By Michelle Anne P. Soliman

THE OPINION on whether bank stocks are attractive to buy and hold remain mixed among analysts as uncertainties surrounding the economic recovery from a pandemic-induced slump remain. However, those drawing up their shopping lists on stocks may want to look at listed banks based on analysts’ recommendations.

The Philippine Stock Exchange’s (PSE) financials sub-index — which included the banks — ended the second quarter at 1,233.96. On a quarter-on-quarter basis, this marked a 0.8% gain in the sub-index as compared to declines of 34.3% and 2.4% seen in end-March and end-June 2019, respectively.

Still, it lagged behind the PSE index’s (PSEi) 16.7% gain in the end-June, which in turn, marked a rebound from the 31.9% contraction logged in the first quarter.

In the three months to June, quarter-on-quarter gains were observed in the share prices of the following listed banks: Bank of the Philippine Islands (BPI, 16.5%), Philippine Savings Bank (PSB, 7.8%), Asia United Bank (AUB, 5.6%), China Banking Corp. (CHIB, 4.2%), Philippine Trust Co. (PTC, 3.7%), UnionBank of the Philippines (UBP, 2.6%), Philippine Bank of Communications (PBC, 2.1%), and Philippine Business Bank (PBB, 1.1%).

On the other hand, other listed banks continued to post declines in their share prices, albeit at a slower pace compared to the previous quarter. These are Metropolitan Bank & Trust Co. (MBT, -7.5%), BDO Unibank, Inc. (BDO, -5.3%), East West Banking Corp. (EW, -4.7%), Security Bank Corp. (SECB, -3.7%), and Rizal Commercial Banking Corp. (RCB, -0.8%).

The Philippine National Bank’s (PNB) share price ended unchanged at the close of the second quarter compared to that in the first quarter.

Analysts attributed the mixed performance of listed banks’ share prices to continued lockdowns that depressed the sector’s lending activities.

In an e-mail, PNB Research Department Senior Equity Research Analyst Wendy B. Estacio and Equity Research Analyst Marco R. Mauleon said investors “remained lukewarm” on the banking sector as it is among the most affected by the implementation of strict lockdowns during the quarter.

“In particular, the ECQ (enhanced community quarantine) was anticipated to result in a deterioration in the sector’s asset quality. This prompted banks to elevate provisioning to cover for potential nonperforming loans (NPLs), which consequently weighed on their bottom line figures,” they said.

AP Securities, Inc. Senior Research Analyst Rachelle C. Cruz said provisioning for potential build-up of NPLs and trading gains due to significant drop in bond yields following the Bangko Sentral ng Pilipinas’ (BSP) sharp rate cuts marked the general “overarching theme” of the second quarter.

To recall, a strict lockdown was imposed on much of the country starting in mid-March up until May before quarantine rules were slowly eased starting June. As of this writing, Metro Manila is placed under a general community quarantine until Sept. 30, subject to changes.

The NPL ratio among the country’s universal and commercial banks (U/KBs) stood at 2.15% as of end-June, higher than the 2.03% in May and the 1.56% logged a year ago, BSP data showed.

RCBC Securities, Inc. Equity Analyst Daphne T. Yang noted NPLs in the second quarter were “masked” by the Bayanihan Act, which provided a moratorium for borrowers.

“Once this moratorium expires, banks will start to see the real magnitude of defaults,” she said.

Ms. Yang also noted that banks were less aggressive in lending during the second quarter, and focused more on maintaining asset quality.

“On a brighter note, banks moved to containing costs. We saw improvement in cost-to-income ratios with major contributions from the deferment of branch expansion and the focus on digital adoption,” Ms. Yang said.

A BSP study earlier showed the majority of banks tightened overall lending standards in the second quarter due to “less favorable economic outlook” and to banks’ “reduced tolerance for risk” at a time when most parts of the country were under strict lockdown. This is the first time that majority of the respondents reported tighter credit standards following 44 straight quarters of “broadly unchanged credit standards.”

Meanwhile, the provision for credit losses on loans and other financial assets among U/KBs grew six times to P99.14 billion in the second quarter from just P16.51 billion in the second quarter of 2019.

This substantial increase in provisions noticeably dragged net income among U/KBs in the second quarter. For the period, the country’s biggest banks booked a P78.67-billion net income, 21.8% lower than the P100.62 billion posted in the same three months last year.

On the other hand, 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 3.68% in the second quarter from 3.58% in the first quarter and 3.38% in the second quarter of 2019.

I.B. Gimenez Securities, Inc. Research Head Joylin F. Telagen is “neutral” on banks and the financials, despite their price-to-book ratios being cheap as their returns on investment versus PSE’s other sub-indices during economic crises are “below the average.”

“On that note, I think it’s better to focus on resilient stocks and to look at global investment asset that could offer a better return,” Ms. Telagen said.

Nevertheless, she pointed to SECB as the clear standout among listed banks during the quarter as it managed to post a year-on-year net income growth of around eight percent to P2.77 billion in the second quarter, despite increasing its provision for credit losses by 15 times to P5.3 billion.

For China Bank Securities Corp. Research Associate Zoren Philip A. Musngi, BDO was notable for its “high level” of loan loss provisions amounting to P22.1 billion, bringing its bottom line to a net loss of P4.5 billion from last year’s net profit of P10.4 billion.

“As of [the first half of 2020], BDO had a net income decline of 78.89%, the highest decline among banks and greater than the average decline of 8.4% for the group (BDO, BPI, MBT, SECB, EW, UBP, CHIB, PNB, and RCB),” Mr. Musngi said.

On the other hand, Mr. Musngi cited EW as having the best performance among the group with a 65% and 55.7% in the first half and the second quarter of 2020, respectively.

“EW had one of the lowest increase in provisions (only at 3.29 times from prior year), highest increase in NIM (+142 basis points), and highest improvement in cost-to-income ratio (-16.1%). They reported the highest return on equity for the group at 17.40%, while having comparable NPL ratio at 1.80% (versus 2.10% on average),” Mr. Musngi added.

RCBC Securities’ Ms. Yang likewise pointed to EW as a standout, citing its higher net interest income and trading gains during the quarter.

“While other banks reported a softer quarter-on-quarter NIMs, EW was able to sustain margin expansion. EW benefitted from its repricing gaps as 77% of total loan portfolio consists of consumer loans with longer interest-rate fixing,” Ms. Yang said.

AB Capital Securities, Inc. Head of Research Lexter L. Azurin pointed to BPI and EW as the only banks they covered that “reported in-line/ahead with expectations”, while the rest fell behind their fiscal year targets.

Piper Chaucer E. Tan, client engagement officer and research associate at Philstocks Financial, Inc., continues to expect an increase in banks’ provisioning for bad loans.

“As the government is planning little by little to ease quarantine restrictions,… the demand for loans and the other business segments for banks will start to recover, but if the lockdown continues and strict measures are still in place, [the third and fourth quarter] will be worse reversing our previous expectation that [the second half of 2020] will recover earnings for banks on the assumption that economic activity will gradually pick up…” Mr. Tan said.

To manage expectations, Mr. Tan said they do not expect earnings this year to be as good as 2019 to reach pre-pandemic levels as the pace of economic recovery remains uncertain.

For Unicapital Securities, Inc. Research Head Justin Lawrence J. Tembrevilla: “We believe that core lending and deposit-taking activities will remain this year, contributing higher net interest income on the back of lower funding costs. Fees and transaction-related charges could pick up by second half of 2020, should there be no tighter lockdown implemented…” he said.

Mr. Tembrevilla added there could be opportunities for trading gains as interest rates remain low.

AP Securities’ Ms. Cruz expects “income statement recession” for banks this year as most of them have been boosting provisioning in anticipation of the increase of NPLs in the next quarters.

“Moreover, we also see lower fee-income for banks especially those with significant number of branches as more customers shift to online/digital banking for their transactions,” she said.

For RCBC Securities’ Ms. Yang: “In general, we expect sustained growth in banks’ net interest income on sustained NIMs, although [with] tempered loan growth as banks would be less aggressive in lending.”

“However, bottom line would be hurt by higher provisions,” she added.

For PNB Research’s Ms. Estacio and Mr. Mauleon, the ongoing crisis may lead to deterioration in asset quality, possibly eroding the banking sector’s bottom lines.