Analysts are eyeing the proverbial “pot of gold at the end of the rainbow” for the Philippine banking sector this year once the economy is able to gradually loosen its pandemic movement curbs. Risks, however, remain apparent with a continuing surge of COVID-19 and the Fed’s tightening monetary policy.
Finance expert Luis A. Limlingan, Head of Sales of Regina Capital Development Corporation, said that the country’s banking sector would continue to improve since the government is continuously stepping up efforts to fast-track our economic recovery. “With continued vaccination rollout, the Philippine border reopening for tourism, and decline in daily infections, it’s possible to see the industry post a high, single-digit growth at least.” He, however, noted that as long as the pandemic persists, the outlook will likely remain clouded.
Other analysts are banking on the banking sector to continue its improvement in financial performance as the economy leads to recovery. “Business conditions for banks are expected to be similar to 2021, as the global economy continues to recover, although at a slower pace,” one analyst said. “Overall, a stable and improved bank financial performance can be expected for this year, driven by economic and loan growth despite an uneven path to full recovery,” another one said.
Strong 4th quarter performance
As a measuring stick for the sector’s performance, Limlingan noted that the Philippine Stock Exchange index ended the fourth quarter of 2021 at 7,122.63, or an increase of 2.4% on a quarter-on-quarter basis. It logged only 6,952.88 in the previous quarter.
Meanwhile, the financial subindex that included the banks rose by 14.4% to 1,606.17, reversing the 6.3% quarter-on-quarter drop seen in the third quarter.
“Those that logged a strong [fourth quarter 2021] performance have likely booked much lower provisions amid credit risk normalization and saw a significant increase in their fee-based income,” Limlingan said. He attributed the increases in share prices among most of the listed banks to lower loan loss provisions of banks stocks amid the economy’s gradual recovery.
Twelve out of 15 of the listed banks posted growths in their share prices during the fourth quarter.
Metropolitan Bank & Trust Co. (MBT) had the highest growth at 27.5% quarter on quarter. It was closely followed by Union Bank of the Philippines (17.5%), Bank of the Philippine Islands (13.1%), Philippine Trust Co. (12.4%), and Security Bank Corporation (12.3%). Shares in Asia United Bank, meanwhile, fell by 3.9%. Also experiencing decreases were the Philippine Bank of Communications (-1.1%), and the Philippine National Bank (-0.5%).
Increase driven by improvements in asset quality
Senior Equity Research Analyst Wendy B. Estacio said that the increase in share prices of these banks was driven by improvements that were made in their asset quality, resulting in lower loan loss provisions. “The banks’ improved cost-to-income ratios as lenders enabled them to continue their shift to digitalization, which in turn expanded their operation’s efficiency,” Estacio said. “On asset quality side, non-performing loans were lower as credit standing of retail and corporates improved. As a result, banks provided lower loan loss provisions which improved their bottom line during the period,” she added.
Philippine central bank data showed that provision for credit losses by universal and commercial banks was nearly halved to P93.27 billion by end-December last year, down from P192.71 billion in 2020.
The total net income of big banks jumped by 45.5% year on year to P207.45 billion in the fourth quarter. Gross non-performing loan ratio of big lenders, meanwhile, improved to an 11-month low of 3.55% as of December last year.
Another analyst, Cristina S. Ulang, Research Head of First Metro Investment Corp. (FMIC), attributed the positive performance of banks during this period to a parallel decline in COVID-19 cases, as the economy re-opened towards normalcy.
“A sharp drop in the number of COVID-19 cases paved the way for economic reopening in [fourth quarter 2021], which benefitted banks in terms of lending opportunities,” Ms. Ulang said. She also noted a growth in the yield curve in 2021, which meant lower trading income for government securities.
Looking at the current market climate, analysts are recommending that investors should look at the loan portfolio of banks as they start to become less conservative in lending. “Market participants should still consider the composition of a bank’s loan portfolio, their classification, and prospects. They should find out how eager these banks are in strengthening their digital framework amid rising fraudulent activities,” Mr. Limlingan said.
Factoring in the Russia-Ukraine crisis and the Fed’s hawkish moves, the Bangko Sentral ng Pilipinas said that it will stick to its plan of raising its record-low key rate by the latter half of this year.
“In theory, this would lead to capital outflows, but the BSP gave a reassuring statement that it wouldn’t result in a sizable impact on the domestic economy and banking industry, citing that the country has sound fundamentals and a resilient banking system,” Mr. Limlingan explained. “Investors should look into a possible rise in operating expenses of banks given the initiatives to improve their digital operations in line with the BSP’s target.”
The central bank is looking at encouraging 70% of Filipinos to have bank accounts by 2023. It also targets half of the country’s payments to be conducted online by the same year.