Buy-in at Security Bank: A bright spot

Amid the widespread sell-off that has sent even our local stock market slipping to bear territory (losing some 20 percent from its previous high of 8,136.97), the decision of Japan’s Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) to acquire 20% of Security Bank has become a bright spot for the Philippines as an investment market.

The transaction will bring in P38.9 billion or some $78 million long-term investment, making Security Bank the fifth largest bank in the country in terms of capital. The deal will increase Security Bank’s capital base to P89.3 billion from P52.4 billion (as of September 2015).

The buy price was placed at P245.00 per share upon approval by SECB’s board last Thursday. The buy-in price represented a premium of 81 percent at the closing trade of P135.00 apiece last Wednesday.

BTMU is the commercial banking arm of Mitsubishi UFJ Financial Group (MUFG), which is “one of the world’s largest and most diversified financial groups with total assets of $2.4 trillion as of September 2015.”

BTMU, known for its retail and SME business capabilities, has recently focused its sights on Asia for growth. The Philippines is one of the countries rich in potential for BTMU’s retail banking services, among other financial services that it can provide.

The buy-in allows the foreign bank to subscribe to 150.7 million newly issued common shares and 200,000 preferred shares at P0.10 apiece. The deal will thus make BTMU the second biggest shareholder in the bank.

BTMU will only appoint two representatives to serve in the board of directors while the Dy family will remain the biggest shareholder with majority representation.

People with knowledge of the matter say BTMU gets veto power on corporate concerns affecting its investment interest. This arrangement is the icing on the cake, for it fostered a more conciliatory collaboration on the part of SECB.

Subject to regulatory approvals, the deal is expected to be completed in the second quarter and is described to “go down as the largest equity investment by a foreign investor in any Philippine financial institution” and the fourth highest among all bank acquisitions in Southeast Asia, according to data compiled by Bloomberg.

The price-to-book ratio (price/book value) of Security Bank based on its September 2015 financials of 602.83 million shares was estimated to be about 2.8x. SECB’s book value of equity per share (BVPS) in the same period was estimated to be P86.77. After the buy-in, SECB’s estimated outstanding shares of 753.54 million would mean a 2.1x price-to-book ratio and a BVPS of P118.42.

SECB’s financial performance

In the first nine months of 2015, SECB reportedly earned P6.1 billion in net income (equivalent to P10.04 per share) for a return on stockholders’ equity (ROE) of 16 percent.

The earnings largely came from SECB’s core business as loan portfolio increased 20% year-on-year to P217 billion and deposits by 19 percent to P275 billion, with consumer loans rising 81 percent and corporate/commercial loans growing 15 percent. SECB’s loan-to-deposit ratio was at 79 percent.

Total assets increased 32 percent year-on-year to P482 billion, with return on assets (ROA) calculated at 1.9 percent. The investment securities at amortized cost portfolio was at P176 billion as of Sept. 30, 2015.

On Sept. 29 last year, SECB declared a second semestral regular cash dividend of P0.50 per share and special cash dividend of P0.50 per share. The record date and payment date would be determined after receipt of regulatory approvals.

In total, the cash dividends declared by SECB would amount to P2.00 per share for the entire year.

Bottom line spin

The investment was an offshoot of Republic Act (RA) 10641 signed by President Benigno Aquino III last July, which allowed foreigners to own 100 percent of Philippine domestic banks. The new law amended the 1994-promulgated Foreign Bank Liberalization Act (RA 7721) that allowed foreign banks to enter the country through any of three defined modes—the “acquisition of up to 60 percent of an existing domestic bank’s voting stock, establishment of branches with full banking authority, or [investment of up] to 60 percent of the voting stock of a new banking subsidiary incorporated under Philippine laws.”

While RA 10641 made the partnership deal possible, the country’s strong fundamentals for sustained growth sealed the deal. The investment, in turn, gave SECB the momentum to further grow at a healthy rate, thus making it a good investment buy.

(The writer is a licensed stockbroker of Eagle Equities, Inc. You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com)