NPLs, economic recovery to guide banking stocks
ANALYSTS remain cautiously bullish on bank stocks amid uncertainties surrounding the outlook for easing lockdown restrictions and timing of vaccinations, whichfluence of demand for loans as well as of banks’ willingness to lend.
The Philippine Stock Exchange (PSE) financial sub-index, which included banks, ended the Fifirst quarter at 1373.83. This marked the sub-index’s 5.1% decline on a quarterly basis, which is a reversal of the 26.8% gain from the previous quarter. The decline in the first quarter, however, was slower than the 34.3% drop recorded in the same quarter last year.
Nonetheless, this sub-index continued to outperform the sharper decline in the benchmark PSE index (PSEi) in the first quarter compared to the performance observed in the fourth quarter of 2020.
In the first quarter, only three publicly traded banks posted higher share prices compared to the previous three months: Philippine Bank of Communications (PBC, 8.3%), Philippine Savings Bank (PSB, 2.8%) and Bank of the Philippine Islands (BPI, 0.2%).
In contrast, the Philippine National Bank (PNB) recorded the largest drop in share among listed banks at 22.8%, followed by double-digit declines in Philippine Trust Co. (PTC, -19.5%), Philippine Business Bank (PBB, -14.2%), Rizal Commercial Banking Corp. (RCB, -10.9%) and East West Banking Corp. (EW, -10.2%).
Other listed banks have also seen their stock prices fall, such as those of Security Bank Corp. (SECB, -9.7%), Metropolitan Bank & Trust Co. (MBT, -9.5%), China Banking Corp. (CHIB, -7.6%). %), BDO Unibank, Inc. (BDO, -4.5%), Asia United Bank (AUB, -3.6%) and UnionBank of the Philippines, Inc. (UBP, -3.2%).
Analysts said the mixed performance of listed banks over the period still reflected developments surrounding the 2019 coronavirus pandemic (COVID-19). Specifically, they point to the peak of COVID-19 infections in March, which prompted the government to place Metro Manila and neighboring provinces again under enhanced community quarantine (ECQ) from March 29 to April 11. Modified ECQ restrictive until May 14, followed by an even less restrictive general community quarantine, albeit “with increased restrictions” until the end of May.
PNB Equity Research senior analyst Wendy B. Estacio said the market “may have mixed feelings” about the banking sector during the period.
“First, investors may have already taken into account the impact of high provisions for credit losses on banks’ bottom line. At the same time, investors are still wary of the potential rise in Nonperforming Loans (NPLs), as most banks said that NPL ratios in the first quarter were still far from their projected peak, ”Ms. Estacio said in an e-post.
“In [the first quarter], the operating profit before provisioning of the banks we monitor (except EW) grew by 12% on average over one year. However, loan loss provisions increased 51% on average year over year. Net profit increased by an average of 10% y / y. Meanwhile, the NPL ratios of index banks (BDO, BPI, MBT, SECB) averaged 2.9% against their projected peak of 4% to 5%, ”she said.
The latest data from the Bangko Sentral ng Pilipinas (BSP) at the time showed the NPL ratio – or gross bad debt as a proportion of total gross loans – stood at 3.61% at the end of December, rising from 3.78% the previous month. Subsequent data from the following months showed that the NPL ratio increased to 3.72% in January, 4.08% in February and 4.21% in March – the latter being the highest since the 4.25% recorded in August 2009.
BSP said the ratio could exceed 5% by the end of 2021.
Meanwhile, Regina Capital Development Corp. Sales Director Luis A. Limlingan said subdued credit activity “continues to be the most important factor in banks’ performance” during the period. .
“In addition, some banks have significantly reduced their provisions for downgraded loans this year as planned since the industry aggressively provisioned last year in anticipation of the formation of NPL,” he added.
Christopher John Mangun, head of research at AAA Southeast Equities, Inc., has a similar assessment, adding that the trend could continue in the second and third quarters or “until restrictions are relaxed.”
The latest BSP data in this regard showed that large banks ‘outstanding loans continued to contract by 2.7% for the third consecutive month in February, reflecting lenders’ risk aversion and declining demand. borrowers.
In separate central bank data, universal and commercial banks showed a net interest margin – or the ratio that measures the efficiency of banks in investing their funds by dividing annualized net interest income by assets. average productive – fell to 3.49% in March from 3.58%. in March 2020.
The allowance for credit losses on loans and other financial assets of universal and commercial banks amounted to 20.61 billion pesos at the end of March, lower than the 192.71 billion pesos at the end of December 2020 and 23.35 billion pesos at the end of March. 2020.
Meanwhile, the big banks’ net income of 48.44 billion pesos was about 4% lower than the 50.44 billion pesos income posted during the same period in 2020.
Analysts remain cautious about the outlook for listed banks in the coming months given current developments, but said there was still room for investors to take long-term positions.
COL Financial Group, Inc.’s senior research analyst, John Martin L. Luciano, cited a slowdown in the rate of COVID-19 infection, as well as the acceleration of the vaccination program, among the key factors that would make rise in the stock prices of listed banks.
“This would give the government an opportunity to further ease restrictions and boost consumer and business confidence. This would ultimately increase the demand for loans. More importantly, further reopening of the economy would allow more companies to operate at higher capacities, which could temper the rise in NPLs, ”he said.
Joylin F. Telagen, head of research at IB Gimenez Securities, Inc., said bank stocks “will perform better” in the coming months compared to last year due to base effects.
“[Listed banks] will work better [in the second quarter] compared to the second quarter of 2020 due to less restrictive quarantine measures, the massive use of vaccines, a [sustained accommodative monetary policy]and the faster recovery of the global economy. However, there is still a definite risk as there are new virus variants, ”Ms. Telagen said.
Nonetheless, Ms Telagen said she remains in ‘sleep mode’ when it comes to local stocks: ‘Technically the PSEi is still down, so I’m waiting for this downtrend to reverse or break … She said. .
For a fourth consecutive policy meeting on May 12, the BSP kept the overnight repo rate, lending rate and deposit rate at 2%, 2.5% and 1.5%, respectively. In addition, the central bank lowered its inflation outlook this year to 3.9%, from a previous estimate of 4.2%, while those for 2022 were raised to 3% from 2.8%.
For Ms. Estacio, the slowdown in the formation of NPL as well as an improvement in asset quality indicators “should support investor sentiment vis-à-vis banks”.
Nonetheless, she said movements in bank stock prices “could remain subdued” as the economy remains in recession.
“As a result, banks can continue to be selective in lending and remain on the defensive to ease additional stress on asset quality. However, better than expected business revenues, cost savings and other factors that can drive profitability growth should make a strong investment case for a bank, ”said Ms. Telagen.
Likewise, Mangun said that a recovery in lending would “generate optimism” among investors in listed banks, but that there would still be “some weakness in the near term.”
Continued monitoring of loan demand, NPL training and provisions would be important in assessing the health of the banking sector amid the pandemic, Mr Limlingan said.
“The central bank’s decision on monetary policy will also play a role in how banks’ balance sheets and income statements look in the coming quarters,” he said. – AMP Yraola