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Daily Edge Summary - 6 February 2014

Core Content

The document presents a financial analysis report dated 6 February 2014, focusing on the performance of the Philippine banking sector and key stock recommendations. It includes barometer data, analyst insights, and detailed views on specific banks, particularly BDO Unibank Inc (BDO) and Bank of the Philippine Islands (BPI). The report also touches on broader economic indicators such as inflation and the outlook for the financial sector.

Key Financial Indicators

Analysts

• Luz Lorenzo: Head of Research / Economist, contact: (632)849 8836, email: luz_lorenzo@maybank-atrke.com
• Laura Dy-Liacco: (632) 849 8840, email: laura_dyliacco@maybank-atrke.com
• Rommel Rodrigo: (632) 849 8839, email: rommel_rodrigo@maybank-atrke.com
• Lovell Sarreal: (632) 849 8841, email: lovell_sarreal@maybank-atrke.com
• Katherine Tan: (632)849 8843, email: kat_tan@maybank-atrke.com
• Ramon Adviento: (63) 28498845, email: ramon_adviento@maybank-atrke.com

Top Idea: BDO Unibank Inc (BDO)

• Rating: BUY (unchanged)
• Target Price: PHP88.00
• Upside Potential: 13%
• Dividend Yield: 1.4%
• Key Highlights:
  • Loan growth in 2013 was 23% YoY, exceeding the industry's 16.4% expansion.
  • Core lending and fee-based income accounted for 84% of gross revenue, with trading and foreign exchange gains contributing 10% on average.
  • BDO's capital increased 5.4% YoY to PHP164b, higher than the estimated 4.2% growth.
  • Anticipated loan growth of 15% in 2014, combined with a 2bps increase in net interest margins, could boost net interest income by 15.4% to PHP48b.
  • Fee-based earnings are expected to grow by 14.6% to PHP16.8b.
  • Strong deposit franchise provides access to cheap funds (60% of total deposits).
  • Capital adequacy ratio under Basel III is estimated at 13.7%, well above the 8.5% minimum requirement.
  • The bank's strong asset quality and reserve cover ratio (152%) support a stable NPL ratio of 2.4%.
  • Expected earnings for 2014 are PHP20b, with a potential 5% slowdown due to lower treasury income.

Market Talk

Banks

• BPI (PHP86.70): FY13 earnings increased 15% YoY to PHP18.8b, resulting in ROE of 18%. Target price adjusted to PHP93.50, providing an 8% upside on top of a 2.1% dividend yield. HOLD rating maintained.
• Loan growth: BPI's loans expanded 21% YoY to PHP635b, faster than the industry's 16.4% growth.
• Net interest income: Rose 10% YoY to PHP30.2b, near the forecast of PHP30.4b.
• Operating costs: Subdued, growing by 7% YoY to PHP26.6b, resulting in a lower cost-to-income ratio of 50.9%.
• Tier 1 capital: Surged to 18.6% post-rights offer.
• Investment portfolio: Declined 8% YoY to PHP188b due to a conservative stance amid changing interest rates.

Mining

• AT (Atlas Consolidated Mining and Development Corp): Completed initial commissioning of its expansion project, showing positive results. Expected to increase milling capacity to 60,000 tonnes per day by March 2014.
• Major components installed: Two units of 19x31 feed ball mills, four 300-cubic meter rougher flotation tanks, and an auxiliary line with 30,000 tonnes per day capacity.

Economy

• January inflation: Rose to 4.2% YoY, driven mainly by food inflation (5.5%) and alcoholic beverages.
• Core inflation: Remained unchanged at 3.2% in January.
• Central Bank Policy: Expected to remain at 3.5% due to the short-term nature of inflation and the need to avoid currency volatility.
• Impact of inflation: Housing and utilities inflation stabilized after a spike in December due to power plant shutdowns.

Key Figures and Tables

• Figure 1: Shows headline inflation rising to 4.2% in January.
• Figure 2: Highlights core lending and fees as a percentage of gross income among big banks.
• Figure 3: Depicts BDO's loan market share and growth.
• Figure 4: Breakdown of 2014F gross income for BDO.
• Figure 5: Fee-based earnings for BDO.
• Figure 6: Projected trading gains for BDO.
• Figure 7: Operating costs as a % of assets.
• Figure 8: NPL vs NPL cover for BDO.
• Figure 9: 12-month forward P/BV band.
• Figure 10: Earnings and valuations table for BDO and other banks.
• Figure 11: Interim results for BPI.
• Figure 12: Key data for BDO.

Summary of Ratings and Projections

Conclusion

The report highlights BDO's strong performance and resilience in the face of market volatility, driven by its robust recurring income and stable asset quality. It also provides insights into BPI's earnings and market position, along with broader economic indicators like inflation and the outlook for the banking sector. Analysts maintain BUY and HOLD ratings based on projected growth and current valuations.