Analysts on banks’ stocks: Aggressive purchase and hold at current levels

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By Carmina Angelica V. Olano

THE GROWTH of banking stocks during the quarter accelerated, an uptrend which analysts attribute to lenders’ impressive corporate earnings. For this year, they also signaled an “overweight” on the sector, amid favorable interest rate environment and sustained strong economic fundamentals.

The Philippine Stock Exchange index (PSEi) breached the 8,500 level for the quarter, which at that time, analysts attributed to window dressing by corporations, as well as sustained inflow of foreign investors favouring the approval of TRAIN (Tax Reform for Acceleration and Inclusion). The local bourse closed the year at an all-time high of P8,558.42, up 386.99 points or 4.7% from the third quarter of 2017.

“The Financial industry outperformed the PSEi by 9% after the sector increased by 13.7%, compared to just 4.7% of the benchmark,” said Dean M. Ebona, investment officer at the Trust and Asset Management Group of China Banking Corp. He attributed this “stellar” performance primarily to the double-digit surge in the stock prices of BDO Unibank, Inc. (BDO) and Metropolitan Bank & Trust Co. (MBT) at 25.5% and 17.2%, respectively.

For John Martin Luciano, research analyst at the COL Financial Group, Inc. the top-tiered banks were the big movers of the Financial sub-index. “The three largest banks outperformed the [PSE] during the fourth quarter,” he said.

In the third quarter last year, the Financials sub-index — which includes banks — grew only by 1.2% in the third quarter of last year. For the full-year 2017, the index rose 34.6%, which also outperformed the PSEi’s 24.7% jump from P6,861.31 at the beginning of the year.

Top-tiered BDO and MBT are joined by peer Bank of the Philippines Islands (BPI) with a price hike of 8.7%, as well as mid-tiered banks Security Bank Corp. (SECB) and China Banking Corp. (CHIB), with increases at 3.4% and 1.7%, respectively.

Of the 13 listed banks, four have posted price retreats, dragging the sector’s average gain at 3.9%. The Philippine Business Bank (PBB) dropped the most at 8%. Both Philippine Bank of Communications (PBC) and Philippine National Bank (PNB) followed with a fallout of 4.1%, while East West Banking Corp. (EW) fell 1.5%. Only Union Bank of the Philippines (UBP) showed no price movement during the quarter.

For Joseph James F. Lago, assistant vice-president and head of research at the PCCI Securities Brokers Corp., some banks’ prices fell due to losses in their other income.

“Several banks reported declines in trading gains… [while] some banks’ net interest margins (NIMs) are challenged given the competitive landscape and amount of liquidity, [even as the market yields] continued to rise during the period,” he said.

For Carlo B. Tiu, equity analyst at the First Resources Management and Securities Corp., the financial sector “performed better” compared to the PSEi during the quarter, “driven by robust remittances stream that went towards the banks due to the Holiday season.”

However, for smaller banks, price gains from remittances news were canceled out by speculations. “Due to the drastic decline in the Philippine peso that went to P51.98 in October [against the dollar]. The small banks took much of the hit from the negative speculations… [while] the large banks flourished during the quarter, as investors started transferring assets towards companies that are considered ‘safe.’” Mr. Tiu said.

LENDING GROWTH BOOSTS EARNINGS
Analysts have attributed banks’ higher corporate earnings to improvements in both core lending and investment businesses, which drove net interest income and net interest margins higher.

“In general, net interest income drove the growth in earnings during the period,” Mr. Luciano said.

Mr. Tiu agreed saying, “The core lending segments and deposit-taking and fee-based businesses of the banks drove most of their earnings higher.”

For Rachelle C. Cruz, research analyst at the AP Securities, Inc., banks benefitted from higher debt yields.

“Banks performed quite well in the fourth quarter of 2017, thanks to rising interest rates which boosted net interest margins (NIMs).” On the demand side, she also mentioned that credit lending has “remained strong,” given the “banks’ loan portfolio growing at mid-to-high teens level.”

As for Mr. Lago, “Those with stable NIMs [has enabled] expansion of their consumer loan portfolios.” This segment has yielded better compared to the “very competitive” corporate lending, he said.

He also mentioned that banks that have taken “longer-term infrastructure or power sector loans” have showed improved NIMs and [business] yields.

Mr. Lago has identified individual stocks whose price drop did not directly correlate with its earnings. Contrary to EW’s stock price, which fell during the quarter, its profits jumped by 60% to P9 million from a year ago.

Likewise, PBC has nearly doubled its profit this quarter from a year ago, he said. PBC’s earnings was due to “two factors. The new majority owners’ resolve to refresh the image of the bank over the past two years, and the low profit base of its P9-million gain in 2016.”

A higher or stable NIM — the difference between the interest income earned and the interest paid — indicates that a lender realizes more profits in using its assets to generate returns that to offset interest expenses.

For Maria Eleanor C. Reyes, head of research at the Unicapital Securities, Inc., BPI, MBT and SECB earnings has stood out among listed banks. “Corporate loans drove growth in [BPI’s] total loans. Its growth in net interest income has compensated for the drop in non-interest income, so that total revenue reported a decent 6.7% hike year on year,” she said.

As for MBT, “corporate banking brought in the most to the bottom line… [in which] NIM remained high at 3.75%, the highest among its peers,” Ms. Reyes said.

Likewise, Cristina S. Ulang, assistant vice-president and head of research at First Metro Investment, Inc. (FMIC) recognized, MBT has the best value among the top three banks, given its 1.3 times price-to-book and below peer average price-to-earnings ratio at 13 times. “MBT has achieved a 10% core earnings growth for 2017, beating estimates,” she said.

Both Ms. Reyes and Ms. Cruz had mentioned SECB’s stand out earnings performance. “54% or P1.3 billion worth of trading gain in 2017 was generated during the quarter, [coupled] with consumer loans, comprising 16% of total loans, grew by 49%,” Ms. Reyes said.

Ms. Cruz, on her part said, SECB has, “outperformed street estimates. This is due to the one-time strong core business, gain from the sale of trading securities, and lower operating expenses.”

OVERWEIGHT ON LENDERS’ STOCKS
Analysts have recommended an “overweight,” or stocks that poses better value compared with other stocks.

“Most equity analysts are recommending an overweight in the banking sector as it mirrors the country’s gross domestic product (GDP),” said Ms. Ulang. She expects banking stocks to track GDP, which FMIC forecasts a 7.5% full-year growth, “driven by investments, manufacturing, and government spending,” she said.

Some analysts underpinned banks advantage on loan portfolio expansion and policy rate hikes.

“Strong GDP growth is seen to support demand for credit,” and “we believe that the best beneficiaries of a rising interest rate environment are banks,” said Ms. Cruz. Therefore, she looks out for banks that are “expanding to the consumer and small and medium enterprise space, as these segments remain underpenetrated.”

Similarly, she sees potential long-term growth on banking stocks given healthy asset quality supports further loan expansion, and rising interest rates will support higher NIMs. “Capital-raising activities through rights offer (i.e. BPI, MBT, RCB) should be viewed as positive as this will allow banks to have adequate capital to sustain long-term growth,” she mentioned.

For Mr. Luciano, he expects corporate earnings will continue to rise. “We expect the banking sector’s core businesses (net interest income + fees) to drive the earnings growth in 2018. Growth in net interest income is expected to come from strong loan growth on the passage of the tax reform program,” he said.

“Meanwhile, we expect gradual improvement in net interest margins amidst rising interest rates and lower reserve requirement ratios. Fee-based revenues are also expected to post steady results with the increase in the overall economic and banking activity,” he added.

For his part, Luis Gerardo A. Limlingan, head of sales at the Regina Capital Development Corp., said an “imminent” rate hike could possibly happen during the first half of 2018, “with inflation moving up, and the BSP adjusting their full-year forecast to 4.3%.” Likewise, too much liquidity in the system “combined with positive surprise on inflation is starting to create a base for higher rates.”

“We like banks in general due to double digit loan growth… as a result of increasing interest rates,” and reduced dependence from trading income, said Raul P. Ruiz, first vice-president and head of research at RCBC Securities, Inc.

Mr. Lago also count on banks’ efforts to expand loan portfolio, especially when “the increase in disposable income for the domestic consumers after implementation of TRAIN.”

Mr. Ebona recommends a buy on BDO, BPI, and MBT at “below their fair values as they have an inherent competitive advantage to attract low-cost funding and lend to big companies with high credit quality. Furthermore, they have above average return (ROE) and more efficient in operations.”

In contrast, Mr. Tiu said, “it would be best of investors would hold their financials stock and buy more during pullbacks, for the first quarter.”

“Banking stocks would remain stable. Inflation is still controllable, same as the declining peso. However, should the tides change and result to a further incline in inflation due to TRAIN, we may see a slowdown in growth of banking stocks though the quarter,” he said.