FREE Special Report: July 2018 Banking Sector Outlook (MBT, SECB, BPI, BDO, EW Target Prices)

Hold on to EW, BPI and BDO

We do not anticipate any extraordinary catalysts for BPI and BDO, and remain tentative on EW’s ability to secure stock rights offering (SRO) funding given the market’s volatility.

MBT and SECB are Buys

However, buy in tranches given the current price movements. MBT’s net interest spread will serve it well when rates are on the rise. Meanwhile, SECB’s 1st Quarter (1Q) 2018 performance positions it to do well this year.

Summary of Recommendations and Target Prices:

Metrobank (MBT) – Buy, Target Price of PHP 79.80

Security Bank (SECB) – Buy, Target Price of PHP 210.60

Bank of the Philippine Islands (BPI) – Hold, Target Price of PHP 99.60

Banco de Oro (BDO) – Hold, Target Price of PHP 137.00

East West Bank (EW) – Hold, Target Price of PHP 14.90

Handling PFRS 9, higher documentary stamp tax (DST) and trading losses

One of the biggest stumbling block for banks this year is implementing the PFRS 9 reporting standard
where expected credit losses are posted to the income statement.

BDO, EW and MBT had to book over PHP 1 Billion in charges, reflected under trading losses and provisions for loss while BPI reported less than PHP 800 Million in provisioning. SECB, however, had disposed the investments that would have exposed them to this reporting requirement, in early and late 2017.

Not surprisingly, SECB has one of the lower cost to income ratios, even after recording higher DST expenses brought on by the tax reform. While everyone is exposed to lower trading gains, SECB and BPI have managed to do well since they anticipated PFRS 9‘s effect.

Rising yields favor the Banking sector. Banks earn more from the spread between what they pay depositors and interest earned from loans and highly-rated debt like Treasuries. MBT has the highest net interest margin (NIM) among the 4 big banks. And while EW has an exceptional NIM as well, its funding requirements create an overhang on the stock.

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