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Bank of the Philippine Islands (BPI) Summary

Core Content

• Share Price: PHP91.00
• Target Price: PHP93.50 (+3%)
• Market Capitalization (USD): 8.0B
• Average Daily Trading Value (USD): 5M
• Market Position: BPI holds 15.4% of industry loans (2nd) and 13.5% of deposits (3rd) in the Philippines.

Main Views

• Earnings Growth: BPI's earnings are forecasted to increase by 2% in FY14 and 7% in FY15, resulting in a two-year 14% CAGR for net profit.
• Capital Deployment: Proceeds from the recent capital rights issue will support core lending and net interest earnings, although they will dilute EPS by 9.5% in FY14.
• Valuation: The stock is currently trading at 2.48x 2014F PBV and 17.2x PER. The upside to the target price of PHP93.50 is limited to 2.7%, with total returns (including dividends) expected at 4.7%.
• Market Recommendation: Maintain HOLD due to the rich valuation, but potential acquisition plans could be a key catalyst for value enhancement.
• Parent Company: Ayala Corp (AC - BUY) is suggested as a better investment option compared to BPI.

Key Information

Financial Projections (FYE Dec, PHP m)

Loan Growth and Net Interest Income

• BPI's FY13 loans grew by 20.6% to PHP635b, exceeding the guidance.
• For FY14, the loan growth is expected at 18%, lower than management's target of 22% due to margin protection.
• Net interest income is projected to grow by 19% in FY14, supported by a 16% rise in interest earnings and 8% slower growth in interest costs.

Net Interest Margin (NIM)

• NIM is projected to contract by 4bps to 3.11% in FY14 and expand by 10bps to 3.21% in FY15.
• The contraction is attributed to the increase in deposits with the BSP and other banks offering lower yields.

Capital Adequacy

• CET1 is estimated at 14% in FY14 (down from 15.7% previously), due to a 14% increase in risk-weighted assets (RWA).
• The capital is still above the central bank's minimum requirement of 8.5%.

Fee Income and Non-Interest Income

• BPI is strengthening its trust and investment banking businesses to boost fee-based income.
• Non-interest income is expected to fall by 5% YoY in FY14 but recover by 6% in FY15.
• Trading gains are projected to decline by 40% to PHP2.9b in FY14 due to the tapering of the US Federal Reserve's bond-buying programme.

Investment Portfolio

• BPI adopted a conservative approach, retaining 51% of its investment portfolio in held-to-maturity (HTM) investments.
• Total investment declined by 8% YoY to PHP188b due to the reduction of AFS and held-for-trading positions.

Operating Expenses

• Operating expenses are expected to increase by 9-10% in FY14-15 due to expansion plans and a new collective bargaining agreement.
• BPI added 618 new employees in FY13 but managed to keep manpower costs growth at 1.6% due to senior officer retirements.

Acquisition Strategy

• BPI is expected to make an acquisition in the near future, possibly targeting PNB or RCB.
• The last acquisition was in 2005 when it bought Prudential Bank for PHP5.6b (1.8x PBV).

Share Price Performance

• The stock has shown mixed performance, with a 3.1% gain in the last month, 9.4% in the last three months, and a 13.7% decline in the last year.
• Relative to the country, the performance was slightly negative in the last month and three months but slightly positive in the last year.

Key Catalysts

• Potential acquisitions could significantly enhance the stock's value.
• Fee-based income growth through trust and investment banking.
• Loan growth and net interest income improvements.

Summary

BPI is expected to grow its earnings and loans at a moderate pace, supported by capital rights issue proceeds. Despite a rich valuation and limited upside to the target price, the bank's focus on strengthening fee-based income and its potential for value-enhancing acquisitions could offer growth opportunities. The conservative investment approach and efficient cost management are also key strengths, but the bank faces challenges from a declining NIM and increased operating expenses. The recommendation to maintain a HOLD is due to the current valuation, though the parent company Ayala Corp is seen as a more attractive investment option.