Listed banks’ price dip in Q4 as market braces for rate cuts

By Lourdes O. Pilar, Researcher

MAJORITY of the bank stocks dropped quarter-on-quarter in the final three months of the year as investors get ready for possible interest rate cuts in the latter half of 2024.

The Philippine Stock Exchange index (PSEi) gained 2% on a quarter-on-quarter basis in the final three months of 2023, a reversal from the 2.3% decline in the third quarter. Year on year, PSEi dipped by 1.8%.

Meanwhile, the financials subindex, which included the banks, fell by 6.6% quarter on quarter at the end of the October-December period, a turnaround from the 0.8% growth recorded in the third quarter. The subindex, however, rose by 5.7% annually.

Ten banks’ stock performance declined out of 15 banks covered in the fourth quarter last year. Leading the quarter-on-quarter decliners were Security Bank Corp. (SECB, -10.6%), East West Banking Corp. (EW, -9.3%), and BDO Unibank, Inc. (BDO, -8.0%).

Five banks were able to gain with their banks’ stock performance in the fourth quarter: Philippine Trust Co. (PTC, 20%), Asia United Bank, (AUB, 6.4%), China Banking Corp. (CHIB, 1.6%), Philippine Business Bank (PBB, 1.2%), and Philippine National Bank (PNB, 0.3%).

Aggregate net income of universal and commercial banks went up by 16.3% to P334.27 billion as of end-December from P287.34 billion last year, data from the Bangko Sentral ng Pilipinas (BSP) showed.

Gross total loan portfolio of these big lenders rose by 8.8% to P12.85 trillion as of end-December from P11.80 trillion a year ago.

The big banks’ gross nonperforming loans (NPLs) ratio, however, edged up to 2.94% in December from 2.85% in December the previous year.

The big banks’ net interest margin (NIM) — a ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income to average earning asset — grew to 4.52% in the fourth quarter from 3.43% recorded in the same period in 2022.

Despite healthy earnings growth, the banks covered by Maybank Investment saw stock prices weakening in the fourth quarter was a result of some investors pricing in the impact of potential rate cuts in 2024 to the banks’ margins and the slower industry lending growth.

“We, on the other hand, remain positive on the sector, particularly on the big three (BDO, BPI, and MBT), given their scale and pricing power which gives them the advantage on the corporate lending segment, as well as the capacity to fund huge infrastructure projects,” Rachelleen A. Rodriguez, head of research for Maybank Investment Banking Group, said in an e-mail.

“The Philippine banking system remained relatively stable with strong capital and liquidity buffers and improving asset quality.  Most banks kept their credit standards generally unchanged for lending to businesses and consumers in the fourth quarter of 2023,” said Toby Allan C. Arce, head of sales trading at Globalinks Securities and Stocks, Inc., in an e-mail.

Regina Capital Development Corp. Head of Sales Luis A. Limlingan said in an e-mail that key drivers banks growth in the fourth quarter were interest rate movements, economic indicators such as gross domestic product (GDP) growth and unemployment rates, regulatory changes, and market sentiment towards the financial sector.

“Interest rate hikes or cuts by central banks, for instance, can impact net interest margins and profitability. Economic indicators reflect the health of borrowers and overall loan demand. Regulatory changes, especially in terms of capital requirements and compliance costs, can affect operational efficiency and profitability,” added Mr. Limlingan.

Data from the Philippine Statistics Authority (PSA) showed the Philippine economy grew by 5.6% in 2023, falling short of the government’s full-year target of 6-7%. It eased from the 7.6% expansion in 2022.

Preliminary results from the PSA’s Labor Force Survey showed the average unemployment dropped to a record low of 4.3% rate last year, it was lower than 5.4% logged in 2022.

This was the lowest jobless rate in almost two decades since the PSA revised the definition of unemployed in April 2005 to refer to Filipinos aged 15 years and older without a job and are available for work and actively seeking one.

“Continued loan growth and margin expansion drove higher revenues. This was accompanied by lower loan loss provisions for Bank of the Philippine Islands (BPI) and Metropolitan Bank & Trust Co. (MBT). As for Union Bank of the Philippines, despite its strong topline performance, its profitability was dragged down by much higher increases in operational expenses and provisions,” said PNB Research in an e-mail.

The Monetary Board hiked interest rates 450 basis points (bps) from May 2022 to October 2023, bringing the key interest rate to a 16-year high of 6.5% to control inflation.

Latest central bank data showed gross outstanding loans by big banks reached P12.85 trillion at end-December, 8.9% increase from P11.80 trillion in 2022.

BANK STOCK PICKS
In choosing bank stocks, analysts said that investors should look for banks’ loan growth and the consistency of NIM expansion.

“We continue to look to loan growth and net interest margin as the factors driving bank lending income, and thus earnings growth. For the most part, the banks who have been able to keep funding cost low and manage this well, thereby maintaining consistent NIM expansion, are the ones that outperform,” Charmaine Co, research analyst at COL Financial Group, Inc., said in an e-mail.

Mr. Limlingan said that when considering buying bank stocks in the future, investors and traders should weigh several factors.

“Firstly, they should assess the economic environment, including interest rate expectations and GDP growth projections, as these directly impact bank revenues and loan quality. Secondly, regulatory developments, especially those affecting capital adequacy ratios and lending practices, should be monitored closely. Thirdly, competitive positioning within the banking sector, including market share, product offerings, and digital capabilities, is crucial for long-term growth prospects,” he said.

For Ms. Rodriguez, she said that investors should look into the bank’s pricing power, deposit franchise, and lending appetite.

“Scale gives banks pricing power, which we believe is essential to preserve margins. Strong deposit franchise would also help contain the impact of elevated funding costs; we prefer banks with higher current and savings account ratios,” said Ms. Rodriguez.

On the lending side, she recommends going for the banks with the strongest high-yielding consumer loan growth push and the most appetite and scale to take on infrastructure loan demand given the government’s more aggressive infrastructure push this year.

INFLATION
In response to persistent inflationary pressures, the central bank is expected to maintain a hawkish stance on monetary policy in the near term, aimed at curbing inflationary forces. While this strategy may benefit banks through increased interest income, prolonged high interest rates could potentially lead to a rise in loan defaults and NPLs.

“Even if the Monetary Board decides to maintain its current stance, the stringent monetary policy is likely to exert downward pressure on economic growth,” said Mr. Arce.

It is anticipated that the central bank will prolong its pause on rate adjustments until inflation expectations are firmly anchored.

“Looking ahead, the central bank is expected to maintain its cautious approach well into 2024, with the possibility of considering rate cuts only towards the latter part of the year, contingent upon favorable economic conditions and subdued inflationary pressures,” Mr. Arce added.

“This 2024, we expect earnings to expand by 11.1% year on year against 22.5% year on year growth in 2023. The increase in earnings is expected to be driven by higher lending income as loan growth continues and net interest margin expansion tapers off,” said Ms. Co of COL Financial.

“We expect to still see growth in select names due to still healthy expected income growth to be driven by robust consumer lending, improved cost-to-income ratios from the banks’ digital push, and lower overall credit costs.” Ms. Rodriguez of Maybank said.

“For 2024, we forecast earnings growth of around 10% for index banks,” PNB said.