Analysts bullish on banking games amid market turmoil

The turmoil caused by rising consumer costs and fears of recession has forced many investors to flee the stock market, look to safer alternatives or weather the storm with cash safe. Some stockbrokers, however, say investors with a relatively higher appetite for risk might consider some stocks in the Philippine banking sector.

They cite a number of tailwinds, ranging from better margins due to rising interest rates to new opportunities emerging from the continued push to digital. Maybank Securities says the rise of e-wallets and digital banking is also a boon to the industry, given rising fee-based income and growth in savings.

“Our general opinion is that the current environment of growing interest should push [net interest margin] expansion, as loans are gradually repriced higher,” Nicole Garcia, research analyst at AB Capital Securities, told the Inquirer.

During this tough time, she says the big banks are the safest bets.

“The big banks will benefit the most because more than 70% of their deposits are [current account/savings account] and they are unlikely to be repriced higher based on loans,” says Garcia.

Garcia warns, however, that lenders with fewer resources and greater exposure to small business and consumer loans could see a “second wave” of debt turn sour.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said the Bangko Sentral ng Pilipinas (BSP) is set to raise the key rate to as much as 0.5% next month to rein in soaring costs. .

The country’s inflation in June soared to 6.1%, its fastest increase since October 2018.

“Higher local policy rates would lead to some increase in borrowing or funding costs, which could lead to lower earnings and valuations, and a slowing economy, an unintended consequence of countering pressures inflationary,” says Ricafort.

For COL Financial Group, earnings in the banking sector in the first quarter “were generally positive” and exceeded expectations.

COL Group reports that the banks that recorded higher profits 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 increase, supported by higher asset returns and improving lending volumes and policy rate hikes,” COL said.

Industry-wide loan growth is also expected to accelerate “as the economy continues to recover amid easing COVID-19 restrictions.” The latest data from the BSP shows a 10.1% increase in loans last April compared to an 8.9% growth in March.

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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 major lenders: the current wave of e-wallets and digital start-up banks. Once feared as industry disruptors, these new entrants seem unlikely allies to the banking industry, at least for now.

“The increase in the number of e-wallet subscribers should be positive for banks. E-wallet platforms generate cash-in or cash-out transactions and partnerships for the cross-selling of banking or investment products and insurance products,” explains Maybank.

He notes that 10-15% of bank fee revenue came from e-wallets at the end of 2021.

“Going forward, collaboration with e-wallet providers could boost retail lending, as well as reach and subscribers to insurance and investment products,” Maybank adds.

E-wallets, in particular, increased the banking population to 53% at the end of September last year, from 29% before the pandemic.

With momentum on the side of digital players, Maybank says traditional bank account holders still have room to grow. He expects the segment to add another 18 million accounts to eventually reach 38.5 million, or 50% of the country’s adult population.

He has 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 traditional and digital banks to co-exist, especially as there is still huge room for growth for deposit account holders,” Maybank says.

“The presence of foreign digital banks will help the banking sector by accelerating digital transformation, but we do not expect any significant negative impact on the growth of Philippine banks,” he adds.

Meanwhile, the country’s major lenders are locked in something of an arms race, investing in digital products and system upgrades. Digital spending jumped 60% on average, accounting for 70-90% of total capital spending, Maybank notes.

Of the banks it covers, Maybank has issued buy ratings for BPI, UnionBank, PNB and Security Bank.

But his best “early stage” choice remains the country’s largest lender, BDO.

A member of the billionaire Sy family’s SM Group, BDO is committed to its dual expansion strategy: pursuing both physical branch expansion while making new digital inroads.

From 2019 to 2021, BDO spent 36 billion pesos on IT, surpassing its competitors. It also implemented a new cybersecurity system in early 2022 after a recent episode of hacking affecting hundreds of customers.

“BDO is best positioned to benefit from the economic reopening, which will drive both business and retail growth,” Maybank said.

Because the Philippines is archipelagic, physical branches are still considered the best way to reach and educate the unbanked.

Maybank has assigned BDO a 12-month price target of P157, up around 33% from the end of June. Profits are expected to rise 11.4% this year and 17% in 2023, due to higher net interest income, business loans and higher fees.

“Its dual expansion strategy of physically expanding into the provinces while pursuing digital transformation effectively creates more market, which it could capture in the long term, maintaining higher revenues over time,” according to Maybank. . INQ

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Michael J. Birnbaum