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Underperformance of banking stocks unwarranted

/ 05:06 AM March 04, 2019

Banking stocks were among the worst performers over the past two weeks, with the PSEi financials index falling by 5.8 percent, more than the 3.4-percent decline of the PSEi index.

Banking stocks fell due to various reasons. For example, Security Bank and Metrobank were sold off after reporting weaker-than-expected 2018 profits. BPI was dumped despite reporting a 13.1-percent increase in its fourth quarter 2018 earnings as provisions increased to P2.1 billion during the quarter from only P186 million during the same period in 2017. Surprisingly, even BDO was sold down despite reporting better-than-expected 2018 profits that were higher by 16.5 percent.

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Another possible reason why banks fell was news that bank lending growth slowed for the third month in a row this January to 15.3 percent from 15.7 percent in December.

Despite these reasons, I don’t think the steep selloff of banking stocks was warranted.

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Although Security Bank and Metrobank both reported below expected profits, the reasons for their underperformance are not worrisome. For example, Security Bank’s profits disappointed as it booked higher-than-expected income taxes (up by 47 percent year-on-year). Pretax profits were actually in line with expectations. Meanwhile, Metrobank’s lower-than-expected profits were due to the booking of higher-than-expected provisions for loan losses. However, its higher provisions are not really worrisome as its nonperforming loans ratio was steady at 1.2 percent as of end December. Moreover, both net interest income and non-interest income increased by a healthy pace and were in line with expectations.

Although BPI’s provisions increased significantly in the fourth quarter, part of the increase was due to the partial impairment of one of its investments. As such, BPI’s higher provisions do not automatically indicate significantly higher nonperforming loans.

Although lending growth is slowing down, this is already expected given the higher interest rate environment. Moreover, despite the slowdown, the pace of lending growth should stay healthy given that the Philippine economy is still growing by more than 6 percent annually.

Interest rates in the secondary market also remain stable and should remain stable given expectations that inflation would continue to go down in February. In fact, the BSP made a statement saying that it expects February inflation to be between 3.7 and 4.5 percent. This minimizes the risk of a significant jump in banks’ funding costs in the short term, similar to what happened in 2018.

Most importantly, despite some negatives, majority of banks that reported fourth-quarter earnings disclosed higher net interest margins as they were able to reprice their loans to reflect higher interest rates. Recall that one of the main reasons why we expect banks to perform well in 2019 is improving net interest margins. In fact, the expected cut in bank reserve requirements later this year could further boost net interest margins.

Given the steep selloff that took place the past two week, some stocks are already starting to look attractive from a valuation perspective. Investors should take advantage of this opportunity to buy banking stocks cheaper as nothing has changed to make banks fundamentally less attractive.

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