Financial Sector Outlook in the Philippines

Sharing and reblogging below FREE report from PinoyInvestor. Below is a broker analysis and recommendation from their partner, AP Securities, on the banking sector, as of end of May2018. Caveat emptor. These are not my recommendations, but theirs, but personally, worth taking a look, hence I’m sharing them here, especially with the run the PSEi has had the past few days. Here we go:

Related: Southeast Asia ETFs Reacting to U.S.-North Korea Peace Document with Skepticism

Financial and Banking Sector Outlook

The financial index has lost 18% of its value since the PSEi peaked last January 29, and is also down 17% as of end May. Aside from the fact that 1Q 2018 earnings disappointed due to the drop in trading gains and higher expenses, the large banks were also one of the leaders in the index rally to 9,000. It is no surprise, therefore, that the ongoing lack of confidence in the equities market has spread to banking stocks.

Return on Equity (ROE) Deteriorates

Other than lower trading gains, the key culprit to lower ROE of the industry is the large capital-raising made by BPI and MBT this year, with EW, UBP, and RCB set to follow. Historically, it takes about 2-3 years for the big banks to fully deploy the capital into loans. This means that it will take time before sector ROE recovers.

Broker Recommendation

Since the start of the year, we were bullish on banks, and we are keeping our overweight view (albeit with lower Target Prices) as we believe that our investment theses were not impaired by the 1Q 2018 miss in estimates.

We remain a BUY on the Banking Sector because:

  1. 1Q 2018 loan growth has been strong at 18% despite higher rates, and we see net interest margins expanding in the next quarters;
  2. Growth is coming from the lending business leading to more sustainable and quality earnings
  3. The sector de-rating paves the way for positive surprises going forward; and
  4. The correction has led to more attractive valuations, with the financial index trading below the 5-year mean.

We prefer to buy the following banks on weakness:

  • Metrobank (PSE: MBT) – Buy, Target Price: PHP 95.00
  • Banco de Oro (PSE: BDO) – Buy, Target Price: PHP 150.00
  • Philippine National Bank (PSE: PNB) – Buy, Target Price: PHP 67.50

Get reports like this for FREE. Just sign-up in PinoyInvestor

For more portfolio construction trends from around the globe, visit the Portfolio Construction Channel.