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East West Banking Corporation WED 02 MAY 2018

Revising estimates on normalized loan


growth outlook; maintain BUY rating
We are decreasing our earnings forecasts for EW following its 2017 results. Although the bank
outperformed our estimates, this was mainly caused by the gains from the sale of HTM securities
and capital gains from EW Ageas Life. Excluding these items, earnings would have ended below
our forecasts at only 91% of our target due to faster-than-expected operating expense growth and
BUY
higher-than-expected effective tax rate. In addition, we expect the bank’s loan growth to settle at
industry average over the next 3 years. In light of these factors, we are revising our 2018 and 2019 TICKER: EW
earnings forecasts downwards by 7% and 10%, respectively. Furthermore, we are cutting our fair value FAIR VALUE: 23.40
estimate by 4% to Php23.4/sh to account for the earnings revisions. Nevertheless, we are maintaining
our BUY rating as upside to our fair value remains significant. CURRENT PRICE: 17.30
One-off gains boost earnings. EW reported Php1.4Bil earnings during the fourth quarter, up by UPSIDE: 35.26
27% y/y. This brought the full-year earnings to Php5.1Bil, higher by 48% y/y. Although the bank
outperformed our estimates, earnings were boosted by the gains booked from the sale of HTM
securities (Php317Mil) and capital gains from EW Ageas Life (Php665Mil). Excluding these items, SHARE PRICE MOVEMENT
earnings would have ended below our forecasts at only 91% of our target due to faster-than-
expected operating expense growth and higher-than-expected effective tax rate. Meanwhile, 110
the bank’s net interest income expanded 20% during the year, driven by both higher volume and
margins. The full-year earnings translate to an ROE of 13.8%.
Normalized loan growth outlook. Loan growth in 2017 decelerated to just 11% from 28% in the 100
previous year. The slower loan growth stemmed from a) the high base in consumer loans after
the bank acquired Standard Chartered Bank’s retail business in the previous year and b) weaker
corporate loans (-2% y/y) as the bank opted to get out of some unprofitable loans and reallocate
90
funds to the higher margin consumer loans. Going forward, we expect the bank’s loan growth
to normalize to industry average. In particular, we are revising our loan growth assumption to
~17% over the next three years, largely in line with management guidance of high teens.
80
Revising earnings forecasts, maintain BUY. We are revising our 2018 and 2019 earnings 2-Feb-18 2-Mar-18 2-Apr-18 2-May-18
forecasts downwards by 7% and 10% to Php5.4Bil and Php6.5Bil, respectively. This mainly
accounts for lower net interest income, faster operating expense growth, and higher effective EW PSEi
tax rate. This is slightly offset by lower provisions. Our new forecasts imply earnings growth of 7%
and 19% in 2018 and 2019, respectively. A summary of the changes in our assumptions is given
below: (see exhibit 1) ABSOLUTE PERFORMANCE
Meanwhile, we are downgrading our fair value estimate by 4% to Php23.4/sh to account for the 1M 3M YTD
earnings revisions. Nevertheless, we are maintaining our BUY rating as upside to our fair value EW -8.66 -10.82 -18.78
remains significant. We continue to like EW because of its above average margins and strong
growth prospects driven by its large exposure to higher yielding consumer loans. Its aggressive PSEi -2.23 -10.72 -8.84
branch expansion program over the past years should also start to bear fruit as more branches
mature.
FORECAST SUMMARY MARKET DATA
Year to December 31 (Php Mil) 2015 2016 2017 2018E 2019E 2020E Market Cap 38,924.57Mil
Net Interest Income 12,340 15,399 18,451 20,912 24,382 28,239
% change y/y 23.08 24.79 19.82 13.34 16.59 15.82
Outstanding Shares 2,249.98Mil
Non-Interest Income 3,976 6,176 6,754 7,222 8,384 9,738 52 Wk Range 14.467 - 24.07
% change y/y -18.19 55.32 9.36 6.94 16.09 16.15 3Mo Ave Daily T/O 32.77Mil
Income Before Tax 2,663 4,142 6,758 7,252 8,645 10,232
% change y/y 0.98 55.51 63.17 7.31 19.21 18.36
Net Income 2,004 3,408 5,051 5,420 6,461 7,647
% change y/y -3.35 70.05 48.21 7.31 19.21 18.36
CHARLES WILLIAM ANG, CFA
EPS (in Php) 0.96 1.51 2.24 2.41 2.87 3.40
% change y/y -21.38 57.27 48.21 7.31 19.21 18.36 DEPUTY HEAD OF RESEARCH
charles.ang@colfinancial.com
RELATIVE VALUE
P/E(X) 16.45 10.46 7.06 6.58 5.52 4.66 JOHN MARTIN LUCIANO
P/BV(X) 1.13 1.03 0.91 0.81 0.71 0.62 RESEARCH ANALYST
ROAE(%) 7.58 10.35 13.75 13.07 13.77 14.30
john.luciano@colfinancial.com
Dividend Yield (%) 0.00 1.12 1.39 1.39 1.39 1.39
*So urce: COL estimates

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
COMPANY UPDATE I EW: REVISING ESTIMATES ON NORMALIZED LOAN GROWTH OUTLOOK, MAINTAIN BUY RATING

WED 02 MAY 2018

Exhibit 1: Earnings Revisions


2018 2019
Old New Change Old New Change
Net interest income 22,808 20,912 -8.3 27,102 24,382 -10.0
Non-interest income 7,029 7,222 2.7 8,143 8,384 3.0
Provisions 6,456 5,097 -21.1 8,111 6,262 -22.8
Operating expenses 15,489 15,786 1.9 17,487 17,859 2.1
Net income 5,840 5,420 -7.2 7,139 6,461 -9.5

source: EW, COL estimates

COL Financial Group, Inc. 2


COMPANY UPDATE I EW: REVISING ESTIMATES ON NORMALIZED LOAN GROWTH OUTLOOK, MAINTAIN BUY RATING

WED 02 MAY 2018

East West Banking INCOME STATEMENT (PHPMIL)

Corporation (EW) Net Interest Income


FY15
12,340
FY16
15,399
FY17
18,451
FY18E
20,912
FY19E
24,382
FY20E
28,239
% Growth 23.1% 24.8% 19.8% 13.3% 16.6% 15.8%
COMPANY BACKGROUND Non-Interest Income 3,976 6,176 6,754 7,222 8,384 9,738
East West Bank is a medium-sized universal % Growth -18.2% 55.3% 9.4% 6.9% 16.1% 16.2%
Provisions 3,899 5,692 4,464 5,097 6,262 7,491
bank which primarily offers banking services
% Growth 17.7% 46.0% -21.6% 14.2% 22.9% 19.6%
to retail and mid-market corporate clients. Operating Expense 9,754 11,741 13,982 15,786 17,859 20,254
EW is the 13th biggest in terms of assets and % Growth 9.1% 20.4% 19.1% 12.9% 13.1% 13.4%
12th in terms of total deposits. Its principal Net Income 2,004 3,408 5,051 5,420 6,461 7,647
products and services include consumer loans, % Growth -3.3% 70.1% 48.2% 7.3% 19.2% 18.4%
deposit products, corporate banking, treasury EPS 0.96 1.51 2.24 2.41 2.87 3.40
% Growth -21.4% 57.3% 48.2% 7.3% 19.2% 18.4%
and trust products, and cash management
solutions. As of end March 2017, the bank had BALANCE SHEET (IN PHPMIL)
Php293Bil in resources, Php204Bil of which
FY15 FY16 FY17 FY18E FY19E FY20E
are in loans. Cash & Reserve Assets 49,907 60,440 67,795 68,888 74,456 80,342
Investment Securities 15,165 16,398 13,785 15,321 17,040 18,960
Loans and Receivables 155,276 198,876 220,135 258,520 302,130 353,836
LOAN BREAKDOWN
Other Assets 12,508 16,104 15,928 16,107 16,292 16,481
Total Assets 232,856 291,818 317,643 358,837 409,918 469,619
12.2% Deposits 184,144 240,222 258,726 293,140 332,393 377,191
Bills Payable/ Subordinated Debt 9,540 7,164 10,371 11,761 17,091 24,228
Other Liabilities 7,770 9,983 9,541 10,005 10,538 11,152
16.9%
Total Equity 31,403 34,449 39,006 43,930 49,896 57,048
Total Liabilities & Equity 232,856 291,818 317,643 358,837 409,918 469,619
BVPS 14.0 15.3 17.3 19.5 22.2 25.4
70.9%
KEY RATIOS
FY15 FY16 FY17 FY18E FY19E FY20E
Loan Growth (%) 27.9% 28.1% 10.7% 17.4% 16.9% 17.1%
Corporate Middle Market Consumer Interest Earning Asset Growth (%) 25.2% 25.1% 9.4% 13.6% 14.9% 15.1%
Deposit Growth (%) 24.7% 30.5% 7.7% 13.3% 13.4% 13.5%
Loan to Deposit Ratio (%) 84.3% 82.8% 85.1% 88.2% 90.9% 93.8%
Nonperforming Loan Ratio (%) 4.7% 4.2% 4.0% 3.8% 3.7% 3.7%
Coverage Ratio (%) 56.6% 68.6% 69.4% 69.0% 69.0% 69.0%
Average Asset Yield (%) 7.4% 7.3% 7.6% 7.7% 7.9% 8.0%
Average Funding Cost (%) 1.3% 1.3% 1.4% 1.4% 1.4% 1.5%
Net Interest Margin (%) 6.2% 6.2% 6.4% 6.5% 6.6% 6.7%
Cost to Income Ratio (%) 59.8% 54.4% 55.5% 56.1% 54.5% 53.3%
Credit Costs (%) 2.8% 3.2% 2.1% 2.1% 2.2% 2.3%
ROAE (%) 7.6% 10.3% 13.8% 13.1% 13.8% 14.3%
ROAA (%) 1.0% 1.3% 1.7% 1.6% 1.7% 1.7%
CET 1 Ratio (%) 12.4% 10.4% 11.3% 11.0% 10.6% 10.3%
Total CAR (%) 15.6% 13.3% 14.0% 13.4% 12.8% 12.2%

COL Financial Group, Inc. 3


COMPANY UPDATE I EW: REVISING ESTIMATES ON NORMALIZED LOAN GROWTH OUTLOOK, MAINTAIN BUY RATING

WED 02 MAY 2018

INVESTMENT THESIS: MAJOR CORPORATE DEVELOPMENTS (5-YEARS)

Aggressive branch expansion started Raised Php8Bil through SRO with a price of Php21.53/sh and entitlement ratio of
paying off 1/29/2015
32.929 shares for every 100 shares
EW have aggressively expanded its branch
network from 122 in 2011 to 445 in 2016. As Merged with Agusan del Norte-based Green Bank Inc. 7/31/2014
a result, earnings growth have suffered over
the past few years due to the rise in operating
expenses. However, in 2016, earnings have Acquired 83.17% voting shares of FinMan Rural Bank, Inc. for Php34.1Mil. 7/11/2012
finally reached an inflection point with net
income growing 70% y/y. Meanwhile, cost to
income ratio improved to 54% from 64% in
2012. We expect the bank’s cost to income
ratio to futher improve to 51% by 2019.

Focus of consumer segment drive superior


profitability
EW is focused on serving the consumer
segment. As of end 2016, consumer loans
accounted for 68% of its total loan portfolio
from 51% in 2013. This led to a net interest
margin of ~6.2% in 2016, the highest among
banks in our coverage list. Its focus on
consumer lending is largely responsible for its
above average profitability. Moreover, despite
the increase in consumer loans, NPL ratios
have steadily declined from 5.5% in 2013 to
4.2% in 2016. We expect this trend to continue
with NPL ratios settling at 3.5% by 2019.

COL Financial Group, Inc. 4


COMPANY UPDATE I EW: REVISING ESTIMATES ON NORMALIZED LOAN GROWTH OUTLOOK, MAINTAIN BUY RATING

WED 02 MAY 2018

Valuation RELATIVE VALUATION


P/BV ROE
Methodology 2018E 2019E 2018E 2019E
BDO 1.79 1.63 10.5% 11.0%
BPI 1.87 1.71 12.3% 11.7%
CHIB 1.02 0.94 9.8% 10.7%
MBT 1.23 1.13 9.5% 9.7%
PNB 0.64 0.59 7.9% 8.5%
RCB* 0.76 0.74 7.7% 8.3%
SECB 1.45 1.32 10.5% 11.3%
UBP 1.36 1.20 14.7% 14.6%
EW 0.81 0.71 13.1% 13.8%
Average ex-EW 1.26 1.16 10.4% 10.7%
Median ex-EW 1.29 1.17 10.1% 10.8%

VALUATION ASSUMPTIONS

Intrinsic P/BV multiple


Normalized ROE 14.6%
Risk-Free Rate 5.5%
Cost of Equity 13.0%
Long-Term Growth 5.0%
Justified Multiple 1.20
2018E BV 19.50
Fair Value Estimate 23.40

COL Financial Group, Inc. 5


COMPANY UPDATE I EW: REVISING ESTIMATES ON NORMALIZED LOAN GROWTH OUTLOOK, MAINTAIN BUY RATING

WED 02 MAY 2018

IMPORTANT RATING DEFINITIONS


BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to
12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor
or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve
months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be
incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are subject to change
without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/
or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade
them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA


VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA


DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

ANDY DELA CRUZ JOHN MARTIN LUCIANO FRANCES ROLFA NICOLAS


SENIOR RESEARCH ANALYST SENIOR RESEARCH ANALYST RESEARCH ANALYST
andy.delacruz@colfinancial.com john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com

JUSTIN RICHMOND CHENG ADRIAN ALEXANDER YU


RESEARCH ANALYST RESEARCH ANALYST
justin.cheng@colfinancial.com adrian.yu@colfinancial.com

COL FINANCIAL GROUP, INC.


2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 6