Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Philippine National Bank / Equity Bottom-Up

Years of vibrant loan growth have raised moderate asset risk issues in the Philippines Banking System. Corporates (main segment) though do not appear excessively leveraged as in say Turkey or China. There are some pockets of property exuberance in the system. We believe that the banking regulator remains vigilant against excessive risk-taking, and banks' risk and credit-provisioning frameworks continue to improve on the back of regulatory and accounting changes. The banks themselves have adequate liquidity in general, despite forceful loan expansion, and prudent regulatory loss-absorption buffers with a system CET1 ratio of &gt;14%.The greatest potential though lies with the consumer, with rising purchasing power coming off a low base, in a digitalised reality. More than 50% of Filipinos do not have a bank account. The private informal sector has traditionally been strong. Money-transfer operators are popular. Banks may be fast-developing new consumer products for mobile and internet connectivity -the sector is quite advanced technologically by Asean standards- but inclusion still dramatically lags other Pacific countries. A bank such as  <a href="https://www.smartkarma.com/entities/233" target="_blank" data-smartkarma-citation="entities:233:1">Philippine National Bank (PNB PM)</a>  has very low but rising consumer exposure and has developed initiatives such as its own mobile app and the PNB-PAL Mabuhay Miles debit Mastercard for example.PNB has a strong franchise with 690 branches, 1240 ATMs, overseas branches, remittance centres, and subsidiaries. Insurance offers opportunity too given low penetration levels. PNB will increase ownership in Allied Bankers Insurance to 22.7% from 4%. PNB’s aim is to synergise operations of PNB Gen. The economic backdrop is mixed with still healthy GDP expansion, robust tourism, and FDI data. The PSB has taken (overdue) action to cool the economy down with another rate hike of late (the overnight reverse repurchase rate moved to 4.5%) to crimp inflation (6.4%) which is running above target (2-4%), given food supply shortages,  oil,  tax/utility/transport hikes and FX (“risk off”) softness.We highlight the latest value-quality signals from PNB’s quintile 1 PH Score™ of 9. PNB appears to be delivering improved financial metrics in what is quite a heated banking market. Regarding pure valuation, PNB trades at a high earnings yield (22.4%),  a low book value multiple (0.4x), an attractive  dividend-adjusted PEG factor of 2x, plus a franchise valuation of 7.8%. RSI is at a basement level of 30. Thus, the risk-reward looks arguably quite appealing despite jurisdictional and EM challenges.<div class="content-highlight">The PH Score™ encompasses signals from Profitability, Operating Efficiency, Liquidity, Capital Adequacy, Asset Quality, and Provisioning. Scores lie between 0 and 10, with higher rankings representing more positive signs.</div>

Years of vibrant loan growth have raised moderate asset risk issues in the Philippines Banking System. Corporates (main segment) though do not appear excessively leveraged as in say Turkey or China. There are some pockets of property exuberance in the system. We believe that the banking regulator remains vigilant against excessive risk-taking, and banks' risk and credit-provisioning frameworks continue to improve on the back of regulatory and accounting changes. The banks themselves have adequate liquidity in general, despite forceful loan expansion, and prudent regulatory loss-absorption buffers with a system CET1 ratio of &gt;14%.The greatest potential though lies with the consumer, with rising purchasing power coming off a low base, in a digitalised reality. More than 50% of Filipinos do not have a bank account. The private informal sector has traditionally been strong. Money-transfer operators are popular. Banks may be fast-developing new consumer products for mobile and internet connectivity -the sector is quite advanced technologically by Asean standards- but inclusion still dramatically lags other Pacific countries. A bank such as  Philippine National Bank (PNB PM)  has very low but rising consumer exposure and has developed initiatives such as its own mobile app and the PNB-PAL Mabuhay Miles debit Mastercard for example.PNB has a strong franchise with 690 branches, 1240 ATMs, overseas branches, remittance centres, and subsidiaries. Insurance offers opportunity too given low penetration levels. PNB will increase ownership in Allied Bankers Insurance to 22.7% from 4%. PNB’s aim is to synergise operations of PNB Gen. The economic backdrop is mixed with still healthy GDP expansion, robust tourism, and FDI data. The PSB has taken (overdue) action to cool the economy down with another rate hike of late (the overnight reverse repurchase rate moved to 4.5%) to crimp inflation (6.4%) which is running above target (2-4%), given food supply shortages,  oil,  tax/utility/transport hikes and FX (“risk off”) softness.We highlight the latest value-quality signals from PNB’s quintile 1 PH Score™ of 9. PNB appears to be delivering improved financial metrics in what is quite a heated banking market. Regarding pure valuation, PNB trades at a high earnings yield (22.4%),  a low book value multiple (0.4x), an attractive  dividend-adjusted PEG factor of 2x, plus a franchise valuation of 7.8%. RSI is at a basement level of 30. Thus, the risk-reward looks arguably quite appealing despite jurisdictional and EM challenges.The PH Score™ encompasses signals from Profitability, Operating Efficiency, Liquidity, Capital Adequacy, Asset Quality, and Provisioning. Scores lie between 0 and 10, with higher rankings representing more positive signs.

Philippine National Bank: Does Anyone Care?