By Mark T. Amoguis, Assistant Research Head

ANALYSTS were mixed on the prospects for owning bank stocks as the coronavirus disease 2019 (COVID-19) pandemic puts a damper on earnings.

On a quarter-on-quarter basis, the bellwether Philippine Stock Exchange index (PSEi) declined 31.9% in the first quarter this year from a 0.5% growth in the previous quarter and a 6.1% growth in the first quarter of 2019.

The financial subindex — which included the banks — tanked 34.3% in the first quarter, a stark contrast from a 3.3% growth the previous quarter and a one-percent decline in the first quarter last year.

This double-digit decline was mirrored across all the listed banks’ stock price performance during the period, which was largely brought about by the pandemic that sent the Philippine economy to a standstill. On a quarter-on-quarter basis, share prices were lower by range of 45.1% for Security Bank Corp. (ticker symbol: SECB) to eight percent for the UnionBank of the Philippines, Inc. (UBP).

“A big factor in the first quarter for the banks, as well as the broad market, was the uncertainty… brought about by the COVID-19 pandemic and how long it would last,” said China Bank Securities Corp. Research Director Rastine Mackie D. Mercado.

“Moreover, the implementation of the enhanced community quarantine (ECQ) may have weighed on the listed banks’ performance for [the first quarter] as business disruptions may impact the quality of loan portfolios (i.e., potential increase in nonperforming assets) — putting downward pressure on profitability as credit costs mount (higher provisions),” he added.

Mandarin Securities Corp. Research Analyst Zoren Philip A. Musngi said store closures and reduced business activity during the quarter led to expectations of a rise in loan payment delinquencies and possible bankruptcies.

“As seen in first-quarter earnings, banks have mostly doubled their loan loss provisions,” Mr. Musngi said.

“The sell-off in financial markets also led to losses to many trading desks and portfolios, which affected some banks’ non-interest income side,” he added.

To contain the spread of COVID-19, the government ordered a lockdown for the entire Luzon island in mid-March, effectively closing the majority of businesses and suspending public transportation.

“Despite the pandemic, some mid-size banks were able to have double digit growth in net income, driven by lower funding costs and robust trading gains. This was made possible by the recent cut in policy rates and reserve requirement by the BSP (Bangko Sentral ng Pilipinas),” Philippine National Bank (PNB) Research Department Senior Equity Research Analyst Wendy B. Estacio and Equity Research Analyst Marco R. Mauleon said.

During the first quarter, the BSP slashed key policy rates by a total of 75 basis points (bps) — 25 bps on Feb. 6 and 50 bps on March 19. It fired off another 50-bp cut to interest rates last April 16, bringing borrowing costs to record lows since the BSP shifted to an interest rate corridor in 2016 as well as completely scaling back the 150-bp hike implemented by the BSP in 2018 to arrest rising inflation.

As of this writing, the overnight reverse repurchase rate stands at 2.75%, while overnight deposit and lending rates are at 2.25% and 3.25%, respectively.

The BSP’s Monetary Board likewise slashed the reserve requirement ratio (RRR) of universal and commercial banks by 200 bps in a bid to boost liquidity. The Monetary Board has authorized BSP Governor Benjamin E. Diokno to reduce the RRR of up to 400 bps for this year.

The RRR for big banks now stands at 12%, while those for thrift and rural banks were maintained at four percent and three percent, respectively. Liquidity boost for smaller banks came through the 400-bp reduction in the minimum liquidity ratio for stand-alone thrift and rural banks to 16% until the end of the year.

Meanwhile, the country’s universal and commercial banks booked a P50.44-billion net income in the first quarter, 1.82% higher than the P49.54 billion posted in the first quarter of 2019, BSP data showed.

Net interest margin (NIM) — a ratio that measures banks’ efficiency in investing their funds by dividing annualized net interest income to average earning assets — continued to improve to 3.58% in the first quarter of the year from 3.44% in the final three months of 2019 and 3.29% in the first quarter last year.

Meanwhile, the provision for credit losses on loans and other financial assets ballooned 180.3% year-on-year to P23.35 billion in the first three months of the year.

Despite positive earnings performance in the first quarter, prospects for banks remain uncertain according to analysts.

“It’s a mixed bag for banks. For the first two-and-a-half months, banks are doing okay. However, the world drastically changed in the last few days of the quarter due to the “Great Global Lockdown,” I.B. Gimenez Securities, Inc. Research Head Joylin F. Telagen said.

“[O]n conservative note, banks also recognized higher provisions that tempered/affected the bottom line in general,” she added.

Some analysts point to UBP’s and Security Bank Corp.’s (SECB) financial performance during the quarter as both posted double-digit growth in net incomes despite recording higher loan loss provisions.

UBP’s stock performance had outperformed its banking peers and the index so far this year, said Mandarin Securities’ Mr. Musngi.

“We think this can be attributed to the bank’s robust internet/mobile banking app and infrastructure that they have steadily grown over the past years,” he added.

For PNB’s Ms. Estacio and Mr. Mauleon, “Arguably, the ECQ has become an advantage for [UBP] in a competitive standpoint as customers were compelled to embrace digital platforms to address their financial needs. As a result, UBP, being one of the most digitally focused banks in the country, was able to convert its existing customers towards digital platforms and even generate new customers.”

The Aboitiz-led bank’s net income jumped 22% to P2.64 billion during the first quarter from P2.16 billion last year. The potential impact of COVID-19 has also been factored in as UnionBank boosted its provisions for loan losses to P1.3 billion, 7.6 times higher than the P174.6 million it allotted in January to March 2019.

Meanwhile, SECB posted a net profit of P2.89 billion during the quarter, 21% higher than P2.38 billion last year. Its provisioning soared 19-fold to P5.69 billion compared to P295.28 million in 2019’s comparable three months.

“This was attributed to the bank’s strong top-line as NIM expanded by 129 bps year-on-year to 4.68% coupled with higher trading gains,” said PNB’s Ms. Estacio and Mr. Mauleon.

Justin Lawrence J. Tembrevilla, research head at Unicapital Securities, Inc., said all of the banks under its coverage — which includes BDO Unibank, Inc. (BDO), Metropolitan Bank & Trust Co. (MBT), Bank of the Philippine Islands (BPI), SECB, and East West Banking Corp. (EW) — achieved revenue growth amid sustained momentum in core lending and deposit-taking activities.

“[T]heir bottom-line growth tells a different story,” Mr. Tembrevilla said.

“What separated the ‘Big Three’ from their mid-tier counterparts is that BDO, BPI, and MBT needed to book higher provisions to be able to service their heftier portfolio, in stark contrast to the leaner portfolio of mid-sized banks,” he added.

For Piper Chaucer E. Tan, client engagement officer and research associate at Philstocks Financial, Inc., the increase in provisions for loan losses puts a dampener for listed banks’ earnings this year.

“This will pull the net income of the banks, thus shrinking its EPS (earnings per share), which is a major consideration of market investors for the profitability portion and valuation of the stock,” he said.

For PNB’s Ms. Estacio and Mr. Mauleon: “We expect higher provisions to drag banks’ earnings this year, particularly those with higher exposure to retail and SMEs segments. However, these may be offset by expansion in banks’ margins due to lower funding costs,” they said.

For China Bank Securities’ Mr. Mercado, “it’s too early to ascertain the extent of loan loss provisioning moving forward.”

“[B]anks that continue to beef up their loan loss provisions are likely to see more tempered bottom line growth rates this year as this is treated as an expense line item for banks. Thus, the larger the provisions are, the bigger its impact down the line,” he explained.

Mr. Mercado added that while the dovish moves from the BSP have provided a positive impact on the banks’ profits, the outlook for the year “will mostly be determined by banks’ guidance on nonperforming loans and credit costs.”

Unicapital’s Mr. Tembrevilla said the latest monetary decisions from the central bank should help banks tread the challenges in the next quarters.

“Trading gains could arise as we are still in a low interest rate regime, giving banks some opportunities to unwind their investment securities portfolio,” he said.

Mandarin Securities’ Mr. Musngi said the impact of the pandemic and the resulting lockdowns on loan demand remains uncertain even with monetary easing, especially as businesses scale down their expansion plans and consumers take a conservative view on spending.

“Banks that have robust Internet and mobile banking capabilities will likely see better results compared to those that are sticking to traditional banking,” Mr. Musngi said.

“We advise clients to stay away from banks for now as it is still uncertain how much the coronavirus pandemic will negatively impact the economy going forward,” he added.

For I.B. Gimenez Securities’ Ms. Telagen: “I’m more generally neutral to bearish/negative to the sector and will change to buy once I see earnings are picking up and the global economy started to recover. Currently, due to uncertainties, I focus on top banks.”

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