Outlook positive for bank stocks amid hopes of rate hike pause, inflation slowdown

WITH THE DOWNTREND in inflation allowing room for the central bank to retain or cut key interest rates, analysts remain bullish on bank stocks this year as they expect banks’ to net higher earnings and at the same time, lower funding costs.

The barometer Philippine Stock Exchange index (PSEi) gained 2.6% in the fourth quarter, higher than the 1.2% increase posted in the third quarter albeit slower than last year’s 4.7%. This was, however, slower than the 13.7% increase recorded the previous year.

By end of last year, the subindex dipped by 20.6% versus the 34.6% growth recorded in 2017.

This rebound was reflected in the listed banks’ share prices during the October-December period with eight of the 14 listed banks registering quarter-onquarter gains: Metropolitan Bank & Trust Co. (ticker symbol: MBT, 20.8%), Philippine Trust Co. (PTC, 16.2%), Bank of the Philippine Islands (BPI, 12.8%), Rizal Commercial Banking Corp. (RCB, 12.6%), BDO Unibank, Inc. (BDO, 9.2%), Philippine Business Bank (PBB, 4.2%), Security Bank Corp. (SECB, 0.6%), and Asia United Bank (AUB, 0.2%).

On the other hand, Philippine Savings Bank saw the biggest drop in share price during the period at 25.8%, followed by China Banking Corp. (CHIB, -6.1%), East West Banking Corp. (EW, -5.9%), Union Bank of the Philippines (UBP, -4.6%), Philippine Bank of Communications (PBC, -1.2%), and Philippine National Bank (PNB, -0.6%).

Despite higher funding costs due to tightening liquidity during the quarter, banks managed to outpace their earnings last year compared to 2017.

Data from the Bangko Sentral ng Pilipinas (BSP) showed the country’s universal and commercial banks booking a cumulative P159.93-billion net income last year, 9.3% higher than the P146.33 billion in 2017. 139.5 127 36.44

148.5 33

157 36.9

150 37.1

Net interest margin (NIM) — the ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income to average earning assets — improved to 3.17% in the fourth quarter from 3.15% in the third quarter and 3.04% in the same three months to December in 2017.

For the quarter, the BSP raised key policy rates in its Nov. 15 meeting by 25 basis points (bps). Benchmark interest are currently at the 4.25-5.25% range, with its key overnight reverse repurchase at 4.75%, the highest in nearly a decade. To recall, the central bank implemented five consecutive rate hikes from May to November 81.8 93.5 27.947

77.56 23.6

90 27.4

95 23.5 87.4 97 26.258

108.8 28.3 158.5 205 10.178

168.4 9.9

199 10.1

203 10.3 totaling 175 bps amid surging consumer prices.

The last three months of the year also saw headline inflation showing signs of deceleration. From its 6.7% peaks in September and October, the rate of consumer price increases eased to 6% in November and 5.1% in December.

Despite a high interest rate environment, analysts remained optimistic on the banks’ fourth quarter earnings, expecting the lenders’ loan portfolios to have expanded. They also noted the easing inflation during the quarter, which may indicate a break in the central bank’s move to increase key rates in the near future. 25.4 36 9.073 47.6 62 8.837 55.4 75.5 7.381

87.85 9.7

“During the fourth quarter, the slowdown in inflation bolstered the stock prices of the biggest players in the banking sector. Expectations on margin expansion due to policy rate hikes in 2018, as well as strong business loan growth, had helped stock prices to continue trending up,” said Timson Securities, Inc. trader Jervin S. de Celis.

For COL Financial Group, Inc.’s senior research analyst John Martin L. Luciano: “[I]n general, we expect the re-pricing of loans to continue during the fourth quarter, partially offset by higher funding cost. This will result to an improvement in NIMs quarteron-quarter and year-on-year.” 13.02 16.7 4.535

16.2 5.9

14.9 4.6

“In addition, banks may have also booked modest trading gains in the fourth quarter in light of the downward shift in yield curve,” he added.

Rachelle C. Cruz, research analyst at AP Securities, Inc., was of the same view, adding that the drop in 10-year government bond yields from the peak of 8.2% in the third quarter and the recovery of the equities market “should lead to recovery in banks’ treasury income.”