Bank stocks back on menu on strong earnings

AMID strong earnings results for banks and market expectations on lower borrowing costs, analysts are once again warming up to bank stocks.

The barometer Philippine Stock Exchange index (PSEi) lost 2.8% in the third quarter, a reversal from the one-percent increase in the second quarter and 1.2% in the third quarter of 2018.

On the other hand, the financial sub-index — which included the banks — gained 4.9% in the July-September period versus the 2.4% and 8.9% declines in the second quarter and last year’s third quarter, respectively.

This uptrend was reflected on the listed banks’ share prices during the July–September period with six of the 14 listed banks posting quarter-on-quarter gains. The Bank of the Philippine Islands (ticker symbol: BPI) saw the biggest rally among lenders with an 18.5% increase in its stock price, followed by Security Bank Corp. (SECB, 15.9%), Philippine Trust Co. (PTC, 12.2%), Philippine Savings Bank (PSB, 4.7%), East West Banking Corp. (EW, 2.8%), and BDO Unibank, Inc. (BDO, 2.1%).

At the same time, the Philippine National Bank (PNB) saw the biggest drop in share price at 11.5%, followed by that of China Banking Corp. (CHIB, -8.9%), Rizal Commercial Banking Corp. (RCB, -5.7%), Asia United Bank (AUB, -4.1%), Metropolitan Bank & Trust Co. (MBT, -4%), UnionBank of the Philippines (UBP, -3.5%), Philippine Bank of Communications (PBC, -2.8%), and the Philippine Business Bank (PBB, -2%).

“Banks generally outperformed the market… The positive sentiment for banking stocks was brought about by the multiple cuts in banks’ reserve requirement ratios (RRR) which is expected to lower funding cost, especially for smaller banks,” said COL Financial Group, Inc.’s senior research analyst John Martin L. Luciano in an e-mail.

For Senior Research Associate at China Bank Securities Corp. Rastine Mackie D. Mercado: “[B]anks reported double-digit growth in net income in the quarter (compared to the third quarter of 2018) as trading grains recovered from last year’s slump.”

“We note that most banking stocks were depressed in the first half of the year likely due to the yield curve inversion. As such, the recent normalization of the yield curve has been positive for the bank stocks,” Mr. Mercado said in a separate e-mail.

The third quarter saw the BSP cutting policy rates by 50 basis points (bps) as expected following the inflation downtrend and the pronouncements of BSP Governor Benjamin E. Diokno.

It also saw another 100-bp cut in banks’ RRR on September 27, effective in November, following the decision on May 23 that saw the reserve requirements slashed by 200 bps in the three phases or until July 28. It was cut again by another 100 bps in its October 24 meeting — for a total of 400 bps so far this year.

Banks also managed to perform well during the quarter as BSP data showed the bottom line of the country’s universal and commercial banks (U/KBs) grew by 34.19% to P155.76 billion from the P116.1-billion accumulated earnings at the end of the third quarter last year.

Net interest margin (NIM), the ratio that measures banks’ efficiency in investing their funds by dividing the annualized net interest income to average earning assets, improved to 3.43% in the third quarter from 3.38% in the second quarter and 3.15% posted a year ago.

“The [nine-month/three-months-to-September] earnings performance of the banking sector exceeded expectations as me and many analysts are selective on banking stocks at the start of the year,” Philstocks Financial, Inc. Research Associate Piper Chaucer E. Tan told ����ý.

“It turned out that the trend has changed, but this is also in line with our expectations on what the growth for the banking sector will be… in the second-quarter banking report,” he added.

Mr. Tan also attributed “consumer confidence” as one of the “domestic catalysts” for the banks’ bottom line performance for the quarter.

“This also affects not just the consumer companies, but also banks since more people spending means more consumer credit demand will take place. This should also boost the loan growth since spending will also increase demand for credit,” he explained.

The listed bank stocks that stood out, Mr. Tan said, include BPI, BDO, MBT, and SECB owing to their “high double-digit” earnings growth coming mostly from their core businesses.

PNB Vice President and Head of Equity Research Division Alvin Joseph A. Arogo noted BDO and SECB’s high NIM year-on-year expansion in the third quarter at 50 bps and 46 bps, respectively.

“Consequently, the net interest income of both banks also outperformed,” Mr. Arogo said.

For Mandarin Securities Corp. Research Analyst Zoren Philip A. Musngi: “The three big banks (BDO, BPI, and MBT) surprised as they reported strong third quarter figures, with net income growth averaging 43% year on year…”

“In the past quarter (Q2), there was some uncertainty on whether the banks will be able to sustain their strong earnings, but they managed to pull through,” he added.

This assessment was shared by First Resources Management and Securities Corp. Officer-in-Charge of Trading and Research Charlene Ericka P. Reyes: “The third quarter earnings results… were mainly driven by the significant improvements in their non-core businesses, primarily in net trading gains. However, in contrast to the other banks that we cover, what stood out for me was BDO, which surprisingly did not heavily rely on trading gains to boost its non-interest income for the covered period…,” she explained.

“[I]nstead, recurring income from fees and commissions and insurance premiums mainly contributed to the growth in its non-core business,” she noted, citing BDO’s 32.3% decline in trading gains for the third quarter “versus the 200%-500% surge from BPI, MBT, and EW.”

Ms. Reyes also mentioned EW’s “notable” 13.2% loan growth during the quarter, which outpaced the eight-percent average loan growth from the big banks “driven by their high concentration in consumer loans at 72%.”

“[L]astly, MBT was also seen to take advantage of the low interest rate environment this year as reflected by their shift of funds in the bond market, with their total bonds for the first nine months of the year increasing to P62.68 billion from P2.91 billion during the same period in 2018,” she said.

Abacus Securities Corp. Investment Analyst Elizabeth T. Santiago noted MBT’s and EW’s “low current market valuation, which makes them cheap compared to their peers.”

Apart from valuation, Ms. Santiago said that MBT and EW also stood out with the former having the largest trading gains among the listed banks and the latter with its “compelling recovery story as it was disproportionately hit by funding costs earlier in the year.”

“[EW] managed to grow its net income during the quarter… as the other major listed banks despite not having much by way of trading gains…,” she added.

RECOMMENDATIONS AND OUTLOOK
All things considered, many of the analysts being interviewed continued to be optimistic on the prospects of bank stocks going into the fourth quarter.

Joylin F. Telagen, research head at IB Gimenez Securities, Inc., noted that the ongoing US-China trade war “will still continue” to affect stock prices in the last three months of the year.

“Other than that, I’m looking at… the US Federal Reserve’s and BSP’s policy meetings (on December 10–11 and December 12, respectively) that might possibly cause market volatility before the effect of a possible Santa Claus rally,” Ms. Telagen said, referring to the tendency of stock prices to rise over the last weeks of December into the new year.

“We like to focus more on the stable big banks like BDO, MBT, BPI, and the leader in digital transformation UBP as they will stably continue to post strong earnings and capture the larger percentage of the rising market demand,” she added.

For First Resources’ Ms. Reyes: “We are maintaining our recommendation to overweight selected banking stocks as valuations continue to be attractive versus the other sectors.”

“Despite the slowdown in loan and deposit growth, we believe that banks will continue to record improvements in net interest margin driven by the normalization in funding cost amid the reduction in reserve requirement ratio and the decline in bond yields,” she added.

China Bank Securities’ Mr. Mercado was likewise upbeat: “[We are] generally bullish for the sector in light of the recent easing policies from the BSP, as these should translate into higher loan book growth and, at the same time, lower funding costs — which could lead to higher NIMs, especially for those with portfolios tilted towards consumer loans,” he said.

Also hopeful was Abacus Securities’ Ms. Santiago: “We are still bullish for the sector, especially going into next year, as government catch-up spending may finally spur private investment and loan growth through expected multiplier effects.”

“The brunt of this year’s rate cuts would also be felt in 2020, but liquidity may start to ease in the fourth quarter. We also expect margin expansion to continue as easing liquidity would continue to drive funding costs down, while the industry expands efforts to grow its retail and SME lending components (where yields are higher),” she said.

Mandarin Securities’ Mr. Musngi has maintained the positive outlook on the listed banks.

“Even though loan growth has been tempered for the most of 2019, bank profits are benefitting from the [interest] rate and RRR cuts [as well as] solid growth in fee income and recovery in trading gains. We expect the stable market environment and easing policy of the central bank to continue for the most part of 2020,” he said.

Philstocks’ Mr. Tan shared this assessment, but said that they are “still selective” on banks “due to the high competition in the industry” and that they are also looking into “global uncertainties.” — J.E. Hernandez