Bank stocks continue to rise amid aggressive interest rate hikes
By Abigail Marie P. Yraola, Researcher
Listed banks largely grew last year thanks to the central bank’s massive interest rate hikes that improved the lenders’ margins.
The last three months of 2022 saw the barometer Philippine Stock Exchange index (PSEi) gain 14.4% on a quarter-on-quarter basis, a reversal from the 6.7% decline in the third quarter and last year’s 7.8%.
Likewise, the financials subindex, which included the banks, grew by 12.2% quarter on quarter in the three months through December compared with the 1.7% growth in the prior quarter.
On a yearly basis, the subindex went up by 2.4%.
Majority of the banks’ stock performance rose in the fourth quarter amid the ongoing rate hikes by the Bangko Sentral ng Pilipinas (BSP) due to surging inflation.
Eleven listed banks logged quarter-on-quarter increases while four banks declined in the October-to-December period.
Philippine Business Bank (PBB) led with a 36% gain in its share price from P7.50 in the third quarter. Other lenders which posted quarter-on-quarter share price gains included Bank of the Philippine Islands (BPI, 14%), Philippine Trust Co. (PTC, 13.3%), and Philippine National Bank (PNB, 13.1%).
On the other hand, Bank of Commerce (BNCOM) declined the most with 10.3% to P7.90 from the third quarter. BDO Unibank, Inc. (BDO) fell by 5.2% and Asia United Bank (AUB) with 3.6%.
The Philippine Bank of Communications (PBCom) dropped by 0.8% in the October to December period.
Inzaghi Rafael D. Cabacungan, research analyst at RCBC Securities, Inc., said that the central bank’s rate hikes paved the way for the expansion in the listed bank’s net interest margins (NIMs).
He also added that the further economic reopening supported loan and deposit growth.
Robust lending growth, higher NIMs, strong fees and normalized provisions drove the earnings of the listed banks, said Rachelleen A. Rodriguez, Maybank Investment Banking Group-Philippines’ research analyst.
“Banking stocks rose… and continues to trend up in January to February, given the bullish outlook on NIMs following the 350-bp rate hike in 2022, which the banks have yet to fully pass on to their predominantly floating rate loan book, and the unchanged hawkish tone at the start of 2023,” she added.
Ms. Rodriquez also said that the growth seen in most of these banks were due to strong and sustained earnings which raised buying interest, from both local and foreign investors, pushing valuations upward.
For Globalinks Securities and Stocks, Inc. Head of Sales Trading Toby Allan C. Arce, positive performance can also be attributed to window-dressing activities.
December inflation quickened to 8.1%, the fastest in over 14 years or since November 2008’s print of 9.1%.
To rein in stubbornly high inflation, the BSP has hiked benchmark interest rates by a cumulative 400 bps, including the 50-bp hike in February, to a 16-year high of 6%.
RATE HIKES ON BANK STOCKS
Cristina S. Ulang, research head at First Metro Investment Corp., said that the central bank’s rate hikes will keep bank loan spreads “robust” and create upside for the loan repricing cycle, adding that fees that are flow-related will also grow.
For Luis A. Limlingan, head of sales at Regina Capital Development Corp., the impact would vary depending on the bank.
“First tier banks are likely going to be able to benefit from it in the form of margin expansion. Meanwhile, other banks may have to deal with asset deterioration containment,” he said.
Mr. Limlingan added that inflation “imposes great weight” on the public’s paying capacity. The impact of rate hike adjustments, he said, could have dropped more in the last quarter of 2022 and will likely spill over moving forward.
“The continued rate hikes, albeit smaller, will still result in NIM expansion but at a slower pace. In addition, we don’t expect interest rates to rise by too much as to dampen loan demand or result in substantial deterioration of banks’ asset quality,” RCBC’s Mr. Cabacungan said.
Latest BSP data showed that aggregate net income of universal and commercial banks (U/KBs) reached P287.34 billion as of end-December, up by 38.5% from P207.45 billion in 2021.
Gross total loan portfolio of these large banks rose by 12.9% to P11.80 trillion as of end-December from P10.46 trillion in the year prior.
Meanwhile, gross nonperforming loans (NPL) ratio of U/KBs fell to 2.85% in December from 3.01% in November. This was also an improvement from 3.55% in December 2021.
The big banks’ NIM — a ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income to average earning asset — improved to 3.43% in the final three months in 2022 compared with the 3.38% NIM in the third quarter last year.
This was also higher than the 3.21% in the fourth quarter of 2021.
Provision for credit losses by these banks reached P95.32 billion, inching up by 2.2% from the P93.27 billion in the same period in 2021.
“Rate hikes should be positive for banks as their predominantly floating rate loan book could be repriced,” said Maybank’s Ms. Rodriguez.
“But could also temper credit appetite and trigger some corporates to frontload their funding requirements and/or defer [capital expenditures] capex deployments.”
BANK STOCK PICKS
Analysts’ recommendations on which banks should be bought, held and sold, as well as their outlook, must carefully be considered by market players.
Ms. Ulang said that bank valuation will improve in the coming months, which means, price gains and total returns will benefit investors who have overweighted the top three biggest listed banks, referring to BDO, BPI and Metropolitan Bank & Trust Co. (MBT).
She also said that growth in the banks and local bourse in the fourth quarter was due to foreign investors returning to the market.
“Biggest driver of bank profitability this year will be the continuing durability of household and corporate spending as the economy reopens, face to face classes in full swing and more pent-up demand manifesting,” she added.
For Mr. Cabacungan, investors should consider banks with the widest NIM expansion (i.e., BDO and BPI), with the fastest loan and deposit growth rates alongside NIM expansion (BPI and MBT) and those with more than adequate NPL coverage (BDO, BPI, and MBT).
“We forecast 17% growth in our covered banks’ core net income for 2023, underpinned by further NIM expansion from continued rate hikes and sustained loan growth from full-year economic reopening,” Mr. Cabacungan added.
Globalinks’ Mr. Arce said that the banking sector’s NPL ratio is likely to remain elevated for the rest of the year.
“Investors and analysts should pay particular attention for signs that a bank’s revenue is growing and that this growth is sustainable despite an environment of elevated inflation and rising interest rates,” he said.
He added that they should also assess banks’ ability to grow and produce profits by attracting more investors, make sustainable loans, issue credit in other forms or make investments.
For Ms. Rodriguez, banks earnings trajectory will drive stock performance this year and sees the banking sector’s growth to be sustained this year, and the ongoing rate hikes should be positive for the sector.
