Analysts optimistic on banks’ resiliency

THE COUNTRY’S listed banks remained resilient as the local economy flourished amid a high inflationary and high-interest rate environment in the first quarter of the year.

The benchmark Philippine Stock Exchange index (PSEi) closed the first three months of the year at 6,499.68 points declining by 1% on a quarter-on-quarter basis, a reversal from the 14.4% quarter-on-quarter growth in the previous quarter.

Likewise, the index dropped by 9.8% year on year.

On the other hand, the financial subindex, which includes the banks, closed the quarter with 1,810.59 points, up by 10.1% from 1,645.03 points from the previous quarter. Compared with the first quarter of 2022, the subindex gained by 6.8%.

Majority of the banks’ stock performance rose in the first quarter.

Out of 16 listed banks, 11 have logged increases in their share prices. BDO Unibank, Inc. (BDO) surged the most with a 21.6% gain quarter on quarter. It was followed by China Banking Corp. (CBC, 16.8%), Philippine Bank of Communications (PBC, 16.1%), Metropolitan Banking and Trust Co. (MBT, 8.3%), and Security Bank Corp. (SBC, 5.7%).

Meanwhile, shares in Philippine Business Bank (PBB) fell the most by 5.7% on a quarterly basis. It was followed by Philippine Trust Co. (PTC, 3.4%), Philippine National Bank (PNB, 1.1%), and Bank of Commerce (BNCOM, 0.4%).

Rachelleen A. Rodriguez, research analyst at Maybank Investment Banking Group said that as of May 10, only Union Bank of the Philippines (UnionBank) fell below estimates in the first quarter.

“Although it posted a solid 57.4% [year-on-year] growth in revenues, its higher-than-expected provisions and operating expenses (arising from incremental integration costs related to its acquisition of Citi’s retail assets) tempered earnings to P3.4 billion or 19% of our [full-year 2023] forecasts,” she said in an e-mail.

BDO Securities Corp. Head of Research Abigail Kathryn L. Chiw said that BDO, BPI, and Metrobank were among those who stood out in the first quarter amid a solid earnings report brought by a strong lending and fee income performance.

“Sustained economic reopening, improving business activity, as well as increasing employment opportunities continue to support loan demand in our view. The lag effects of rate hikes by the Bangko Sentral ng Pilipinas (BSP), as well as the lifting of credit card rate caps are also seen contributing to higher incomes for banks,” she said in an e-mail.

The country welcomed the first quarter of the year with a better-than-expected economic output but at a slower pace. The statistics agency’s preliminary data showed the country’s gross domestic product grew by 6.4% annually in the first three months, slower than the revised 7.1% growth in the last quarter of 2022.

For Jonathan L. Latuja and Laisa R. Salinas, equity research department head and macro & fundamental research analyst at PNB Research, the delayed effect of the interest rates implemented by the BSP contributed to a higher net interest margin (NIM) — a ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income to average earning asset — and the sustained loan expansion of BDO and BPI.

“They showed net interest margin expansion and loan growth coupled while effectively managing their operating expenses as well as lower loan loss provisions. All these resulted to the favorable performance of these banks,” they said in an e-mail.

Gross total loan portfolio of the country’s big banks rose by nearly a 10^th to P11.59 trillion as of end-March from P10.57 trillion in the previous year, latest data from the BSP showed.

However, gross nonperforming loans (NPL) ratio of universal and commercial banks (U/KBs) slightly inched up to 3.03% in end-March compared with 3.01% in end-February but lower than the 3.73% in end-March 2022.

The big banks’ NIM improved to 3.59% in the first quarter of the year compared with the 3.43% seen in the final three months of 2022. This was also higher than the 3.23% seen in the same quarter last year.

Provision for credit losses by these large banks amounted to P16.28 billion, less than P18.79 billion in the same period last year, the BSP data showed.

The central bank paused hiking rates after nine consecutive meetings of rate hikes. BSP has raised a total of 425 basis points since May 2022. The key rate now stands at 6.25%.

Meanwhile, the staff of the Federal Open Market Committee, during the March 2023 US Federal Reserve meeting, has predicted that there is a possibility of a mild recession “starting later this year.” The collapse of US midsized banks Signature Bank and Silicon Valley Bank was considered in their assessment.

Last May, the Fed increased its interest rate by 25 basis points, making it the 10^th consecutive meeting of rate hikes. The Fed has raised its interest rate by 500 basis points since March 2022 to a range of 5-5.25%.

Analysts are not threatened by the US’ recession fears affecting banks as the local banking industry has a diversified deposit bases and exceeded the requirement set by the central bank.

Ms. Rodriguez of Maybank said the Philippine banking industry can weather a possible recession in the US due to highly localized businesses of banks and expect the banks’ high NPL buffers and strong capitalization can absorb the drag.

“A recession in the US could also trigger Fed rate cuts that would widen the gap [versus] our policy rates and strengthen the [peso], which we believe could arrest domestic inflation, stimulate domestic consumption and accelerate domestic expansions, which we believe is a more vital component of the Philippine economy and banks’ exposures,” she said.

To help wade through the banks, PNB Research’s Mr. Latuja and Ms. Salinas said value banks based on their price-to-book valuation and those trading at a discount.

“Moreover, we prefer those that have relatively higher NIM and return on equity while having the ability to grow their loan portfolio. Lastly, we focus our attention on banks that have sufficient capitalization,” they said.

‘RESILIENT’ BANKING SECTOR
Analysts are hopeful that the banking industry can sustain its performance for the rest of the year.

Mr. Latuja and Ms. Salinas said that positive performance of bank stocks this year will be driven by continued loan growth, NIM expansions, improvements in pre-provision operating profit (PPOP) margin, and return on equity (RoE).

“If [banks] continue to report favorable financial and operating results, we think that those trading at a relative discount to their peers or historical valuation have more room for upside if the market rerates their valuation,” they said.

Maybank’s Ms. Rodriguez affirmed the sector to remain “resilient” given the banks’ healthy liquidity indicators.

“We have noticed an uptrend in the cost of funding, alongside the rise in asset yields, as more Filipinos park their funds in time deposits, but this ultimately addresses banks’ liquidity concerns, and, as such, is still positive for banks,” she added.

BDO’s Ms. Chiw suggested investors look at banks that benefit most in a rising interest rate environment, such as bigger banks with strong deposit franchises because this will support loan growth and sustain healthy fundings for said banks.

Additionally, analysts recommended investors to position their bets at banks with strong pricing power, extensive branch networks and digital platforms will better serve the broader market.

How the BSP will react to global market developments, particularly with the Fed’s monetary policy action, will affect the banks’ performance in terms of how they can cascade higher interest rates to their clients without “jeopardizing [their] paying capacity,” Regina Capital Development Corp. Head of Sales Luis A. Limlingan said in an e-mail. — TCSM