Disclosures & Disclaimer
This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.
MCI (P) 126/02/2017 MCI (P) 069/06/2017
Issuer of report:The Hongkong and Shanghai
Banking Corporation Limited, Singapore Branch
View HSBC Global Research at:
https://research.hsbc
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robust earnings outlook of 17-19% over the next two years
decent fee growth and better NIM outlook
Stocks have done well. The Philippines banks have done well – PFINC Index was
up 19% YTD and has outperformed the broader index which has been up 16%. Our
covered banks also performed well with SECB (27%), MBT and BDO (19%) as the
top performers, while UBP and BPI were the laggards (+16%). We believe the sector
will continue to outperform on robust earnings outlook of 17-19% over the next two
years, supported by a solid macro outlook of 6.5% in 2018e.
Solid 20-22% PPOP growth. PPOP growth and PPOP ROA (from 1.77% in 2017e
to 1.95% by the end of 2019e) are promising. The key drivers of 20-22% PPOP growth
are: 1) robust loan demand of c.20% p.a. across the board; 2) margin expansion now
(+4-7bp in 2017-19e vs flat previously) from tightening liquidity, arising from a current
account deficit, coupled with higher LDR by 2019e; and 3) steady growth in fees (10-
11% p.a.). Another key positive of the sector is that asset quality continues to be
healthy, implying earnings are not vulnerable to spikes in credit costs.
Still has legs to run, prefer MBT and SECB. Despite the sector’s outperformance,
we think the rally still has some legs to run. The sector is currently trading at 15x
2018e, almost at 1SD above mean. Even though ROA (from 1.1% in 2017e to 1.2%
in 2019e) and ROE expansion appear to be flattish due to credit cost normalisation,
PPOP ROA expansion remains strong (from 1.89% in 2016 to 1.95% by the end of
2019e), supported by a healthy macro outlook and limited headwinds risk. Hence, we
expect the sector to continue to re-rate. We continue to like MBT (23-28% in 2018-
19e) and SECB (14-20% in 2018-19e) for their strongest earnings growth outlooks.
Adjusting EPS by 1-2% in 2017-19e; new TPs set on 2018e BV. We adjust our
EPS estimates by 1-2%, where we raise our NIM assumptions slightly by 4-7bp. In
this report, new TPs are based on 2018e BV.
Philippines bank stocks: Valuations
Ticker Rating Share
price*
PHP
____ TP (PHP) _____ __ Rating ___Upside/_ PBV (x)ROE (%) _ _ PE (x) __Market cap (USDm) Avg trdg value
(US$m) Company OldNewOld New Downside(%) 17E 18E 17E 18E 17E 18E
Banco de Oro BDO PM Hold 127.50 122.90 138.10 Hold Hold 8.3 1.8 1.6 11.2 10.1 19.4 16.8 10.9 6.2
Bank of Phil Islands BPI PM Hold 103.00 108.00 119.60 Hold Hold 16.1 2.3 2.1 12.2 12.5 18.9 16.9 7.9 3.6
Metrobank MBT PM Buy 86.65 105.50 124.00 Buy Buy 43.1 1.3 1.2 9.0 10.4 14.1 11.1 5.4 8.5
Security Bank SECB PM Buy 241.00 297.70 332.10 Buy Buy 37.8 1.6 1.5 10.3 10.7 16.5 14.4 3.6 3.5
UnionBank UBP PM Buy 86.80 104.00 119.50 Buy Buy 37.7 1.3 1.1 10.3 13.3 12.7 9.0 1.8 0.5
Sector avg 1.7 1.6 10.7 11.3 17.4 14.6
Source: Bloomberg, HSBC. *Priced as of close on 6 September 2017
8 September 2017
Xiushi Cai*
Banks Analyst
The Hongkong and Shanghai Banking Corporation
Limited, Singapore Branch
xiushicai@hsbc.sg
+65 6658 0617
Kar Weng Loo*
Banks Analyst, SEA
The Hongkong and Shanghai Banking Corporation
Limited, Singapore Branch
karwengloo@hsbc.sg
+65 6658 0621
Mukul Yadav*
Associate
Bangalore
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is
not registered/qualified pursuant to FINRA regulations
Philippine Banks
EQUITIES
FIG
Philippines The rally still has legs to run
EQUITIES ● FIG
8 September 2017Rising demand for credit…broad-based growth coming in
Demand for loans has been extremely strong. In the past six years (2011-2016), the banking
system has been posting at an average of 15%, supported by solid economic growth of c.6%
(except 2011’s 4% GDP growth) during the same period. Our ASEAN economist, Noelan Arbis,
continues to believe in the domestic demand story, which should allow the economy to grow at
a sustainable level of 6.5% over the next two years.
What’s different now, compared to six years ago in 2011, is that the growth has broadened
across more industries. Manufacturing and wholesale (retail, trade and repair) were the key
contributors in 2011, while real estate and personal loans have been the bigger contributors in
2016.
Commercial banks gross loans growth %
y-o-y
Covered banks loan growth forecast %
y-o-y (labels for 2019e)
Source: BSP, HSBCSource: Company data, HSBC
Across segments, business (which account for 86% of total loans as of 1Q17) loan growth has
been extremely robust. For banks under our coverage, large corporates have grown 22% y-o-y
in 2016 and 7% in 1Q17, while middle market and SMEs have grown 15% y-o-y in 2016 but
contracted -2% in 1Q17. Consumer loans have also done reasonably well, growing at 14%
y-o-y in 2016 but flat in 1Q17.
Based on the growth rate of 17-19% posted in the first six months of the year (19% as of June
2017), it is plausible that the mid- to high teens growth rate can be sustained into 2017e. Banks
continue to be upbeat on all segments, and we anticipate them to deliver 20% loan growth
annually in 2018-2019e.While the hybrid PPP (where the government builds the projects and
bids out the operations and maintenance to the private sector) may lower expectations on loan
demand coming from the private sector, we are still upbeat on loan demand, given: 1) the
overall strong domestic economy; 2) our estimates have not factored in financing in relation to
PPP projects due to the uncertainty in terms of bidding and construction.
19.3%
-20%
-10%
0%
10%
20%
30%
40%
De
c-0No
v-0Oc
t-04
Se
p-0Au
g-0Jul
-07
Jun
-08
Ma
y-0Ap
r-10
Ma
r-1Feb
-12
Jan
-13
De
c-1No
v-1Oc
t-15
Se
p-1Gross loans % YoY
20%
17%
20%
25%
30%
10%
15%
20%
25%
30%
35%
BDOBPIMBTUBPSECB
20162017e2018e2019e
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8 September 2017
Commercial banks business vs consumer
loans as of March 2017
Commercial banks business vs consumer
loans growth % y-o-y
Source: BSP, HSBCSource: BSP, HSBC
Margins to see better support from tightening liquidity
System margins have been maintained at the 3.2-3.3% range for the past three years. The
sector’s flat margins were a disappointment, as excess liquidity and competition eroded the
positive impact from the shift in loan portfolios to the higher yielding segments.
There are a couple of factors which could provide support to margins in the near term. These
include:
1. Rising loan to deposits ratio (LDR)
Since the beginning of 2014, LDR of the banking system has seen a gradual upward trend –
LDR rose from 64% at the end of 2013, to 72% at the end of March 2017. This was largely due
to robust loan growth outpacing that of deposit growth. If that trend persists, LDR should
continue to increase and for our covered banks, we expect LDRs to be in the range 73-84% in
by 2019e, from 67-85% in 2017e.
Philippine banking system % LDRCovered banks % LDR (labels for 2019e)
Source: BSP, HSBCSource: Company data, HSBC
14%
86%
Consumer
Business
-10%
0%
10%
20%
30%
40%
Ma
r-0Ma
r-0Ma
r-1Ma
r-1Ma
r-1Ma
r-1Ma
r-1Ma
r-1Ma
r-1Ma
r-1Consumer loan growth % YoY
Business loan growth % YoY
72.1%
60%
62%
64%
66%
68%
70%
72%
74%
76%
78%
Ma
r-0Ma
r-0Ma
r-0Ma
r-0Ma
r-0Ma
r-0Ma
r-0Ma
r-0Ma
r-0Ma
r-1Ma
r-1Ma
r-1Ma
r-1Ma
r-1Ma
r-1Ma
r-1Ma
r-1LDR
84%
79%79%
73%
83%
60%
65%
70%
75%
80%
85%
90%
BDOBPIMBTUBPSECB
20162017e2018e2019e
EQUITIES ● FIG
8 September 20172. Current account deficit
Strong domestic demand and government’s infrastructure spending have led to the surge in
imports. This caused trade deficit to widen, resulting in deterioration in the current account. As
of 1Q17, the Philippines is currently running at a 0.4% deficit. If we were to include FDI, its
current account is likely to see a marginal surplus of 0.9% by the end of this year, but see a
reversal at 0.2% by 2018e. And, on anticipation of rising government disbursements in 2H17,
the current account deficit is likely to widen further. This means that as more liquidity is
channelled into investments rather than savings, liquidity will then decrease.
3. Potential gradual rise in short-term rates
Since the beginning of the year, short-term rates started rising – the 3-month PDST rate rose
from 2.08% at the end of December 2016, to 2.81% at the end of June and dipped slightly to
2.20% at the end of July, largely on expectations of the Fed raising interest rates. So even
though domestic policy rates may not rise in the near term (HSBC forecasts flat policy rates in
2017e and into 2018e), if market expectations of further rises in US interest rates persists, we
might see lending rates improve slightly, as business loans (term loans) are often priced off
PDST rates.
To this end, the potential tightness in liquidity could be offset by a possible cut in RRR (from
20% to 19%) in 2H17e. Banks are likely to park the excess funds in investments (at the BSP or
money market funds) if they are not able to place them out as loans in the shorter term. But
eventually, banks would channel the excess funds into loans, which would yield higher returns.
Overall, the bias is still towards tighter liquidity, which should lend support to margins. We have
also seen margins widen in the recent 2Q17 results. As such, we forecast NIM to expand 4bp in
2017e and 6bp in 2018e.
Covered banks net-interest margins (labels for 2019e)
Source: Company data, HSBC
Recently in January, BSP relaxed existing regulations on deposit taking activities outside bank
premises. Subject to approval, banks are now allowed to accept and disburse cash (facilitating
deposit taking, withdrawals, funds transfer and bill payments) through third-party service
providers such as convenience stores and pharmacies. This may help banks build up their
deposit base at a faster rate, leading to lower funding and capex cost. However, at this stage,
we have not factored in the potential benefits of funding costs yet.
3.36%
2.94%
3.64%
3.45%
2.93%
2.5%
3.0%
3.5%
4.0%
BDOBPIMBTUBPSECB
2014201520162017E2018E
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