CLSA upbeat on Philippine banks

Regional Investment group CLSA Asia-Pacific is bullish on the Philippine banking industry, citing accelerating loan growth and “decent” stock valuations.

A recent banking report written by CLSA head of Philippine Research Alfred Dy noted that the first-semester earnings reports of banks were either in line or slightly ahead of the investment group’s expectations.

CLSA’s top picks in this industry are Banco De Oro, Metropolitan Bank & Trust Co., Bank of the Philippine Islands and Security Bank, all of which are expected to end this year with record high profits.

For the full year, CLSA expects BDO to post P10.08 billion in profit, 48 percent of which had been attained in the first six months based on net earnings adjusted for dividends associated with preferred shares.

Metrobank was projected by CLSA to post a net income of P10 billion, 58 percent of which had been met in the first six months based on its adjusted earnings.

The report added that BPI’s first-half net income was now 49 percent of CLSA’s 2011 net income target of P12.64 billion for the bank.

The six-month net profit of Security Bank was already 57.85 percent of CLSA’s 2011 net income forecast of P4.22 billion.

It was also pointed out that Rizal Commercial Banking Corp.’s six-month net profit was now equivalent to 50.71 percent of CLSA’s full-year bottom line target of P3.97 billion for the bank.

“Metrobank, Security Bank, and Banco de Oro reported the most impressive numbers (in the first semester), while Philippine National Bank is the least impressive,” the report said.

“Note though that we expect PNB’s earnings to continue to recover in the coming quarters.”

PNB’s net income in the first semester hit only 35 percent of CLSA’s full-year bottom line target of P3.29 billion for the bank. Dy noted, however, that PNB’s second quarter earnings were 2.62 times higher than its first-quarter performance.

“All told, we are comfortable with our earnings forecast for all banks in our coverage,” the report said. “We remain bullish.”

The banking sector’s 18.8 percent loan growth figure (net of reverse repurchase   agreements) in May 2011 was running ahead of CLSA’s 2011 loan growth forecast.

“Nonetheless, ongoing debt issues in Europe plus lukewarm economic growth prospects in the United States, we believe that our existing loan growth forecasts of 14 percent in 2011, 16 percent in 2012 and 18 percent in 2013 seem realistic for the time being,” the report said.

The research added it remained to be seen whether strong year-to-date loan growth figure in the electricity, gas, and water space could be sustained in the coming quarters.

“Of course, the long-term prospects for loan growth are great given low outstanding loans to GDP [gross domestic product], loans to deposits, and NPL [nonperforming loan] ratios,” the research said.

CLSA estimated that for public-private partnership projects, potential debt financing needs would hit about P73.77 billion ($1.68 billion). For the power sector, it estimated that an additional 4,000 megawatts of new capacity is needed by 2020.

“Assuming cost of $2.5 million per megawatt and 70 percent debt financing, we estimate that potential financing needs could amount to as much as P308 billion. Of course, this still does not take into account the ‘multiplier effect’ to the economy plus additional capex (capital expenditure) of corporations, which are needed to be undertaken to fully serve the Philippines’ huge and still growing  population base,” the research said.