Analysts remain selective on bank stocks

By Marissa Mae M. Ramos
Researcher

ANALYSTS remain selective on bank stocks amid mixed earnings performance and the differing impacts of loosening monetary policy and ongoing trade tensions on their bottom lines.

The barometer Philippine Stock Exchange index (PSEi) traded sideways in the second quarter, gaining almost one percent in the second quarter, slower than the 6.1% growth posted in the first quarter. This was, however, a turnaround from the 9.9% slump recorded the previous year.

In the second quarter, the financials sub-index declined by 2.4% versus a one-percent loss in the previous quarter and the 15% drop in the second quarter of last year.

The decline in the financials counter reflected the performances of the listed banks’ share prices with more than half registering quarter-on-quarter declines. Metropolitan Bank & Trust Co. (MBT) had the largest decline in its share price during the quarter at 10.83%, followed closely by the Philippine National Bank (PNB) at 10.41%.

Other listed banks that saw their share prices decline include the Bank of the Philippine Islands (BPI, -6.77%); East West Banking Corp. (EW, -4.44%); Philippine Business Bank (PBB, -3.91%); Security Bank Corp. (SECB, -1.73%), Asia United Bank (AUB, -0.43%), and Philippine Bank of Communications (PBC, -0.23%).

On the other hand, Rizal Commercial Banking Corp. (RCB) led gainers with a 5.24% climb in its share price, followed by those of BDO Unibank, Inc. (BDO, 4.63%); Philippine Trust Co. (PTC, 4.45%); China Banking Corp. (CHIB, 2.23%); Union Bank of the Philippines (UBP, 0.66%); and Philippine Savings Bank (PSB, 0.35%).

“The main drivers that drove not just the banking stocks, but also the performance of the banks would be the stance of the BSP (Bangko Sentral ng Pilipinas) and the interest rates in counter balancing other economic data points to consider such as GDP (gross domestic product) and inflation,” said Philstocks Financial, Inc. Client Engagement Officer and Research Associate Piper Chaucer E. Tan in an e-mail.

Mr. Tan, who regarded the first-half of the year as a “mixed bag” for the banking sector and the stock market in general, also cited the ongoing trade tensions between the US and China as a constant “offshore catalyst [trickling] down to the bank stocks and to the stock market” that could potentially trigger a global economic recession.

The second quarter saw the BSP cutting policy rates by 25 basis points (bps) as expected following the decelerating headline inflation trend. Likewise, the reserve requirement ratio (RRR) of universal and commercial banks (U/KBs) were trimmed by 200 bps in mid-May.

Meanwhile, the tit-for-tat trade war between the US and China had been ongoing for more than a year. Apart from some momentary respites, it has yet to see any new developments that would suggest a resolution of trade tensions between the two economic superpowers.

Despite these headwinds, banks managed to perform well on the aggregate. BSP data showed the country’s U/KBs booking a cumulative P100.615-billion net income, 30% higher than the P77.364-billion accumulated earnings at the end of the second quarter last year.

Net interest margin (NIM) — the ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income (NII) to average earning assets — improved to 3.38% in the second quarter from 3.29% in the first quarter of the year and 3.11% in the second quarter of 2018.

Mandarin Securities Corp. Research Analyst Zoren Philip A. Musngi said that SECB stood out among listed banks in the second quarter, citing a “significantly better” 32% year-on-year gain in its net income.

“However, we will still look into succeeding quarters to see if it is indeed a sustainable recovery or just a one-off [gain],” Mr. Musngi said.

Regina Capital Development Corp. Equity Analyst Rens V. Cruz II said PBB and AUB “surprised to the upside” with their net income gains of 96.46% and 89.38% during the period. On the other hand, he pointed to PNB’s 47.98% decline, which “completely breaks the momentum established in the first quarter.”

For China Bank Securities Corp. Senior Research Associate Rastine Mackie D. Mercado, BDO stood out last quarter.

“Of the index banks, BDO reported the highest growth in net income at 53.3% in the first half of 2019. This was driven both by higher NII and non-interest income,” Mr. Mercado said in an e-mail.

“Moreover, BDO’s CASA (current account and savings account) as a percentage of total deposits was at 70.3% in the first half, the highest among the index banking stocks. Trading gains of the bank over the period also normalized, reversing losses incurred in the first half.”

Raul P. Ruiz, first vice-president and head of research at RCBC Securities, Inc., likewise pointed to BDO’s upside.

“Prices of bank stocks under [our coverage] were generally flat to lower in the second quarter with the exception of BDO,” he said.

“[The] [u]nderperformance may have been due to idea… that bank NIMs will fall because of the BSP’s looser monetary policy. However, BDO’s share price increased probably because of the idea that, having the most deposits, it would benefit the most from the BSP’s plan to cut the reserve requirement all the way to 10% in the next few years,” Mr. Ruiz said.

Mr. Ruiz likewise noted PNB’s “above-industry loan and deposit growth rates.”

Apart from the policy rate cut last quarter, the BSP ruled another quarter point trim on benchmark interest rates in its fifth policy meeting earlier this month with hints of another 25-basis point cut before yearend. BSP Governor Benjamin E. Diokno likewise threw in the possibility of an additional RRR cut as early as next month.

OUTLOOK
Similar to last quarter’s performance, prospects for the third quarter were mixed among the analysts interviewed.

“From the third quarter onwards, banks’ earnings growth will be more subdued as the impact of the BSP’s overnight rate cuts will start to be reflected in banks’ asset yields and NIMs,” RCBC Securities’ Mr. Ruiz said.

Regina Capital’s Mr. Cruz was of a similar view, but noted that this should “not yet be significant enough” to cause a year on year slowdown in banks’ net interest incomes.

“On the other hand, the RRR cut will likely only affect the relatively smaller banks, as most of their deposit base are sourced from wholesale and fixed deposits. The bigger banks will continue to incur higher cost of funds since they have higher exposure to CASA deposits,” Mr. Cruz said.

Likewise, Philstocks’ Mr. Tan said that there will be “some slight slowdown” in banks’ earnings as the third quarter is considered historically the weakest quarter of the year.

Nevertheless, Mr. Tan remains “strongly positive” with the banking sector given the positive earnings results in some of the listed banks, adding that its current price-to-book ratio (P/B) of 0.939 times is less than its five-year average P/B ratio of 1.26 times.

“[W]e think that banks will catch up to its average, and this is pretty cheap that investors should really look into if they want to bargain-hunt stocks with cheap valuations and solid fundamentals,” Mr. Tan said.

Mandarin Securities’ Mr. Musngi was likewise upbeat on listed banks: “We are maintaining our positive outlook on bank stocks, particularly the larger/diversified ones,” he said.

“Even though the economic environment remains uncertain, we are still optimistic banks would weather through and show year-over-year growth as they manage their risks/exposures. Bank stock valuations are quite attractive relative to other industries and to historical averages.”

Joylin F. Telagen, research head at IB Gimenez Securities, Inc., said that the global economic situation will remain the main factor that would affect the stock performance of listed banks and the stock market in general.

“I expect that banks’ core business operation will continue to post double-digit growth while non-interest [income] especially trading operation might still be a challenge on the third [quarter] until end of the year,” Ms. Telagen said.

For First Resources Management and Securities Corp. Officer in Charge of Trading and Research Charlene Ericka P. Reyes: “We expect that banks would be able to sustain their earnings growth momentum buoyed by the strong growth in net interest income, accounting for mid-teens loan growth and the continued improvement in net interest margin this year,” she said.

“The non-interest income business of banks may also support their earnings growth for the year driven by the expansion of banks’ non-core business segments, particularly in fee-based income and insurance premiums,” she added.

On bank stocks, China Bank Securities’ Mr. Mercado is “selectively bullish.”

“We would continue to prioritize banks with negative repricing gaps as this ensures that the risk to their NIMs would be minimal,” said Mr. Mercado.

“Individually, the listed banks under the financial index are currently trading below their respective three-year average P/Bs, which may also be indicative of some upside to specific issues.”

On the other hand, Regina Capital’s Mr. Cruz said that the banking sector “is gradually shifting to a neutral stance” for the second half.

“For starters, valuations have spiked since the start of 2019. Secondly, the impressive performance of banks in [the first half of 2019] is already a closed chapter… [with the third and fourth quarters] present different factors to consider — including the 50-bp policy rate cut made in May and August, and the continued liquidity crunch, among others,” Mr. Cruz said.

For RCBC Securities’ Mr. Ruiz: “I’m generally neutral on banks because NIM expansion since at least last year may end due to the BSP’s interest rate cuts.”