Asia Essentials

Event

Philippine banks now offer the best potential for sustained growth in ourcoverage as key beneficiaries of our positive outlook for governmentinfrastructure project execution. We raise our sector net profit forecast by anaverage of 5% in 2016-18E, resulting in accelerating EPS growth culminatingin growth of 19% YoY in 2018E. This growth rate outstrips those of thecountry’s widely acknowledged growth sectors, property and consumer. Wehave an overweight view on the Philippine banks.

Impact

Ideally positioned for likely infrastructure surge. Typically a preferredsector in times of a good macro backdrop, we believe Philippine banks arepositioned to benefit significantly from increased infrastructure spend. Despiterecent negative news flow, we believe government execution should improvesignificantly , further enhancing the macro outlook. Our expectation of greatlyincreased infrastructure spending spearheads our optimism. BDO Unibank’srecent announcement that it plans to raise a record amount of new capitalreinforces the prospects of banks as likely beneficiaries; they can also counton good liquidity, management execution, and an acceptable competitive andregulatory landscape.

Earnings acceleration driven by revenues. The banks’ acceleratingearnings growth stands out in the Philippines and is driven by revenues. Weforecast loan growth to improve from 17% YoY in 2016E to 20% in 2017E, asinfrastructure spending makes a big positive contribution. This new area ofgrowth supports a firming of NIM, crucial to robust net interest income growth,the most important revenue driver. The sector’s strong revenues also standout from an ASEAN banks perspective.

Costs represent our main concern. In our profit forecasts for the sector, ourmain concern is costs, not revenues. Known already as among the worstsectors with regards to cost efficiency and cost control, the highlyexpansionary plans of many Philippine banks raises the risk of them fallingbehind in this area, leading to cost pressure. A negative surprise versus ourexisting forecast of 12% YoY growth in operating costs could be quitedamaging to the sector’s earnings picture. Meanwhile, credit costs deserve acloser watch, as we think the benign asset quality environment would bedifficult to sustain when loans start picking up. We forecast average creditcosts of 51bp for the sector in 2016-18E.

A bargain from a country perspective. Philippine banks rate very well froma country perspective, trading at valuations that are at a significant discount toother Philippine sectors. Moreover, as a sector that has lagged the market inrelative terms, banks offer a fairly unique trait of trading below their historicalaverage on both PER and P/B.