Analysts bullish on banking plays amid market turmoil
T he turmoil caused by rising consumer costs and recession fears have forced many investors to flee the stock market, turning to safer alternatives or riding out the storm with cash safely tucked away. Some stockbrokers, however, say investors with relatively higher appetite for risk might want to consider certain plays in the Philippine banking sector.
They cite a number of tailwinds, from better margins due to rising interest rates to new opportunities emerging from the ongoing push to go digital. Maybank Securities says the rise of e-wallets and digital banks is also a boon to the sector, given higher fee-based income and savings growth.
“Our general view is that the current rising interest environment should push for [net interest margin] expansion, as loans are gradually repriced upwards,” Nicole Garcia, research analyst at AB Capital Securities, tells the Inquirer.
During this challenging period, she says larger banks are the safest bets.
“Bigger banks will benefit most because upwards of 70 percent of their deposits are [current account/savings account] and unlikely to be repriced upwards in line with loans,” says Garcia.
Garcia warns, however, that lenders with less resources and higher exposure to small businesses and consumer loans could see a “second wave” of debts turning sour.
Michael Ricafort, chief economist at Rizal Commercial Banking Corp., says the Bangko Sentral ng Pilipinas (BSP) is poised to raise the policy rate by up to half a percent next month to tame surging costs.
The country’s June inflation zoomed to 6.1 percent, its fastest increase since October 2018.
“Higher local policy rates would lead to some increase in borrowing or financing costs that could lead to lower earnings and valuations, as well as slow down the economy as an unintended consequence in the quest to fight off inflationary pressures,” says Ricafort.
For COL Financial Group, banking sector earnings in the first quarter “were generally positive” and above expectations.
COL Group says the banks that recorded higher earnings were BDO Unibank Inc. (BDO), Bank of the Philippine Islands (BPI), China Banking Corp., Metropolitan Bank & Trust Co. (Metrobank), Philippine National Bank (PNB), Security Bank Corp. and Union Bank of the Philippines.
“Going forward, we expect the sector’s net interest margin to expand, supported by higher asset yield and improving loan volumes and policy rate hikes,” says COL.
Industry-wide loan growth is also expected to accelerate “as the economy continues to recover amidst relaxed COVID-19 restrictions.” Latest BSP data shows a 10.1-percent uptick in loans last April versus a growth of 8.9 percent in March.
Top picks
As of June 6, COL had buy ratings on China Bank, EastWest, Metrobank, PNB and Security Bank.
Maybank sees another trend benefiting the country’s top lenders: the current wave of e-wallets and startup digital banks. Once feared as industry disruptors, these new entrants appear unlikely allies to the banking sector, at least for now.
“The rise in e-wallet subscribers should be positive for banks. E-wallet platforms drive cash-in or cash-out transactions and partnerships for cross-selling banking or investment products and insurance products,” says Maybank.
It notes that 10 to 15 percent of bank fee income came from e-wallets at the end of 2021.
“Moving forward, collaboration with e-wallet providers could boost retail lending, as well as increase reach and subscribers to insurance and investment products,” Maybank adds.
E-wallets, in particular, boosted the banking population to 53 percent by the end of September last year versus 29 percent before the pandemic.
With momentum on the side of digital players, Maybank says traditional bank account holders still have room to grow. It expects the segment to add another 18 million accounts to eventually reach 38.5 million, or 50 percent of the country’s adult population.
It holds similar views on digital banks, which the BSP capped at six players: GoTyme, Maya Bank, Overseas Filipino Bank, Tonik Bank, UNObank and UnionDigital, which is owned by Union Bank.
“We still believe the market is big enough for both traditional and digital banks to coexist, especially as there is still huge room left for deposit account holders to grow,” says Maybank.
“The presence of foreign digital banks will help the banking sector by speeding up digital transformation, but we do not expect any material negative hit to Philippine banks’ growth,” it adds.
Meanwhile, the country’s top lenders are locked in an arms race of sorts, investing on digital products and system upgrades. Digital spending surged by 60 percent on average, accounting for 70 to 90 percent of total capital spending, Maybank notes.
Among the banks it covers, Maybank has issued buy ratings for BPI, UnionBank, PNB and Security Bank.
But its best “early stage” pick is still the country’s biggest lender, BDO.
Part of the billionaire Sy family’s SM Group, BDO is committed to its dual-expansion strategy: pursuing both physical branch expansion while making further inroads into digital.
From 2019 to 2021, BDO spent P36 billion on IT, outpacing competitors. It also implemented a new cybersecurity system at the start of 2022 after a recent hacking episode affecting hundreds of clients.
“BDO is best positioned to benefit from the economic reopening, which will drive both businesses and retail growth alike,” says Maybank.
Because the Philippines is archipelagic, physical branches are still seen as the best way to reach and educate the unbanked.
Maybank has assigned BDO a 12-month price target of P157, a roughly 33-percent upside from end-June. Profits are forecast to grow by 11.4 percent this year and 17 percent in 2023, driven by higher net interest income, corporate loans and higher fees.
“Its dual expansion strategy of physically expanding in the provinces while pursuing a digital transformation effectively creates more market, which it could capture over the long term, sustaining higher income over time,” according to Maybank. INQ
