taking mode despite the sector’s good earnings reports. For this quarter, however, most analysts interviewed have signaled a “buy” on the sector amid expectations of better earnings in the months ahead.

After breaching the 9,000 level following the optimism brought by the implementation of the tax reform, the Philippine Stock Exchange index (PSEi) went down to as low as the 7,900-levels in March, losing 6.76% in the first three months of the year.

The financials index — which included banks — shed 6.30% in the first quarter 2018 from a 9.97% gain in the same period last year and the 13.71% increase posted in the previous quarter.

Banking stocks were not spared in the onslaught as only four listed banks posted quarter-on-quarter gains in their stock prices during the quarter: Bank of the Philippine Islands (BPI) at 8.23%, Philippine Business Bank (PBB, 6.01%), China Banking Corp. (CHIB, 5.71%), and Union Bank of the Philippines (3.87%).

Among listed banks, Rizal Commercial Banking Corp. (RCB) recorded the biggest drop at -17.52% followed by BDO Unibank, Inc. (BDO, -15.24%), Metropolitan Bank & Trust Co. (MBT, -11.49%), and East West Banking Corp. (EW, -11.27%)

Meanwhile, Philippine National Bank (PNB), Security Bank Corp. (SECB), Philippine Bank of Communications (PBC) and Asia United Bank Corp. (AUB) also saw their stock prices decline, while only Philippine Trust Co. (PTC) showed no price movement during the quarter.

John Martin Luciano, research analyst at COL Financial Group, Inc., said the banking stock performance was dragged by the “relatively weak” performance of the overall stock market during the quarter due to the higher-than-expected inflation and substantially weaker peso.

He added that the announcement of plans to conduct a stock rights offering by BPI, MBT, and RCB has “put pressure in the share prices as the market anticipated the dilution from the additional shares.”

Joseph James F. Lago, PCCI Securities Brokers Corp.’s research head, said the decline in the financials subindex and PSEi were “primarily triggered by portfolio profit-taking on expectations that the previous year’s full year profits might not come in as expected and that leading valuations given 2018 profit expectations are a bit high.”

Rens V. Cruz II, investment analyst at Regina Capital Development Corp., was of the same opinion: [I]t has been a rather disappointing quarter for the industry,” he said.

EARNINGS
While stock performance dropped for much of the quarter, banks continue to show earnings growth during the period. Data from the Bangko Sentral ng Pilipinas (BSP) showed a 17.85% increase in the aggregate net income of universal and commercial banks as of March.

Furthermore, net interest margin — the difference between the interest income earned and the interest paid — grew 3.09% from 2.98% in 2017’s comparable period and the 3.04% posted in the previous quarter.

With the exception of BPI, EW, and SECB, banks’ disclosures to the stock exchange showed higher earnings.

For IB Gimenez Securities, Inc. Research Head Joylin F. Telagen, PNB had the “most spectacular performance” last quarter, citing the growth in the bank’s net interest income and net income despite incurring foreign exchange and insurance losses.

PNB saw its net interest income grow 24.77% to P6.427 billion, its disclosure to the local bourse showed. The bank’s net income also increased 20.10% to P1.467 billion last quarter.

For Ms. Telagen, SECB was the “biggest loser” for the quarter.

“SECB actually have strong net interest income. However, it failed to manage its other sources of income and its cost that dragged its corporate earnings,” she said.

SECB posted a net income of P2.347 billion in the first quarter, 16.63% lower than the P2.815 billion in the same period last year.

For Regina Capital’s Mr. Cruz, SECB earnings were only down due to the absence of “extraordinary gains,” saying that core businesses have grown “by a solid 15%.”

“SECB loans are still growing within historical average (20%), with customer loans even accelerating as high as 54%,” he said.

The same thing could be said of BDO, Mr. Cruz explained, as it registered flat earnings for the period due to an asset revaluation. “BDO clarified that excluding the effect of its shift to PFRS 9 (Mark-to-Mark revaluation) for investment in BDO Life, as well as ongoing restructuring expenses from unit One Network Bank, [its] profit would have expanded by a steady 16% for the said period,” he said.

OUTLOOK
Going forward, analysts see the banks’ lending segment continuing to drive earnings this quarter.

“We expect a high single-digit growth on banks’ earnings [this] quarter and the key driver is still the commercial lending segment on the back of higher loan growth supported by the growth in deposits and recent capital raising,” said Dean M. Ebona, investment officer at the Trust and Assest Management Group of China Banking Corp.

COL Financial’s Mr. Luciano likewise expects the banks’ core businesses to continue to drive earnings in the coming quarters.

“The growth in net interest income is expected to be driven by both strong loan growth and gradual improvement in net interest margins. Fee-based revenues are also expected to post steady results with the increase in the overall economic and banking activity,” he said.

For IB Gimenez’s Ms. Telagen: “Generally, we are expecting that net interest income will continue to be strong. However, we think the trading operations will be a challenge this quarter and our concern of higher interest rate environment also means a rising default risks [specially] consumers loans on real estate, condo’s and cars (which we are taking cautious stance, it will not happen sooner but could possibly burst out over the medium term / long-term).”

For Manuel Antonio G. Lisbona, president at PNB Securities, Inc.: “We expect earnings to continue to improve as the banks navigate an increasingly inflationary economy.”

Mr. Lisbona added that the loans to infrastructure-related firms will help boost profits.

“Market volatility will also provide banks’ treasury divisions with trading opportunities albeit at higher risk. Auto-related loans have been dampened by the effects of the TRAIN (Tax Reform for Acceleration and Inclusion) law, but this could be mitigated by increased consumer spending on other goods given the lower effective income tax rates,” he said.

As for Regina Capital’s Mr. Cruz, “Historically, [the second quarter] is the strongest quarter in terms of earnings… so the story of the dismal numbers for [the first quarter of 2018] might not necessarily spill towards the second quarter.”

TIME TO BUY?
Banking stocks are “generally a buy” according to the analysts interviewed by BusinessWorld.

“Higher interest rates are always good for bank lending as it results in higher spreads and NIMs. Given the amount of liquidity in the banking system and differences in lending portfolios, it is a given that some banks will not be as profitable as the others,” PCCI Securities’ Mr. Lago said.

For Papa Securities Corp., the recent sell-down of banking stocks is an “opportunity to buy.”

“We favor the big banks as these have the scale to lower funding costs and improve net interest margins. Continued economic improvement will likely sustain strong lending activities,” it said.

For his part, PNB Securities’ Mr. Lisbona is bullish towards banking stocks, citing the rising interest rates and the administration’s infrastructure spending program as two major reasons.

“Rising rates will allow banks to charge higher loan rates to their clients. In addition, interest rates on bank deposits rise at a slower rate, contributing to a larger interest spread at least for the short term,” he said.

The Monetary Board decided to raise borrowing costs by 25 basis points during its May 10 meeting. Rates are currently at 3.75% for the overnight lending rate, 3.25% for the overnight reverse repurchase rate and 2.75% for the overnight deposit rate.

Mr. Lisbona also noted that the government’s construction program would not only encourage construction firms but also those in related industries to borrow funds to build up their capacity and inventories to address the demand.

On the other hand, Philstocks Financial, Inc.’s research head Justino B. Calaycay, Jr. is “generally neutral” on the sector.

“If what they call ‘transitory impact’ of the TRAIN law fades, and the BBB (Build, Build, Build) push becomes real, then it will present us with the proposition to move banks to the buy column,” Mr. Calaycay said, referring to the government’s massive P8-trillion infrastructure program.