FRI 17 JAN 2020

Banking Industry 2020 Outlook:

Outlook remains positive on
robust core income
Robust core income to offset weaker trading gains BDO Unibank, Inc.
HOLD
PHP145.00
Our outlook for the banking sector remains positive this year even as we expect headline
earnings growth to be subdued given the high base in trading gains. In particular, we are Bank of the Philippine Islands
forecasting the sector’s earnings to grow by 4.0% y/y in 2020 and 11.4% in 2021. Despite BUY
PHP106.00
the subdued growth in 2020, we expect robust core income growth, underpinned by both
faster credit growth and slight improvement in net interest margins. China Banking Corporation
BUY
In our view, loan growth should recover in light of the stronger macro-economic outlook PHP36.00

this year on the back of the timely passage of the 2020 budget and benign inflation rate
East West Banking Corporation
outlook. In fact, economists are forecasting GDP to expand by 6.1% in 2020 and 6.3% in BUY
2021. Moreover, with the BSP cutting its policy rate by 75 bps last year, lending rates have PHP17.00
already started to decline. As a result, we believe businesses should be able to increase
Metropolitan Bank & Trust
their borrowings to finance their capital expenditures and working capital requirements in
BUY
light of the lower borrowing costs. Overall, we are forecasting the sector’s loan portfolio PHP88.50
to grow by 11.8% and 12.8% in 2020 and 2021, respectively, faster than the 8.9% growth
registered as of the third quarter of 2019. Philippine National Bank
BUY
PHP60.00
With the acceleration in loan growth, we expect all banks to post double digit growth rates
in lending income, with net interest income growing by 12.8% y/y this year and 12.4% y/y Security Bank Corporation
next year. Similarly, we expect steady growth in fee-based revenues on the back of the HOLD
PHP209.00
increase in economic activity. Based on our estimates, industry fees could grow by 9.7% y/y
in 2020 and 9.6% in 2021. Union Bank of the Philippines
BUY
Exhibit 1: 2020 Growth Forecasts PHP69.00

Loan Net interest income Fee Earnings

BDO 12.3% 10.9% 9.2% 2.5%

BPI 12.2% 14.8% 11.1% 4.2%
CHIB 10.6% 14.6% 15.8% 12.1%
EW 10.1% 12.5% 8.6% 3.3%
MBT 11.3% 12.9% 6.6% 4.3%
PNB 13.8% 15.8% 15.8% 18.0% John Martin Luciano, CFA
SECB 12.1% 17.9% 16.2% 15.6% Senior Research Analyst
UBP 8.4% 10.8% 9.5% -20.1% john.luciano@colfinancial.com
source: COL estimates

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
 BANKING SECTOR I BANKING INDUSTRY 2020 OUTLOOK: OUTLOOK REMAIN ROBUST CORE INCOME

FRI 17 JAN 2020

Net interest margin to expand on lower funding cost

Secondary rates have fallen sharply in 2019, driven by the normalization of inflation rate
as well as the BSP decision to cut its policy rate. Note that from a peak of 8.3% in October
2018, the 10-year bond rate has declined to 4.5% as of end-December 2019. This, along
with the phased reduction in the reserve requirement ratio from 18% during the start
of the year to 14% by the end of the year, caused the banks’ funding cost to decline
throughout the first nine months of 2019. This caused the net interest margin of most
banks to improve sequentially. We expect this trend of normalization in funding cost
to continue in 2020 as we believe that there was a lag on passing on the lower rates to
depositors. Furthermore, we expect bond rates to be generally stable for the year on the
back of the benign inflation rate outlook. Note that economists are forecasting the 10-
year bond rate to end just slightly higher in 2020 to 4.6% from 4.5% as of end-December
2019. Moreover, we expect some recovery in the banks’ CASA growth given that the
spread between rates time deposit and CASA has narrowed, reducing the opportunity
cost for depositors when placing funds in CASA accounts. This should help support the
faster credit growth of the sector.

Meanwhile, on the asset side, we believe there will be pressure on loan yields to decline,
particularly on the corporate and middle market segment, in light of the BSP’s guidance
of a ~50 bps cut in policy rate for 2020. Likewise, competition may intensify given that
funding cost has already started normalizing. Nevertheless, we expect the decline in the
yields of corporate and middle market to be tempered by a) further cuts in the reserve
requirement ratio and b) effort to continuously expand the higher yielding consumer
loans. As a result, we are forecasting the sector’s net interest margin to still slightly
improve by 14 bps in 2020 and 10 bps in 2021.

Exhibit 2: Rates have normalized in 2019

8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan
2018 2018 2018 2018 2018 2018 2019 2019 2019 2019 2019 2019 2020

10-Year Bond rate

Source: Bloomberg

COL Financial Group, Inc. 2

 BANKING SECTOR I BANKING INDUSTRY 2020 OUTLOOK: OUTLOOK REMAIN ROBUST CORE INCOME

FRI 17 JAN 2020

8.0

7.0

6.0

5.0

4.0

3.0

2.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2019 2019 2019 2019 2019 2019 2019 2019 2019 2019 2019 2019

Time Deposit Rate (Below 1 Year) Average Lending Rate (All Maturities)

Source: BSP, Bloomberg

Exhibit 3: Quarterly Net Interest Margin

Net Interest Margins

3Q18 4Q18 1Q19 2Q19 3Q19
BDO 3.64 3.73 3.80 3.98 4.24
BPI 3.15 3.07 3.19 3.21 3.18
CHIB 3.16 2.88 2.80 2.68 3.08
EW 6.23 5.73 5.33 5.53 5.96
MBT 3.39 3.36 3.32 3.36 3.53
PNB 3.34 3.15 3.02 3.10 3.26
SECB 2.95 3.01 3.06 3.25 3.63
UBP 3.46 3.57 2.91 3.17 3.65
RCB 3.48 3.83 3.36 3.33 3.58
Median 3.39 3.36 3.19 3.25 3.58
Source: Banks, COL estimates

Muted trading environment

We expect trading gains to normalize in 2020 following the surge last year. Recall that all
banks booked robust trading gains last year following the sharp decline in bond rates.
We believe banks have already realized most of the gains in their portfolio. Furthermore,
as previously mentioned, the outlook for bond rates is largely stable, which could limit
trading opportunities next year. As such, we are forecasting the sector’s trading gains to
fall from Php23.1Bil in 2019 to a normalized level of Php4.7Bil in 2020.

Capital ratios remain healthy

COL Financial Group, Inc. 3

 BANKING SECTOR I BANKING INDUSTRY 2020 OUTLOOK: OUTLOOK REMAIN ROBUST CORE INCOME

FRI 17 JAN 2020

In terms of capital, we believe all banks generally have healthy capital ratios to support
their asset growth for the year as they were able improve their CET1 ratios following the
strong trading gains in 3Q19. However, EW currently has the lowest CET1 ratio at 10.4%.
The bank noted that is still comfortable with their current capital levels as internally
generated funds are sufficient to fund the current pace of growth. Still, we contend that
it may have to do so should there be a significant acceleration in loan growth.

Meanwhile, last year, the BSP decided to amend the Higher Loss Absorbency (HLA)
requirement for banks under Domestic Systematically Important Bank (DSIB) in the
bucket 2 from 2.5% previously to a range of 1.5% to 2.0%. This benefited the larger banks
as they will be able to increase their leverage and ROE. BDO, in particular, has benefited
the most given that its parent CET1 ratio (12.6%) is the closest to the minimum CET1 level.

Exhibit 4: Capital ratios remain healthy

18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
SECB MBT BPI PNB UBP RCB BDO CHIB EW

Consolidated CET1 Ratio Parent CET1 Ratio Minimum CET1 Ratio

Source: Banks, BSP, COl Estimates

Top pick: MBT

Our top pick for the sector is MBT. We continue to like MBT as it is expected to be one of
the major beneficiaries of the growing demand for loans given its size, and highly liquid
and healthy balance sheet. It has a good source of low-cost funding as seen in their high
CASA ratio (64% for MBT and 69.1% for BPI as of end-September 2019). In addition,
the bank has enough capital buffer to support its growth over the next three years. In
addition, MBT is in the process of consolidating its credit card subsidiary, Metrobank
Card Corporation. This should improve the bank’s ability to cross sell its products as well
as increase its capital efficiency. Among the big 3 banks, it is also the most disciplined
controlling its cost as seen in the bank’s single-digit operating expense growth. At its
current price, the bank is also trading at a steep discount at vs its peers at 0.9X 2020E P/
BV (vs BDO’s 1.7X and BPI’s 1.3X).

COL Financial Group, Inc. 4

 BANKING SECTOR I BANKING INDUSTRY 2020 OUTLOOK: OUTLOOK REMAIN ROBUST CORE INCOME

FRI 17 JAN 2020

Exhibit 5: Valuations and Ratings

Target
Price 2020 P/B Rating
Multiple Price
BDO 152.00 1.68 1.60 145.00 HOLD
BPI 85.00 1.31 1.65 106.00 BUY
CHIB 24.90 0.65 0.95 36.00 BUY
EW 11.98 0.50 0.70 17.00 BUY
MBT 65.90 0.89 1.20 88.50 BUY
PNB 34.05 0.37 0.65 60.00 BUY
SECB 187.00 1.12 1.25 209.00 HOLD
UBP 57.50 0.79 0.95 69.00 BUY
Source: Bloomberg, COL estimates

COL Financial Group, Inc. 5

 BANKING SECTOR I BANKING INDUSTRY 2020 OUTLOOK: OUTLOOK REMAIN ROBUST CORE INCOME

FRI 17 JAN 2020

IMPORTANT RATING DEFINITIONS

BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may
be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are
subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of
a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies
mentioned in this report and may trade them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA

VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG
SENIOR RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@colfinancial.com

COL FINANCIAL GROUP, INC.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 6