Huge 2013 net profits seen difficult to surpass in 2014

Less than half of Philippine corporations may post higher profits this 2014 coming from a high base last year alongside rising margin pressures, based on a survey commissioned by Bank of America Merrill Lynch among chief financial officers (CFOs).

Based on the BofA Merill Lynch’s CFO Outlook 2014 released last week, only 43.3 percent of CFO respondents from the Philippines said they expected their companies to end this year with higher profits. The proportion was significantly lower than the 77.8 percent of CFOs who were optimistic on profit growth in last year’s poll.

This tempered optimism was likewise evident among peer CFOs across the Asia-Pacific. On a regional basis, 76 percent of Asia-Pacific respondents said they expected revenues in 2014 to rise, up from 72 percent who shared such optimism in the survey for 2013 outlook. However, only 60 percent of those surveyed in this year’s poll expected net profits to rise, down from 65 percent in 2013.

In the case of the Philippines, a high base seen in 2013 and margin pressure reduced the proportion of the optimistic CFOs to a minority.

The study surveyed 639 CFOs and other senior financial executives in the region. Close to 60 percent of them represented corporations with annual revenues of $1 billion and above.

Now on its third edition, the BofA Merrill Lynch CFO outlook 2014 offers insights into the strategies deployed by key financial decision makers across multiple industries and 12 economies, with a 50-50 split this year between respondents from multinational corporations and large local companies. Interviews were conducted in Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand.

Across the region, the “value gap” between those who expected revenues to rise and those who expected profits to rise was 16 percentage points, up from 7 percent last year—suggesting that it was getting tougher to extract value out of revenue growth, the study said.

“Margin pressure is a real issue this year given the rising costs of doing business,” said Steven Victorin, head of Asia Pacific corporate banking and global corporate banking subsidiaries at BofA Merrill Lynch. “Costs associated with labor, materials and financing have been rising as the Fed normalizes its monetary policy through tapering of its quantitative easing program. Long-term rates may go up, and certain countries—such as India and Indonesia—already have hiked interest rates. We also have seen depreciation of some currencies last year, which equates to rising imported material costs.”

Organic growth was the number one way CFOs intend to use surplus cash, while just 24 percent planned to deploy it for M&A (merger and acquisition), the study said. Sixty-two percent of CFOs said that they did not have M&A plans in 2014, around the same proportion as last year. For those who are keen on M&As, the hottest target is Southeast Asia.

Other key findings include:

CFOs in the manufacturing sector are the most bullish on both top line and bottom line expectations: 83 percent expect revenue growth and 67 percent forecast higher profit this year.

On the effect of Fed tapering: A minority 41 percent of CFOs agree that the end of quantitative easing in the United States will lead to major problems in Asia while 59 percent have no opinion or disagree.

Financial market risks top CFOs’ list of concerns for 2014: 36 percent were most concerned about financial markets risks, followed by operational risk at 25 percent and macro-economic risk at 24 percent. In the financial market risks category, CFOs are most concerned about currency volatility (35 percent), liquidity risk (30 percent) and interest rate movements (20 percent). Counterparty risk is at the bottom of the list at 15 percent;

Bank borrowing is the top choice for financing despite interest rate uncertainties: 57 percent of CFOs expect to finance their business with bank loans, more than doubling the 25 percent in 2013. Appetite for this mode of financing is highest in the manufacturing sector, with 66 percent of CFOs planning to use bank loans, followed by 64 percent in pharmaceuticals and 61 percent in the metals and mining sector. Internal sources of funding or self-funding was favored by 29 percent of CFOs regionwide.

Political change does not seem to pose a threat to business as 86 percent of CFOs think any change will have a positive or no impact on their business. However, 26 percent rate political unrest as their highest enterprise risk.