May 29, 2009
Philippines Banks
Overweight an Often
Overlooked Market
Initiate on Philippine banks with Attractive view: we
see upside risk from solid growth, increasing returns and
a recovery in investment markets. The Philippines offers
positive demographics, vast remittances flows, liquid
balance sheets and typical emerging market challenges
and opportunities. Low investor interest has meant low
liquidity – a vicious cycle. However, we see a range of
investment themes – quality (BPI), market leverage
(MBT), and a longer-term integration play (BDO).
BPI Overweight, P44.50, 12-month PT P55 … quality:
BPI is trading on 17x EPS, 2.2x book, with a three-year
earnings CAGR of 27% and ROE of 13% on our FY09
estimates. We believe BPI offers a high-quality play on
Philippines’ under-owned, emerging market. BPI has a
strong and highly liquid balance sheet - Tier I of 12.7%,
NPL ratio at 3.9%, and 97% of funding from deposits.
MBT Overweight, P33.00 12-month PT P53 … market
leverage: MBT is trading on 14x EPS, 0.9x book, with a
three-year earnings CAGR of 33%. We expect ROA to
recover with improved investment markets. Tier I is
ample at 10.0%. The discount to peers partly reflects its
greater sensitivity to investment markets and subdued
growth and returns over recent years. However, we
expect the gap to narrow as markets recover. MBT is the
highest leveraged play on investment market recovery.
BDO Equal-weight, P32.50 12-month PT P36 …
indigestion risk: BDO is trading on 20x EPS, 1.2x book,
with a three-year earnings CAGR of 57% on our FY09
estimates. The share price appears to discount
concerns on capital management, asset quality, and
integration. Tier I is 8.5%, and at risk if growth
momentum is sustained. BDO has a large unseasoned
book that has grown at a pace well above the system.
We would like to see a period of consolidation to avoid
any indigestion risk from rapid growth and acquisition.
Risks to our call … 1) No investment market recovery;
2) credit cycle worse than expected; 3) global recession
hits remittances and domestic growth story falters.