Outlook positive for bank stocks amid bets of policy easing

By Edwin C. Aruta, Jr. and
Carmina Angelica V. Olano, Researchers

ANALYSTS are generally bullish on bank stocks this year amid expectations of the central bank to ease monetary policy further in order to support economic growth.

The barometer Philippine Stock Exchange index (PSEi) gained 0.5% in the fourth quarter of last year, a reversal from the 2.8% decline in the third quarter and slower than the 2.6% in the fourth quarter of 2018.

However, the period saw nine of the 14 listed banks posted quarter-on-quarter losses on their share prices. The Philippine National Bank (ticker symbol: PNB) saw the biggest drop at 20.9%, followed by Philippine Savings Bank (PSB, -15%), Rizal Commercial Banking Corp. (RCB, -13.2%), Bank of the Philippine Islands (BPI, -5.5%), Asia United Bank (AUB, -5.2%), UnionBank of the Philippines (UBP, -2.4%), Philippine Business Bank (PBB, -2.3%), Philippine Bank of Communications (PBC, -1.4%), and Security Bank Corp. (SECB, -1%).

On the other hand, BDO Unibank, Inc. (BDO) saw its share price rally the most with 10.5%. Other gainers during the period include Metropolitan Bank & Trust Co. (MBT, 9.5%), East West Banking Corp. (EW, 1%), Philippine Trust Co. (PTC, 0.8%), and China Banking Corp. (CHIB, 0.2%).

Despite this, analysts said bank stocks are among the best bets coming into this year.

In an e-mail, PNB Securities, Inc. Senior Equity Research Analyst Wendy B. Estacio and Junior Equity Research Analyst Marco R. Mauleon noted the financials subindex — which included the banks — outperformed the PSEi for the most part of November following the release of third-quarter gross domestic product (GDP) results.

“Further reduction of the universal and commercial banks’ (U/KBs) reserve requirement ratio (RRR) to 14% [effective December 2019] also contributed to positive investor sentiment. We believe investors have digested upbeat results from banks under the Financials Index in the first nine months of 2019 with an average parent net income growth of 28.3% year on year,” they said.

Likewise, Unicapital Securities, Inc. Research Head Justin Lawrence J. Tembrevilla said the Bangko Sentral ng Pilipinas’ (BSP) move to reduce the RRR for local bonds issued by banks and quasi-banks to 3% from 6% previously made bond issuances “more conducive for banks” to beef up their funding base, compared to normal deposits that have a reserve requirement of 14%.

The fourth quarter saw rates for overnight reverse repurchase, as well as overnight deposit and lending unchanged at four percent, 3.5%, and 4.5%, respectively. On the other hand, it recorded a 200-basis point (bp) reduction in cumulative RRRs that took effect in November and December.

The BSP has also reduced the RRR for bonds issued by banks and quasi-banks by 300 bps to three percent from six percent previously. The central bank said this move, which took effect last November, complemented its streamlining of rules and requirements for banks’ and quasi-banks’ issuance of debt instruments,

Meanwhile, the country’s U/KBs booked a cumulative P211.57-billion net income last quarter, 32.3% higher than the P159.93 billion posted in the fourth quarter of 2018, BSP data showed.

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 3.44% in the fourth quarter from 3.43% in the third quarter and 3.17% posted a year ago.

“We are reiterating our recommendation to overweight selected banking stocks as valuations continue to be attractive and the low interest rate environment should support the improvement in net interest margins with the cheaper funding costs,” said First Resources Management and Securities Corp. Officer-in-Charge of Trading and Research Charlene Ericka P. Reyes.

Ms. Reyes said that BDO stood out among listed banks: “BDO remained resilient for this quarter [with its stock price] gaining by 10.5% despite the weakness in the overall market performance supported by the bank’s net interest margin expansion,” she said.

Latest financials show BDO’s net earnings jump by 49.6% to P32.1 billion in the nine months to September from P21.5 billion reported in the same period in 2018.

The lender’s NIM improved to 4.12% in the first nine months of 2019, from the 3.58% during the same period of 2018. At end-September, its net interest income reached P88.46 billion, where P31.54 billion was earned during the third quarter, up 23.53% from P25.53 billion in the same period last year.

Unicapital’s Mr. Tembrevilla gave “buy” recommendations for MBT, BPI, and EW.

“Valuations remain attractive [for MBT], trading at the lowest price-to-book ratio among the big three (along with BDO and BPI). The slower growth in total deposits, however, could dampen its push for higher CASA (current account and savings account) ratio, as MBT currently trails behind BDO and BPI,” Mr. Tembrevilla said.

Mr. Tembrevilla said EW will look to sustain its “consumer-driven model,” while BPI is set to benefit from its deal with Philam Asset Management, Inc. where the former’s subsidiary BPI Investment Management, Inc. assumed management of the latter’s funds.

On the other hand, Mr. Tembrevilla is neutral on BDO and SECB stocks. “BDO’s cost-to-income ratio continues to exceed U/KB average, mainly brought by the upkeep costs of its extensive branch network. As such, BDO might focus on expanding BDO Network Bank given the cheaper license fees for thrift and rural banks,” he said.

While SECB’s “build-up of low-cost CASA should bring funding costs down, [as well as its] increased penetration in the consumer segment (mortgage, credit cards, personal) translate to better NIMs,” he added.

Mandarin Securities Corp. Research Analyst Zoren Philip A. Musngi said BDO was the most notable among the listed banks last quarter as its stock price “remained relatively stable” throughout the quarter despite the sell-off in Philippine equities.

Nevertheless, he maintains his positive outlook for both large-cap and mid-to-small cap bank stocks.

“Even though loan growth has been tempered for the most of 2019 and various risks emerged, bank profits are expected to benefit from the rate & RRR cuts,” he said.

OUTLOOK
Mr. Musngi said the release of fourth-quarter and full-year earnings will drive the price movements of listed banks in the first quarter.

“Investors will also look into net income guidance from bank management to see if recent events (coronavirus, Taal eruption, regulatory crackdown on onerous deals) will have any adverse impact on profitability,” he said.

Mr. Musngi expects profits of these lenders to be driven by gains on loan growth and margins from the BSP rate cuts, but would be slightly offset by lower trading gains due to uncertainties in the global economy.

PNB’s Securities’ Ms. Estacio and Mr. Mauleon were likewise optimistic: “We expect banks to sustain positive earnings trajectory driven primarily by net interest income growth, as we see margins expanding as a result of lower funding costs,” they said.

“Trading gains, however, will be relatively softer in 2020, in our view, as benchmark yields have already corrected so far this year. Nonetheless, GDP growth acceleration should translate to higher loan volumes, which clearly benefits banks in general.”

Philstocks Financial, Inc. Client Engagement Officer and Research Associate Piper Chaucer E. Tan cited “regulatory risks” this year arising from the government’s move to revoke the extension of its agreement with the country’s largest water concessionaires Manila Water Co., Inc. and Maynilad Water Services, Inc. as among factors that would adversely affect listed banks, especially those dealing with companies affected by the said risk.

For Regina Capital Development Corp. Equity Analyst Rens V. Cruz II: “Expect the first three months of 2020 to be a period of re-positioning into cheaper bank stocks, since prices pulled back significantly since December 2019. Participants will be monitoring for these firms to establish a clear bottom support before re-entering, influenced by the mid-term prospects of continued healthy earnings & regular dividend pay-outs,” he said.

“Banks are still the top sector to look out for in 2020, and most are now undervalued,” he added.

For China Bank Securities Corp. Senior Research Associate Rastine Mackie D. Mercado: “We are generally bullish on the sector’s earnings as we begin to realize the trickle-down effects of the BSP’s round of RRR cuts… Moreover, the expected pick-up in government and private spending…may help contribute to an increase in banks’ loan books, buoying net interest income.”