By Carmina Angelica V. Olano
Researcher
4Q February 2019 Forecast
WITH THE DOWNTREND in inflation allowing room for the central bank to retain or cut key interest rates, analysts remain bullish on bank stocks this year as they expect banks’ to net higher earnings and at the same time, lower funding costs.
The barometer Philippine Stock Exchange index (PSEi) gained 2.6% in the fourth quarter, higher than the 1.2% increase posted in the third quarter albeit slower than last year’s 4.7%. This was, however, slower than the 13.7% increase recorded the previous year.
By end of last year, the sub-index dipped by 20.6% versus the 34.6% growth recorded in 2017.
This rebound was reflected in the listed banks’ share prices during the October-December period with eight of the 14 listed banks registering quarter-on-quarter gains: Metropolitan Bank & Trust Co. (ticker symbol: MBT, 20.8%), Philippine Trust Co. (PTC, 16.2%), Bank of the Philippine Islands (BPI, 12.8%), Rizal Commercial Banking Corp. (RCB, 12.6%), BDO Unibank, Inc. (BDO, 9.2%), Philippine Business Bank (PBB, 4.2%), Security Bank Corp. (SECB, 0.6%), and Asia United Bank (AUB, 0.2%).
On the other hand, Philippine Savings Bank saw the biggest drop in share price during the period at 25.8%, followed by China Banking Corp. (CHIB, -6.1%), East West Banking Corp. (EW, -5.9%), Union Bank of the Philippines (UBP, -4.6%), Philippine Bank of Communications (PBC, -1.2%), and Philippine National Bank (PNB, -0.6%).
Despite higher funding costs due to tightening liquidity during the quarter, banks managed to outpace their earnings last year compared to 2017.
Data from the Bangko Sentral ng Pilipinas (BSP) showed the country’s universal and commercial banks booking a cumulative P159.93-billion net income last year, 9.3% higher than the P146.33 billion in 2017.
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 3.17% in the fourth quarter from 3.15% in the third quarter and 3.04% in the same three months to December in 2017.
For the quarter, the BSP raised key policy rates in its November 15 meeting by 25 basis points (bps). Benchmark interest are currently at the 4.25-5.25% range, with its key overnight reverse repurchase at 4.75%, the highest in nearly a decade. To recall, the central bank implemented five consecutive rate hikes from May to November totaling 175 bps amid surging consumer prices.
The last three months of the year also saw headline inflation showing signs of deceleration. From its 6.7% peaks in September and October, the rate of consumer price increases eased to 6% in November and 5.1% in December.
Despite a high interest rate environment, analysts remained optimistic on the banks’ fourth quarter earnings, expecting the lenders’ loan portfolios to have expanded. They also noted the easing inflation during the quarter, which may indicate a break in the central bank’s move to increase key rates in the near future.
“During the fourth quarter, the slowdown in inflation bolstered the stock prices of the biggest players in the banking sector. Expectations on margin expansion due to policy rate hikes in 2018, as well as strong business loan growth, had helped stock prices to continue trending up,” said Timson Securities, Inc. trader Jervin S. De Celis.
For COL Financial Group, Inc.’s senior research analyst John Martin L. Luciano: “[I]n general, we expect the re-pricing of loans to continue during the fourth quarter, partially offset by higher funding cost. This will result to an improvement in NIMs quarter-on-quarter and year-on-year.”
“In addition, banks may have also booked modest trading gains in the fourth quarter in light of the downward shift in yield curve,” he added.
Rachelle C. Cruz, research analyst at AP Securities, Inc., was of the same view, adding that the drop in 10-year government bond yields from the peak of 8.2% in the third quarter and the recovery of the equities market “should lead to recovery in banks’ treasury income.”
“For BDO, MBT, BPI, and RCB, we expect a jump in provisioning related to the [Hanjin Heavy Industries and Construction Philippines, Inc.’s] debt,” AP Securities’ Ms. Cruz said, referring to the Subic-based shipbuilder that filed for corporate rehabilitation and has around P20 billion in debt with the country’s big banks.
For Charlene Ericka P. Reyes, officer-in-charge of trading and research at First Resources Management and Securities Corp., the Philippines’ strong “macroeconomic fundamentals” continue to bring optimism in the banking sector despite concerns on tightening liquidity.
“[The] [i]nflation rate in our country was also expected to ease by fourth quarter of the year, which translates to a potential slowdown in interest rate hikes. Additionally, the strong influx of remittances due to the holiday season also contributed to the overall performance of the local market,” Ms. Reyes said.
Cash remittances brought by overseas Filipino workers reached $2.849 billion that month, up 3.9% from the $2.741 billion inflows recorded in December 2017, BSP data showed. Full-year inflows were up 3.1% to $28.943 billion from 2017’s $28.060 billion — a little past the BSP’s three-percent growth projection.
BULLISH ON BANK STOCKS
Analysts remained bullish on the banking sector, despite expectations of a slower loan growth and higher funding costs amid high interest rates in the fourth quarter.
“We have earlier expected a slowdown in loan growth for the banks as the rise in interest rates may have affected consumer behavior on borrowing, and with the average lending yields rising already by around 100 bps. Our loan growth assumption remains to low-to-mid teens which could affect the net interest income growth of banks,” said First Resources’ Ms. Reyes.
Similarly, Mandarin Securities, Inc. research analyst Zoren Philip A. Musngi said they are “generally bullish on bank stocks” despite a downward revision in loan and deposit growth.
“Even though the economic environment remains uncertain and bank lending are showing signs of slowing down, we are still optimistic banks would weather through and show year-over-year growth as they manage their exposures and risks,” Mr. Musngi said.
“Bank stock valuations are quite attractive relative to other industries and to historical averages. As for forecasts, we have lowered growth assumptions for loan and deposit growth and also calibrated interest rate assumptions (i.e., no hike/cut in 2019 as opposed to previous assumption of 1 to 2 rate hikes in 2019),” he added.
For her part, AP’s Ms. Cruz is still “overweight” on the sector, but downgraded their forecasts based on loan growth and credit cost.
“The 175-bps rate hike made by the BSP should temper loan growth to low-teens this year, while the increased focus on growing the higher-yielding SME and consumer loans may lead to an uptick in NPLs, and consequently credit costs,” she said.
For Timson’s Mr. De Celis: “I remain bullish on the banking sector provided that the inflation slows down further to BSP’s target range. A possible reserve cut and shift to higher-yielding loan segments can also drive continued growth especially for the firms that are well positioned in this business such as Metrobank, BDO, and BPI.”
HOW BANKS FARED
Even as most banks saw their stock prices rise, analysts noted the differences in banks’ financial figures during the quarter.
“The aggressive monetary policy decision delivered by the BSP was seen to put BPI at an advantage due [to] the favorable loan re-pricing, which was reflected in their sustained double-digit growth in net income for the third quarter of the year, and with the increase in its interest income from loans by 24% despite being affected by lower trading gains,” First Resources’ Ms. Reyes said.
She added: “Loan re-pricing also had an impact on the net interest income of BDO, which resulted to an increase of 20.6% year-on-year, at the back of expansion in net interest margin supported by loan growth, which offset the increase in funding cost.”
For Timson’s Mr. De Celis, BDO, MBT and PNB “are in a better spot to yield better numbers in terms of revenue.”
He cited PNB’s lower operating expense and credit costs, which can boost the company’s earnings per share by 5%-6% for 2018, while its sales may reach P35.5 billion compared to 2017’s P27.7 billion.
On the other hand, Mr. De Celis said that BDO and MBT could possibly incur higher credit costs due to higher provisions for their exposure to Hanjin.
“Metrobank’s stronger capital position may allow more room for loan growth while BDO’s growth may be fuelled by its wider margin from business lending which may be offset partially by the slower consumer loans. BDO is estimated to earn P146 billion in revenues versus the P128 billion in 2017 while Metrobank may record P93.7 billion in sales versus the P82.4 billion in 2017,” he said.
OUTLOOK
Moving forward, analysts expect first-quarter earnings to improve further given potential reductions on funding costs due to a possible rate cut by the BSP amid decelerating inflation.
COL Financial’s Mr. Luciano said that the potential cut in reserve requirement ratio of the BSP this year could reduce banks’ funding costs pressures.
“Based on our estimates, NIMs would improve by an average of 5 bps for every 1 percentage point drop in the reserve requirement,” he said.
The analyst also expects earnings growth of these banks to be driven by higher net interest income and fees this year: “While we forecast slower loan growth of low to mid-teens (versus 15.6% in December) for the year… we believe that this is still a healthy pace of growth for banks going forward,” Mr. Luciano said.
“In addition, we expect the NIM expansion will continue in 2019 as asset yields continue to re-price.”
For Timson’s Mr. De Celis: “I think the loan segments of the big players in the banking sector will remain as the driver for growth in the first quarter especially when the BSP cuts the bank reserves. Decelerating inflation may also urge the BSP to delay or cut rates. Lower borrowing costs may spur further demand for consumer and business loans that may drive profits higher for the first quarter.”
For Mandarin’s Mr. Musngi: “We expect [first quarter] 2019 earnings to be somewhat better… as banks may likely book some trading gains due to the recovery in equity market and the peso [to] see some margin benefit as inflation expectations have lowered considerably. However, these gains may be diminished by the slowdown in lending, which was likely driven by the current high interest rate environment.”
AP’s Ms. Cruz had a similar outlook as she expects earnings to grow at the mid-teens in the first three months of 2019.
“Last year was a low-base for banks due to lower interest rates and [the] absence of large trading gains. We expect the 175-bps rate hike made by the BSP to continue feeding through banks’ lending rates this year. Moderating inflation should also temper pressure on deposit rates,” she said.
“Overall, we still expect core lending business to drive earnings growth, while trading income should also recover as the Philippine capital market rebounded starting January due to a spike in dollar inflows.”
For her part, First Resources’ Ms. Reyes said: “We are expecting that the slower NIM growth due to the higher funding cost could impact the banks’ earnings for the first quarter of the year, especially on banks with a lower CASA (current account and savings account) base,” she said.
She added that demand in bank stocks would most likely be boosted by the release of the full-year earnings for 2018, “especially if banks will report higher-than-expected growth despite the softer credit demand assumption.”

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