Philippine Banks
Not compelling enough
Philippines
Banks
Harsh Wardhan ModiAC
(65) 6882- 2450
harsh.w.modi@jpmorgan.com
J.P. Morgan Securities Singapore Private
Limited
Sunil Garg
(852) 2800-8518
sunil.garg@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
Summary Ratings and Estimates
Company Price Rating Price Target PT End Date Metric Current FYE Next FYE
Banco De Oro Unibank, Inc. (Php) 21.75 UW (Php) 19.00 Dec-09 Basic EPS (rep'd) (Php) .36 (Php) 1.84
prior N (Php) 45.00 Dec-08 (Php) 2.51 (Php) 3.94
Bank of the Philippine Islands (Php) 37.00 N (Php) 35.00 Dec-09 Basic EPS (rep'd) (Php) 2.01 (Php) 1.54
prior (Php) 39.00 Jun-09 (Php) 2.89 (Php) 3.24
Metropolitan Bank and Trust Company (Php) 22.75 N (Php) 22.00 Dec-09 Basic EPS (rep'd) (Php) 1.77 (Php) 1.54
prior (Php) 36.00 Jun-09 (Php) 3.52 (Php) 4.84
Source: Company data, Reuters, J.P. Morgan estimates. All prices as at 12 Feb 09.
See page 33 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
• Low valuations but capital calls a risk: Philippine banks currently
trade at decade low multiples, but we believe there is a possibility of
‘last capital call’ for the sector before the ghost of 1997 crisis is finally
buried. BDO has already announced plans for a Php7bn-8bn rights issue
in due course and we expect more banks to follow.
• Missed opportunity: The sector started cleaning up legacy Asian crisis
NPLs aggressively starting 2005. The idea was to reduce NPL levels to
2%-3% range with 100% coverage by 2010. There was an excellent
opportunity to do so earlier by using mark to market bond gains during
2005-2007. A part was done but a lot still remains. NPL ratio for the
big banks stand at 4.5%, with 71% cover as of now. Hence, we believe
the banks can either choose to raise more capital now and completely
clean up their books to take a position of strength or risk a steady decline
in earnings and a sub-10% RoE for next two years.
• Margin pressure: Banks would face an impact of lower margins and
lower non-interest income over 2009E-10E. NIM compression would be
a function of lower interest rates as large banks face lower deposit
spreads. Asset spreads should also reduce as banks shift towards slower
loan growth and change the mix in favor of higher quality securities.
• Lower non interest revenues - quantity and quality: Recurring non
interest revenue streams such as fees and brokerage should decline on
lower activity levels. Partial offset to this would be mark to market gains
on bond portfolio as interest rate head lower. But the one-off nature of
these gains would make this support a low quality one; hence it should
not be a stock price driver.
• Asset quality: Credit quality is far better in comparison with the Asian
crisis but NPLs and credit costs should remain elevated. Of recent
vintage, we are more worried about consumer loans due to industry
leading growth in last two year without the benefit of substantial
historical and current consumer underwriting data.
• Sector is attractive from a longer term perspective but there are
limited catalysts in next 3 to 6 months. We would look out for capital
raising to address legacy balance sheet concerns before turning positive.
BPI (N) remains our preferred pick for dedicated investors, while we
maintain N on Metro on valuations. BDO (UW) is our funding source.

Table of Contents
The last capital call...................................................................4
NIMs compression.......................................................................................................5
Non-Interest Income ....................................................................................................6
Loan growth to slow ....................................................................................................6
Asset quality ................................................................................................................7
Conclusion................................................................................8
Companies................................................................................9
Banco De Oro Unibank, Inc.......................................................................................10
Metropolitan Bank and Trust Company.....................................................................19
Bank of the Philippine Islands (BPI) .........................................................................26

 

 

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