JP MORGAN Chase sees Philippine banks sustaining double-digit growth in profits yearly through 2018, driven by more durable earnings flow from corporate lending.
In a research note issued last week, JP Morgan projected the local banking sector to post a 14-percent compounded average growth rate (CAGR) in earnings through 2018, driven by a 19-percent loan CAGR. The sector’s loan book is seen growing at the fastest pace in Southeast Asia.
“Base effects from treasury gains have subsided, and corporate capex (capital expenditure)-driven credit growth is making a comeback after almost two decades. This is sustainable, unlike real estate-led loan growth in 2013-2014, as the risks of regulatory intervention are lower,” the research note said.
“Accordingly, we see valuations holding, and possibly testing historical highs,” said the research note which is authored by analysts Harsh Wardhan Modi, Daniel Andrew Tan and Jeanette Yutan.
Bank of the Philippine Islands is JP Morgan’s top pick among large banks. Among smaller banking players, it favors Philippine National Bank and East West Bank.
Corporate capex spending perked up the banking sector’s loan growth by 17 percent year-on-year in May 2016, the research noted. Key drivers of credit demand include clearer macroeconomic fundamental as well as banks’ willingness to grant long-term business loans at single-digit yields.
JP Morgan said this made mid-teens internal rate of return (IRR) projects worthwhile for first time since the Asian crisis, spurring private investment spending.
IRR is a metric used in capital budgeting measuring the profitability of potential investments. It refers to the discount rate that makes the net present value of all cash flows from a particular project equal to zero.
But despite recent optimism, the JP Morgan research said its investment case for the banking sector was not based on a spike in government-led projects or PPP (public-private partnership)-funded infrastructure projects.
JP Morgan expects banks’ net income margin to expand by 12 basis points in the next two years, despite competition driving loan yields lower. Based on its estimate, a 5-percent shift in asset mix in favor of loans from securities would add 10 basis points to blended yield for the “big 3”—referring to Banco de Oro, Metrobank and BPI.
BPI and Metrobank are seen to benefit the most from this shift in asset mix while Security Bank is seen to benefit the least, limiting return on equity (RoE) expansion for the bank.