Borrowing costs

Analysts remain bullish on banks as borrowing costs rise

FREEPIK

LISTED BANKS held up better in the first quarter despite rising inflation environment aggravated by Russia’s ongoing invasion of Ukraine.

After the central bank raised borrowing costs, these lenders could see increased profitability this year, analysts said.

The Philippine Stock Exchange Index (PSEi) ended the first quarter at 7,203.47, up 1.1% quarter-on-quarter from 7,122.63 in the last quarter of 2021.

The financials sub-index, which included banks, rose 5.5% to 1,694.89, down from the 14.4% growth recorded in the fourth quarter.

In the first quarter, the share price of six listed banks out of 16 rose quarter on quarter. BDO Unibank, Inc. leads with 9.9% growth, followed by Bank of the Philippine Islands (BPI, 8.1%); China Banking Corp. (CHIB, 3.8%), Rizal Commercial Banking Corp. (RCBC, 2.5%), Metropolitan Bank & Trust Co. (MBT, 2.3%); and Asia United Bank (AUB, 1.3%).

Meanwhile, the share price of Philippine Business Bank (PBB) fell the most by 13.4%, followed by East West Banking Corp. (EW, -12.2%); Philippine Trust Co. (-8.5%); and Security Bank Corp. (-8.4%).

“In terms of share price performance, BDO and BPI stood out with returns of 9.9% and 8.1%, respectively, in the first quarter, which can be attributed to investor optimism in the sector. given that BPI and BDO are the most weighted bank stocks. in the PSEi and financial sub-index,” Rastine Mackie D. Mercado, research director of China Bank Securities Corp., said in an email.

“It may also reflect continued investor interest in these two banks’ digital initiatives, which continue to gain visibility,” he said.

Mr Mercado said BPI and Security Bank Corp. (SECB) stood out the most in terms of attributable net profit for the first three months of the year, growing by 60% and 66%, respectively.

“Despite the industry’s positive outlook for 2022, continued pandemic-related headwinds, geopolitical tensions, US rate hikes and cuts, global inflation, and a new Philippine president by mid- year all weighed on the banking sector during [first-quarter] 2022,” Toby Allan C. Arce, head of sales for Globalinks Securities and Stocks, Inc., said in an email.

Wendy Estacio, senior equity research analyst at the National Bank of the Philippines (PNB), said the market was uncertain in the first quarter of the impact of rising interest rates and the inflation environment. high aggravated by the ongoing war between Russia and Ukraine.

“While stock prices across the board were affected by geopolitical and inflationary concerns, bank stocks were significantly more resilient,” said China Bank’s Mercado.

Central bank data showed total net income of major banks rose 26.7 percent year-on-year to P61.38 billion in the first quarter.

Meanwhile, the provision for credit losses by universal and commercial banks fell 8.8 percent at the end of March to 18.79 billion pesos from 20.61 billion pesos in 2021, according to data. BSP data.

The total loan portfolio of major lenders rose 8.6 percent in March to 10.2 trillion pesos from 9.39 trillion pesos last year.

The gross NPL ratio of universal and commercial banks improved to 3.73% in March from 3.87% in February.

After the Philippines’ gross domestic product rose 8.3% in the first quarter, the central bank raised interest rates by 25 basis points (bps) last May to contain soaring inflation.

However, analysts see higher rates as a “benefit” for banks as their profitability would also increase, but also warned of risks to other aspects of the economy.

“In theory, this would support the bank’s profitability this year. However, as the pandemic persists, the timing of rate hikes is crucial as lenders would assess how quickly they can pass the hike on to their clients,” said Regina Capital Development Corp’s chief sales officer. Luis A. Limlingan in an email.

“If the timing is not right, borrowers could be pushed to the brink of default. Therefore, we see banks would be able to absorb a marginal rate hike, albeit with a slight lag “, did he declare.

“A central bank takeoff could likely dampen the recovery in demand and employment, especially in the absence of fiscal support to shield the economy from higher borrowing costs,” Arce said.

“Inflation is tipping the outlook down as rising food and fuel prices challenge the central bank’s accommodative monetary policies, and there is growing pressure to stem inflationary pressures by raising rates. interest as of this month Households are likely to face stronger headwinds as weaker house price growth and rising costs of living add pressure to household budgets “, he added.

Estacio said rate hikes could improve banks’ net interest margins (NIMs) this year, adding that they were looking at a 10 to 20 basis point increase in NIMs if the central bank raised 50 basis points. base.

The latest data from the BSP showed that net interest margin – the ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income by average earning assets – increased slightly to 3, 23% at the end of March, against 3.21% at the end of December. However, this figure was lower than the 3.49% recorded at the end of March last year.

OUTLOOK
For the rest of the year, analysts see a favorable period for banks and banking stock investment as the country continues to lower quarantine levels and the economy slowly recovers from the shocks of the first trimester.

“Philippine banks are expected to return to pre-pandemic levels of profitability this year with a recovering economy and an imminent resumption of activity,” Arce said.

“The sector’s comfortable capitalization and stable funding profiles will support banks’ credit profiles. General credit conditions should provide significant support for economic activity. Bank lending seems to have picked up the slack in recent months. Lending activity continues to gain traction amid optimistic business outlook due to continued vaccine rollouts and easing of restrictions,” he added.

PNB’s Ms. Estacio and China Bank’s Mr. Mercado both estimate growth in loans and NIMs as the central bank has begun to raise borrowing costs.

Ms Estacio expects an average loan growth of 8% this year for the banks under their cover, and an increase in their NIMs of 15 basis points. It also predicts that bank profits will rise by an average of 17% year-on-year thanks to lower provisions for loan losses.

“For 2022, investors should factor in a recovery in loan portfolios as banks begin to become less conservative on lending due to better economic growth. Wider margins from potential rate hikes managers could also improve bank profitability,” Estacio said.

“Investors should look into a possible increase in operating expenses for banks given initiatives to improve their digital operations,” she added.

However, Mr. Arce also reiterated the risks that could affect the encouraging outlook for the year, such as a further resurgence of COVID-19 and a rapid rise in interest rates that could affect credit demand and put pressure on small and medium-sized enterprises (SMEs) still recovering from the pandemic.

“While we continue to be generally bullish on bank stocks, we believe investors will continue to pay attention to banks: (1) continuing to post stronger headlines [year-on-year] bottom line, (2) who have made greater progress in expanding their loan portfolios, (3) who continue to improve the quality of their assets (as evidenced by lower non-performing loan ratios), and recognize more normalized loan loss provisions, and; (4) who continue to invest and give greater visibility to digital initiatives. It should also be noted that [Philippine] banks remain well capitalized and have enough reserves to withstand any further shocks,” Mercado said. — Bernadette Therese M. Gadon