Economic rebound, asset quality to drive bank stocks — analysts

ANALYSTS expect bank stocks to perform better this year as market players look for catalysts that will aid on economic recovery, but noted banks’ provisions for credit losses to continue weighing down on their outlook.

The barometer Philippine Stock Exchange index (PSEi) jumped 21.8% in the fourth quarter of 2020, a reversal from the 5.5% decline in the previous quarter and faster than the 0.5% pace logged in the same period in 2019.

Likewise, the financials subindex, which included the banks, surged by 26.8%, a big rebound from the 7.5% drop in the third quarter.

The fourth quarter period saw all of the 14 listed banks logged quarter-on-quarter increments on their share prices with 12 posting double-digit increases. Among the banks, Security Bank Corp. (ticker symbol: SECB) marked the biggest climb at 45.4%, followed by Philippine Business Bank (PBB, 35.0%), UnionBank of the Philippines, Inc. (UBP, 32.7%), Metropolitan Bank & Trust Co. (MBT, 28.4%), Philippine Bank of Communications (PBC, 26.0%), East West Banking Corp. (EW, 25.4%), Philippine National Bank (PNB, 25.4%), Bank of the Philippine Islands (BPI, 24.1%), BDO Unibank, Inc. (BDO, 23.8%), China Banking Corp. (CHIB, 14.7%), Rizal Commercial Banking Corp. (RCB, 14.4%), Philippine Trust Co. (PTC, 12.1%). Philippine Savings Bank (PSB, 5.2%), and Asia United Bank (AUB, 0.9%).

“In a broader sense, the pandemic is still the greatest influence over the banks’ 2020 profitability. Demand for loans is likely still muted in the fourth quarter for both the retail and corporate client bases,” Regina Capital Development Corp. Head of Sales Luis A. Limlingan said.

For Philippine National Bank (PNB) Senior Equity Research Analyst Wendy B. Estacio and Equity Research Analyst Marco R. Mauleon, the share price increases among listed banks were driven by the overall bullish investment sentiment during the October to December period.

“There were more bullish investors in the [fourth quarter 2020] as news on the vaccine started coming out as interest rates in the Philippines continued to go down,” they said.

The fourth quarter saw the Bangko Sentral ng Pilipinas (BSP) cut rates unexpectedly by 25 basis points (bps) in their November policy meeting and then maintaining these rates in its final meeting in December. In total, the BSP slashed benchmark interest rates by 200 bps last year, bringing down the overnight reverse repurchase, lending, and deposit facilities to record lows of 2%, 2.5%, and 1.5% respectively. These settings were likewise maintained in its first policy meeting this year.

Unicapital Securities, Inc. Head of Research Justin Lawrence J. Tembrevilla said the low interest rate environment persists to be beneficial for banks to book higher net interest income on the back net interest margin (NIM) expansion, as funding costs remain cheap.

In addition, Mr. Tembrevilla noted that provisions for loan losses continued as the “main focal point” for banks in the fourth quarter.

BSP data on universal and commercial banks (U/KBs) showed NIM — the ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income to average earning assets — improved to 3.58% as of December 2020 versus 3.44% in December 2019.

Meanwhile, provision for credit losses on loans and other financial assets among universal and commercial banks (U/KBs) reached P192.71 billion in the fourth quarter, 4.3 times more than the P45.13 billion recorded in the same three months in 2019.

Unsurprisingly, this increase in provisions dragged net income among U/KBs in the fourth quarter. For the period, the country’s biggest banks booked a P142.56 billion in net income, 32.6% lower than the P211.57 billion posted in the same period in 2019.

Meanwhile, the nonperforming loan (NPL) ratio among U/KBs stood at 3.11% at end-December 2020, lower than 3.26% in November but still higher than the 1.57% in end-December 2019.

The banks’ asset quality remains the “main theme for 2021” along with the potential recovery of loan demand following the contraction seen last year, COL Financial Group, Inc. Senior Research Analyst John Martin L. Luciano said.

“The improvement in the visibility of asset quality generally drove the banks’ share prices higher. Recall that banks underperformed last year (before third quarter results) on the back of the uncertainty caused by the loan moratorium under Bayanihan I (Republic Act No. 11469 or the Bayanihan to Recover as One Act),” Mr. Luciano said.

The Bayanihan I gave a one-month debt holiday to borrowers, which expired on June 24 last year. Another 60 days were granted upon passage of Bayanihan II that expired in December.

OUTLOOK
Analysts expect listed banks to be among those that will perform better this year.

“We expect the sector to benefit from the gradual recovery of the economy from the COVID-19 pandemic. Moreover, with the availability of the vaccines domestically, we believe that the government could further ease restrictions, boosting consumer and business confidence and ultimately increasing the demand for loans,” Mr. Luciano said.

“More importantly, the further reopening of the economy would allow more businesses to operate at higher capacities, which could temper the rise in NPLs,” he added.

Meanwhile, Mr. Tembrevilla expects listed banks to “perform slightly better” than the PSEi, explaining the financial sector will not be a “direct beneficiary” of a faster COVID-19 vaccine rollout.

“Banks have been somewhat resilient during the stretch of community quarantine, with bottom line impact deriving only from the front-loaded provisions for loan losses,” Mr. Tembrevilla said.

He also advised investors to keep an eye on the asset quality of banks amid expectations of faster NPL formation following the expiration of the loan moratorium under Bayanihan II last December.

“If banks managed to record NPLs below the consensus of 4-6%, then this should translate to a healthier macro backdrop and faster recovery trajectory,” he said.

Ms. Estacio and Mr. Mauleon shared a similar view, saying investors should be looking at how banks will be adapting to the lifting of the loan moratorium under the Bayanihan Act.

“This will give a clearer indication of how the pandemic affected the bank and the overall economy. Therefore, investors should continue watching out for banks’ capital buffers, which will provide cushion to potential deterioration in asset quality,” they added.

Ms. Estacio and Mr. Mauleon also noted that investors would likely consider adding banks that would be able to maintain or improve their NIM despite the low interest rate environment.

“Moreover, banks that will be able to exhibit acceleration in loan growth without damaging asset quality should also be a strong investment case. However, these should also result in profit growth for the bank,” Ms. Estacio and Mr. Mauleon said.

For China Bank Securities Corp. Research Associate Zoren Philip A. Musngi, investors will likely take positions in bank stocks once the outlook for economic recovery improves, noting the performance of banks to be “largely tied” to the state of the economy.

“[E]conomic outlook remains heavily predicated on pandemic containment efforts and vaccine rollout, so positive developments with regard to these should also consequentially affect investor sentiment for bank stocks,” Mr. Musngi said.

Mr. Musngi also advised investors to monitor “monetary policy actions and regulatory developments” that may drive interest into bank stocks such as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill and the recently signed Financial Institutions Strategic Transfer (FIST) Act (Republic Act No. 11523).

The FIST law allows financial institutions to clean up their books by selling their soured loans to so-called FIST Corporations.

Meanwhile, the CREATE bill will immediately slash the corporate income tax (CIT) to 25% from 30%. It further cuts CIT to 20% for micro, small, and medium enterprises with net taxable income below P5 million and total assets below P100 million.

CREATE will also lower the minimum CIT to 1% from 2% from July 2020 to June 2023, as well as taxes on nonprofit hospitals and educational institutions to 1% from 10% within the same period.

The measure, which was originally known as the Corporate Income Tax and Incentives Reform Act, also streamlines the government’s fiscal incentives program. As of this writing, Congress has ratified the final version of CREATE, which is now awaiting President Rodrigo R. Duterte’s signature.

This is best time to “slowly accumulate” on bank stocks, said I.B. Gimenez Securities, Inc. Research Head Joylin F. Telagen.

“Financials are the biggest sector losers last year 2020 and I think the worst is over and time to slowly recover… [T]he best strategy is slowly accumulate bank stocks and be part of the portfolio. And since it’s coming from a low base, financials could possibly perform better than PSEi/other sector indices,” she said.

Mr. Limlingan said that investors interested in the banking sector should keep an eye out for the BSP’s decision on interest rates and reserve requirement ratio, as well as banks’ earnings performance, and loan and deposit appetite.

“The top three banks underperformed compared to the PSEi last year, especially during the beginning of the lockdown. Hence, their current levels are comparatively cheaper. It may attract some investors to position. However, earnings performance and progress in the vaccine will still play a role,” he added, referring to BDO, BPI, and MBT. — Jobo E. Hernandez