Bank stocks back on the menu after 3Q selloff

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By Mark T. Amoguis, Researcher

WITH THE LOCAL stock market showing signs of recovery, investors may consider bank stocks as banks gradually reprice their loan portfolios following the successive interest rate hikes from the central bank.

The barometer Philippine Stock Exchange index (PSEi) gained 1.2% in the third quarter, a reversal from the 9.9% decline posted in the second quarter albeit slower than last year’s 4.2%.

On the other hand, the financials sub-index — which included the banks — continue to drop by 8.9% in the July-September versus the 1.2% growth notched in the third quarter last year. This was, however, slower than the 14.9% slump recorded in the previous quarter.


As of end-September, the sub-index slipped by 27.7% compared to the 18.4% growth recorded in the same nine months last year.

This gloomy downtrend was reflected the listed banks’ share prices during the July-September period with only two of the 14 listed banks registering quarter-on-quarter gains: Philippine Trust Co. (ticker symbol: PTC, 4.2%) and Philippine Bank of Communications (PBC, 2.3%).

Union Bank of the Philippines (UBP) saw the biggest drop in share price during the third quarter at 23.4%, followed by Security Bank Corp. (SECB, -23.0%), China Banking Corp. (CHIB, -14.1%), Philippine National Bank (PNB, -10.8%), and East West Banking Corp. (EW, -10.6%).

Rizal Commercial Banking Corp. likewise shed its share price by 9.6% as well as Metropolitan Bank & Trust Co. (MBT, -8.7%), Bank of the Philippine Islands (BPI, -5.9%), BDO Unibank, Inc. (BDO, -4.5%), Philippine Business Bank (PBB, -3.4%), Philippine Savings Bank (PSB, -3.0%), and Asia United Bank (AUB, -0.5%).

While the banks’ stock prices tumbled for the quarter, they managed to eke out earnings during that time.

Universal and commercial banks booked a cumulative P116.07-billion net income as of September. This was 9.2% higher than the P106.26 billion recorded in the same nine months of 2017, data from the BSP showed.

Net interest margin (NIM) — the ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income to average earning assets — improved to 3.15% in the third quarter from 3.11% in the second quarter and 3.06% in the same three months to September last year.

Higher interest rate environment that pushed banks’ funding costs was the main culprit for the quarter’s disappointing performance among bank stocks.

The Bangko Sentral ng Pilipinas (BSP) decided to tighten its policy rates to rein in inflation expectations early this year. The BSP’s Monetary Board hiked its rates by 25 basis points (bps) each in May and June followed by a back-to-back 50-bps increases in August and September. It then fired off a softer 25-bps increase in November. Benchmark rates now range between 4.25% and 5.25% starting Nov. 16.

“Investors dumped banks stocks for the most part in Q3 due to fears that higher market interest rates would be detrimental for banks’ margins, as most expected that funding costs would rise faster than the repricing in loans,” said Zoren Philip A. Musngi, research analyst at Mandarin Securities Corp.

“Most were also disappointed by the quarterly earnings, as banks saw lower trading gains due to the difficult economic and market environment,” he added.

“In general, higher interest rates caused the banks’ funding costs to increase. Likewise, this also caused most banks to book poor trading performance,” said John Martin L. Luciano, senior research analyst at COL Financial Group, Inc.

Rachelle C. Cruz, research analyst at AP Securities, Inc., shared the same view: “In Q3, improvement in lending yields and sustained loan demand are the positive factors, while lower trading gains and fee-based income due to languid performance of the capital markets as well as impact of higher policy rates resulted to decline in income from non-core business.”

Still, analysts remained bullish on the banking sector, believing that a recovery will be seen by next year on the back of gradual loans repricing due to soaring interest rates.

“Our long-term outlook for the banking sector continues to remain positive,” COL’s Mr. Luciano said, but added that the banking sector’s performance in the near term may be weighed down by continued policy rate tightening.

“Higher policy rate and tighter liquidity in the system will cause banks to raise deposit rates to attract funding, increasing the funding costs of most banks. Likewise, the higher interest rates will drag the trading performance of banks. Nevertheless, these risks should be tempered as loans gradually reprice,” he said.

For her part, AP Securities’ Ms. Cruz saw recovery in earnings per share towards next year.

“This is as we expect loan demand to still settle at the low- to mid-teens growth, while lending rates is expected to trend up as banks gradually reprice their loans,” she said.

“The negatives on trading portfolio were already recognized this year — thus, we see more sustainable earnings growth from banks next year as core lending business will be driving the recovery.”

RCBC Securities, Inc. Research Head Raul P. Ruiz was “overweight” on the banking sector.

“Profit growth is expected to accelerate for most banks because NIMs have been rising sequentially quarter-on-quarter. We expect this to continue until next year as the BSP has guided on further rate hikes. Consumer loans will accelerate as some banks resume lending to public school teachers and car purchases pick up after slowdown this year,” he said.

Justino B. Calaycay, Jr., research and engagement head at Philstocks Financial, Inc., was also bullish on bank stocks, especially on the so-called big three and those which are well-positioned to expand in this “elite group.”

“Government’s continued push for its projects and the easing of inflation concerns, and hopefully, more stability in domestic rates, should allow banks to operate in a lending/borrowing conducive environment,” he said.

Emeterio “Jojo” D. Gonzales III, president, managing director, and head of research at Philippine Equity Partners, Inc., was also optimistic: “We think the drag on earnings would be largely confined to 2018.”

Despite being bullish on the sector, analysts noted the different performances among banks during the quarter.

“Negative standout was SECB that posted single-digit loan growth in 3Q of just 8%,” said Arabelle C. Maghirang, deputy research head at Papa Securities Corp.

“SECB was the most challenged by negative factors among our covered banks, with much of the weakness coming from higher funding costs, absence of trading gains, and increase in effective tax rate,” AP Securities’ Ms. Cruz said.

AP Securities’ Ms. Cruz saw some “green shoots” on BDO and BPI as net interest income grew strongly on the back of higher asset yields, with their respective current account and savings account ratios protecting NIMs.

She said that the growth of Ty-led MBT, whose net income attributable to the parent company surged by 55.5% in the third quarter, was due to a “low base” in the same period last year following a big jump in provisions.

“Otherwise, (MBT’s) earnings were just in line with our estimates,” Ms. Cruz said.

Meanwhile, Mandarin Securities’ Mr. Musngi said that smaller banks such as EW, UBP, and SECB were the ones that saw sizable declines in their performance due to weaker-than-expected earnings, affected by their higher exposures in teachers’ salary loans, difficult trading environment, and reliance on high-cost deposits.

He said despite being a big bank, SECB “saw a large drop in their stock due to the significant miss in earnings, which was driven by their outlook for lower net interest margins.”

“This was caused by the bank having a relatively weak deposit franchise, considering they have just recently ventured into the consumer business,” he said.

Papa Securities’ Ms. Maghirang said that positive standouts mainly were BDO, which was boosted by trading gains, and MBT, on the back of less provisioning costs.

For Mr. Ruiz of RCBC Securities, he said that one of the quarter’s best performer was PNB which reported its sharpest profit hike because of a P3-billion gain on the sale of real and other properties acquired.

On the other hand, he noted EW’s third-quarter net income, which fell 13% year on year, reflecting the suspension of salary loans to public school teachers in the first semester of the year, which reduced both its interest income and fee income.

Moving forward, analysts said that fourth-quarter earnings will provide additional boosts to the banks on the back of holiday spending as well as moderating interest rate hikes from the BSP.

“An expected upsurge in spending — including on credit — by both businesses as they beef up inventories for the holiday season, and for consumers as the cheer gets into higher gear should translate to increased activity for banks,” Philstocks’ Mr. Calaycay said, as this could help these institutions sustain the momentum of the first three quarters for “decent-to-impressive” results for the full year that could provide impetus to its share prices.

“We can see consumer lending and commercial lending as the drivers with fair contributions from trading and investments allowing for wider margins both at the top and bottom lines,” he said.

“I think overall investor sentiment and inflation expectations would play a large part in bank stock performance,” Mandarin Securities’ Mr. Musngi said.

“Bank stocks typically lead the market in a rally/rebound and in the scenario that [domestic] inflation shows convincing signs of slowing down. [I]t may prompt the BSP to tone down their rate hikes and pause their tightening,” he said.

“We anticipate banks with stronger/established deposit bases (such as BDO and BPI) to have an edge in this market environment, as they continue to post NIM improvements due to their asset-sensitive balance sheets.”

Mr. Luciano of COL Financial expects net interest income and fees to continue to drive earnings growth for banks toward the end of the year.

“I think 4Q would be more of the same…slowing loan growth, improved deposit growth, NIM expansion may be clearer as banks reprice loans in the wake of rising interest rates,” Philippine Equity Partners’ Mr. Gonzales said.

AP Securities’ Ms. Cruz expects the banking sector to post mid to high teens earnings-per-share growth in the final quarter led by the big three banks, which include BDO, MBT, and BPI.

“With the current interest rate environment, most of the growth is expected to come from the core lending business as banks take advantage of higher yields to increase their spread,” she said.

Papa Securities’ Ms. Maghirang was of the same view: “4Q earnings should be in line with consensus estimates, driven by core lending income and some potential boost from trading gains.”

She said that moderating interest rates could provide for trading gains in the quarter ending in December and further lift valuations.

“Potential cut in the BSP’s reserve requirement (now at 18%) could also raise stock prices,” Ms. Maghirang said.

RCBC Securities’ Mr. Ruiz said: “Investors will start to be more confident about earnings momentum of banks, which will be seen in quarterly net income results,” which will be buoyed by lending business primarily driven by small and medium enterprises and consumers.