Analysts selective on bank stocks

ANALYSTS are painting a rosy picture for banking stocks following the sector’s mixed performance in the first quarter and the central bank’s decision to slash reserve requirements, but advise investors to remain selective on which ones to include in their respective portfolios.

The barometer Philippine Stock Exchange index (PSEi) gained 6.1% in the first quarter, higher than the 2.6% posted in the last quarter of 2018 and was a reversal from the 6.8% decline in 2018’s comparable period.

Banks, in general, underperformed the market last quarter, with the financials sub-index dipping one percent. The quarter-on-quarter loss was a reversal from the 9.8% gain in the final three months of 2018 but was an improvement from the 6.3% decline a year ago.

This decline was reflected by the listed banks’ share prices during the January-March period with only six of the 14 listed banks posting quarter-on-quarter gains: Philippine National Bank (ticker symbol: PNB, 33.3%), Philippine Business Bank (PBB, 15.2%), Security Bank Corp. (SECB, 11.6%), Philippine Bank of Communications (PBC, 6.2%), BDO Unibank, Inc. (BDO, 2.3%) and East West Banking Corp. (EW, 2.2%).

Philippine Trust Co. (PTC) saw the biggest drop in its share price during the quarter at 24.2%, followed by Bank of the Philippine Islands (BPI, -10.4%) and Philippine Savings Bank (PSB, -7.2%).

Rizal Commercial Banking Corp. (RCB, -6.3%), Union Bank of the Philippines (UBP, -4.9%), Metropolitan Bank & Trust Co. (MBT, -1.3%), Asia United Bank (AUB, -1.1%), and China Banking Corp. (CHIB, -0.9%) also saw their share prices decline last quarter.

Meanwhile, the country’s universal and commercial banks booked a cumulative P49.54-billion net income last quarter, 24.6% higher than the P39.77 billion posted in the first quarter of 2018, data from the Bangko Sentral ng Pilipinas (BSP) 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 3.3% in the first quarter from 3.2% in the final three months of 2018 and 3.1% posted a year ago.

“Interest rates play an integral role in the operation of banks, so monetary policies and policy expectations were one of the main factors which influenced their price movement in the first quarter,” Philstocks Financial, Inc. Client Engagement Officer and Research Associate Piper Chaucer E. Tan said in an e-mail.

“As of May 15, 2019, the financials index was down 5.55%… This could be attributed to the slowdown in bank lending growth from end-2018 to start of 2019 due to the series of policy rate hikes done by the BSP during the preceding year,” he said.

“Net foreign sell-off has been also a major culprit to the banks’ share price slump. Year to date, net foreign selling registered at almost P4.5 billion, [which] clearly shows that they are hesitant in banking sector…”

Mr. Tan also cited the global economic growth slowdown, which led the US Federal Reserve to pause on its tightening of monetary policy. This, Mr. Tan said, led others to expect another “era of low interest rates” that in turn would affect profitability of banks.

China Bank Securities Corp. Research Director Garie G. Ouano noted the “steep decline” in domestic benchmark yields during the quarter as a negative development for many banks as the “potential for better trading gains was likely eclipsed by the potential for lower NIMS.”

“Note that most listed banks have a positive repricing gap for the year, so lower yields may dampen the outlook for NIMs,” he said.

As of end-March, yields on government securities (GS) declined on average by 111.8 basis points (bps) relative to the end-December 2018 levels as GS yields in the secondary market for all tenors declined except for that in the 91-day debt paper, according to the PHP Bloomberg Valuation Service (BVAL) Reference Rates published on the Philippine Dealing System’s website.

During the quarter, GS debt yields were lower by a range of 57.4 bps for the 182-day GS to 167.2 bps for the 20-year GS compared to yields in end-December 2018.

For Papa Securities Corp. Research Head Arabelle C. Maghirang: “[The] slow 9.9% industry loan growth in March pulled down sentiment across the banks, with the exception of PNB which was buoyed by M&A (mergers and acquisitions) rumors.”

According to BSP data, outstanding loans increased by 9.9% year on year in March, slower than the 13.7% pace logged the previous month.

Likewise, money supply growth eased in March to 4.2%, posting the slowest pace in almost eleven years since April 2008’s 2.5%.

PNB Securities, Inc. President Manuel Antonio G. Lisbona pointed to news on Hanjin Heavy Industries and Construction Philippines’ $412-million loan default as having a “direct effect” on the stock prices of those listed banks that have exposure.

It was reported that RCB, Land Bank of the Philippines, MBT, BPI, and BDO have a $412-million dollar loan exposure to the firm.

“At the time of default, the BSP assured the public that Hanjin’s local debt only accounted for 0.24% of the total gross loans in the Philippine banking system and 2.5% of total foreign exchange loans granted by local lenders,” Mr. Lisbona said.

FIRST-QUARTER PERFORMANCE
Despite the slump in the financials index during the period, analysts noted some listed banks that stood out during the quarter.

For Zoren Philip A. Musngi, research analyst at Mandarin Securities Corp., BDO was the top performer during the period, citing the growth in the lender’s net income.

“Another one that caught our attention was UBP, which had lower net income (-25%) year on year due to a rather weak loan growth of 7.5%. We believe that high funding costs and the impact of the government’s directive on teachers’ loans continued to drag their overall profitability,” Mr. Musngi said.

For IB Gimenez Securities, Inc. Research Head Joylin F. Telagen, “[i]t depends on the bank.”

“[O]verall, I expect stable big banks (BDO, MBT, BPI) to capture the larger percentage of the rising market demand, banking the unbanked and higher corporate earnings towards the end of the year and possibly better stock performance,” she said.

“[W]hen it comes to technology, I’m rooting for UBP, being the first commercial bank that will issue bank-backed Peso blockchain-based token (PHP Token) after it gets approval from the BSP. This is an interesting future revenue stream of UBP as we are seeing ‘Generation Z’ (i.e. those born in the late 1990s to the early 2010s) increasing rate on using the blockchain/cryptocurrency,” Ms. Telagen explained.

For Unicapital Securities, Inc. Research Head Wendy Estacio, BDO’s first-quarter showing “was a surprise due to a challenging market environment.”

“BDO was able to grow its net interest income by 24.8% led by the rise in loans and CASA (current and savings account) base. Even non-interest income grew double digits in spite of volatile market condition. Results were in line with our [first quarter 2019] estimates,” Ms. Estacio said.

Likewise, IB Gimenez’s Ms. Telagen noted the “spectacular performance” of BDO’s earnings.

“Compared to other banks, BDO managed to increase its bottom line [attributable to parent company] by 66% to P9.76 bllion [in the first quarter] versus P5.88 billion in the [same period last year,]” Ms. Telagen said.

AP Securities, Inc. Research Analyst Rachelle C. Cruz noted BDO, BPI, and MBT as positive standouts. On the other hand, she was “slightly disappointed” with SECB and PNB given the former’s “higher-than-expected operating expenses” that dragged earnings growth and the latter’s gains coming mostly from chopping trading and foreign exchange gains.

Ms. Cruz is neutral on the banking sector given “higher intermediation costs as well as intense competition” that continue to put pressure on earnings and capital.

“While valuations are attractive, we prefer to be company-specific at this point,” she said.

China Bank Securities’ Mr. Ouano, who is “selectively bullish” on listed banks, pointed to SECB and PNB as standouts during the quarter, noting that not all banks are “equally attractive in terms of valuation.”

“Recent management changes in PNB and plans to bring in a new investor has sparked optimism over the bank due to its proactive growth strategy,” Mr. Ouano said.

“SECB is among the most attractively valued among the index banks, has among the narrowest repricing gaps, and has the lowest loan-to-deposit ratio among the index banks,” he added.

OUTLOOK
Moving forward, analysts cited local and external factors which may affect bank stocks’ performance in the second quarter.

For Unicapital’s Ms. Estacio, lowering the reserve requirement ratio (RRR) would further benefit the banks as it would free up loanable funds without them having to “incur additional costs from issuing securities such as LTNCDs (Long-Term Negotiable Certificates of Deposit).”

AP Securities’ Ms. Cruz noted that while loan demand is expected to go up, a sharp cut in policy rates “would be negative for banks’ NIMs.”

In its third policy review this year on May 9, BSP’s Monetary Board slashed benchmark interest rates by 25 bps amid easing inflation. This partially dialed back a cumulative 175-bp hike to benchmark rates last year as monetary authorities scrambled to put a lid on accelerating inflation.

A week later, the BSP announced a series of reductions in the RRR of universal and commercial lenders. The rate will be reduced to 17% effective May 31, 16.5% effective June 28, and to 16% effective July 26.

Currently, big banks are required to keep in reserve at least 18% of their deposits. The BSP has said that trimming big lenders’ reserve requirements by a percentage point will likely unleash about P90-100 billion into the financial system.

Aside from global uncertainties, major macroeconomic data will continue to affect market performance, according to AB Capital Securities, Inc. junior equity analyst Alyssa Mae U. Lit.

“Given a more favorable macro outlook this year, we are maintaining our ‘Buy’ rating as these banks’ core business remains intact. We believe there is only little downside risk to the banking industry amid solid fundamentals. Hence, we think that bank stocks are currently trading at attractive levels,” Ms. Lit said.

For his part, PNB Securities’ Mr. Lisbona noted the ongoing US-China trade war as well as the US Federal Reserve’s monetary policy stance as among the external factors that may influence banks’ stock movements.

Some analysts maintain a positive outlook on bank stocks despite its first-quarter performance.

“Even though the economic environment remains difficult/uncertain and bank earnings/lending are showing signs of slowing down, we are still optimistic banks would weather through and show year-over-year growth as they manage their risks/exposures,” Mandarin Securities’ Mr. Musngi said.

“Bank stock valuations are quite attractive relative to other industries and to historical averages.”

For COL Financial Group, Inc.’s senior research analyst John Martin L. Luciano: “We remain positive on banks as we believe that the sell-off was overdone.”

Timson Securities, Inc. trader Jervin S. De Celis shared a similar view: “While some of the banks have underperformed, I think this gives investors the opportunity to buy them at bargain prices especially that many of these companies have booked good bottom line figures for 2018,” he said.

“Most of the banking stocks remain fundamentally sound and I still expect this sector to perform well in the next coming months.” — Christine Joyce S. Castañeda and Macky A. Madrid