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An opportunity emerges from Hanjin’s grounding

/ 05:07 AM January 14, 2019

Banks were among the worst performers last Friday, with the financials index falling by 2.5 percent, much worse than the Philippine Stock Exchange Index’s (PSEi) 1-percent drop.

Banking stocks fell on news that five local banks had a total loan exposure of $412 million to Hanjin Heavy Industries, the local shipbuilding subsidiary of Korean conglomerate Hanjin, which declared bankruptcy early last week.

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The five banks with loan exposures are RCBC (RCB) with $140 million: Land Bank with $80 million; Metrobank (MBT) with $72 million; BPI (BPI) with $60 million and BDO (BDO) with $60 million. RCB, MBT, BPI and BDO are listed in the Philippine Stock Exchange.

Banking stocks fell last Friday due to concerns the five banks would have to book significant losses. According to an Inquirer report, banks’ total exposure to Hanjin is bigger than the $386 million in Lehman Brothers-related losses in the wake of the 2008 global financial crisis.

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There were also concerns that Hanjin’s bankruptcy signified the presence of a systemic risk that would mean more substantial defaults materializing in the near term.

Although the size of banks’ exposure to Hanjin is significant in absolute terms and bigger than their exposure to Lehman Brothers in 2008, the impact is less significant since the capital base of Philippine banks is now substantially bigger due to accumulation of profits and numerous capital raising activities in the past 10 years.

Moreover, we think the big three banks (BDO, BPI and MBT) are well positioned to absorb potential losses. Based on COL Financial’s estimates, the potential impact on the big three’s profits, assuming they fully provide for the losses, is only 10.3 percent for BDO, 13.3 percent for BPI and 16.5 percent for MBT based on their projected 2018 profits.

Meanwhile, the potential impact on the capital base would only be 1 percent for BDO, 1.3 percent for BPI and 1.4 percent for MBT, while non-performing loans ratio would only increase marginally by 10 to 20 basis points to 1.2 percent for BDO, 2 percent for BPI and 1.4 percent for MBT—still far from alarming levels.

The impact on RCB is more substantial given the larger amount of its exposure and its size relative to the big three. Based on COL Financial’s estimates, the potential impact on RCB’s profits, assuming that it fully provides for its losses is 166.1 percent based on its projected 2018 profits. Meanwhile, the potential impact on its capital base is 8.7 percent while its non-performing loans ratio would almost double to 4.3 percent from 2.2 percent currently.

There is a possibility that banks would book less losses compared to our estimates.

Metrobank president Fabian Dee explained the bank’s exposure to Hanjin has already been reduced substantially, most likely because the Korean firm was already showing signs of distress much earlier. As such, it would not be surprising for MBT to have already booked provisions for losses in the past.

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We also don’t think Hanjin’s bankruptcy signifies the presence of a systemic risk. Hanjin’s bankruptcy seems to be a result of the company’s highly leveraged position and challenges facing the shipbuilding industry, which include low prices, low volumes and unattractive payment terms. As such, we don’t think investors should be concerned of more substantial defaults due to systemic factors materializing in the short term.

Given the minimal impact of Hanjin’s bankruptcy on banks and the absence of systemic risks, investors should take advantage of the drop in banking stocks to buy them at cheaper valuations.

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