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BDO Unibank (BDO PM) Summary

Core Content

BDO Unibank (BDO PM) is a leading Philippine bank with a strong position in the market due to its resilient performance and solid fundamentals. The current share price is PHP77.95, with a target price of PHP88.00, indicating a potential upside of 13%. The market capitalization is PHP6.2B, and the average daily trading volume (ADTV) is USD9M. The bank's strong recurring income and less dependence on trading gains make it well-positioned to weather market volatility, especially with the US Federal Reserve tapering its bond-buying programme.

Key Financial Highlights

• Loan Growth: BDO's loans grew by 23% YoY in 2013, surpassing both the forecast of 18% and the industry average of 16.4%. This growth is expected to continue with a 15% increase in 2014, boosting net interest income by 15.4% to PHP48b.
• Net Interest Margin (NIM): BDO's NIM is expected to remain stable at 3.15% in 2014. A 5bps increase in NIM could lead to a 1.6% increase in net interest income.
• Fee-Based Income: Fee-based earnings are projected to grow by 14.6% to PHP16.8b in 2014, contributing about 23% of total income, the highest among banks covered.
• Operating Expenses: Operating costs have been growing at a single-digit rate, with the cost-to-income ratio expected to drop to 63.2% in 2014 from 66.4% in 2012.
• Capital Adequacy: BDO's capital adequacy ratio reached 15.75% at end-2013, well above the minimum requirement. Its CET1 ratio is estimated at 13.7%, and the bank has amended preferred shares to qualify them as additional Tier 1 under Basel III.
• Asset Quality: The bank's NPL ratio dropped to 2.4% from 8.3% five years ago, with a reserve cover ratio increasing to 152%. Credit costs are expected to fall to 49bps from 64bps last year.
• Shareholders' Value: Share capital increased by 5.4% YoY to PHP164b, suggesting strong earnings or higher net unrealized gains. The bank's fundamentals remain strong, with no expected capital-raising this year.

Main Views

• Earnings Outlook: Earnings are expected to slow down by 5% to PHP20b in 2014 due to anticipated weakness in treasury income, but a strong recovery of 18% is expected in 2015.
• Dividend Yield and Valuation: The net dividend yield is 1.4%, and the target price of PHP88 provides a 12.9% upside. The bank's core P/E ratio is 14.1x, and its P/BV is 1.6x, both reflecting its strong fundamentals.
• Market Position: BDO leads the industry with a 21.5% market share in total loans and is expected to maintain this position through aggressive marketing and a wide branch network.
• Risk Management: The bank's strong deposit franchise and asset quality help manage risks, allowing it to lower operating and credit costs in case of zero trading gains.

Key Information

• Share Price Performance: BDO's share price has outperformed the benchmark index and financial index by 13.3ppts and 10.5ppts respectively YTD.
• Dividend and Profitability: Net dividend yield is 1.4%, and the bank's ROAE is expected to reach 12.8% in 2014.
• Recurring Income: Core lending and fee-based income account for 84% of gross revenue since 2007, highlighting the bank's stable income streams.
• Capital and Liquidity: The bank's capital adequacy ratio is well above the regulatory minimum, and it has a strong liquidity position with a loans-to-deposits ratio of 75.2%.
• Shareholder Value: Shareholders' value is expected to remain intact and grow, with a conservative forecast of lower net unrealized gains of PHP382m for 2014.

Rating and Recommendation

• Investment Rating: BUY, unchanged from previous recommendations.
• Support from Recurring Income: The bank's strong recurring income supports its ability to maintain profitability despite market volatility.
• Valuation Metrics: The target price of PHP88 represents a potential upside of 13% and is based on the bank's strong fundamentals and growth prospects.

Figures and Data

• Loan Growth: 23% YoY in 2013, 15% expected in 2014.
• Net Interest Income: Expected to increase by 15.4% to PHP48b in 2014.
• Fee-Based Earnings: Projected to grow by 14.6% to PHP16.8b in 2014.
• Operating Costs: Estimated to drop to 3.1% of assets in 2013 and 2.9% in 2014.
• NPL Ratio: 2.4% in 2013, down from 8.3% five years ago.
• Capital Adequacy Ratio: 15.75% at end-2013, with potential increase to 14.1% due to preferred shares amendments.

Contact Information

• Katherine Tan: Head of Research, (63) 28498843, kat_tan@maybank-atrke.com

Research Offices

• Philippines: Luz LORENZO, (63) 28498836, luz_lorenzo@maybank-atrke.com
• Malaysia: WONG Chew Hann, (603) 2297 8686, wchewh@maybank-ib.com
• Singapore: NG Wee Siang, (65) 6432 1467, ngweesiang@maybank-ke.com.sg
• Indonesia: Wilianto IE, (62) 21 2557 1125, willianto.ie@maybank-ke.co.id
• Thailand: Maria LAPIZ, (66) 2257 0250, Maria.L@maybank-ke.co.th
• Vietnam: LE Hong Lien, (84) 844 55 58 88 x 8181, Tien.Le@maybank-kimeng.com.vn

Disclaimer

• This report is for general information only and does not constitute investment advice.
• Past performance is not necessarily a guide to future performance.
• The information is based on sources believed to be reliable, but not independently verified.
• The report may contain forward-looking statements and is subject to change without prior notice.