WED 26 AUG 2020

Proactive provisioning drag 2Q earnings

as expected

Proactive provisioning drag 2Q earnings as expected BDO Unibank, Inc.

BUY
PHP129.00
Most banks delivered weaker earnings in the second quarter. Among the nine banks that
we monitor, six banks (BDO, BPI, MBT, PNB, UBP, and RCB) reported lower earnings y/y. Bank of the Philippine Islands
As a result, the banking sector’s earnings declined by 60% y/y during the quarter. The BUY
PHP81.00
lower earnings were mainly caused by the upfront provisions for the COVID-19 pandemic
as banks allocated even more provisions vs 1Q20. This was further dragged by weaker China Banking Corporation
fee-based revenues following the waiver of some fees during the enhanced community BUY
quarantine as well as slowdown in economic activity. These were partially offset by robust PHP26.00

trading gains following the decline in interest rates as well as strong lending income.
East West Banking Corporation
BUY
Despite the weaker earnings, results were generally met or exceeded our expectations. In PHP12.10
particular, four banks (BDO, BPI, MBT, and SECB) ended in line with our estimates. Meanwhile,
Metropolitan Bank & Trust
three banks (CHIB, EW, and UBP) ended above our forecasts on the back of stronger than
BUY
expected trading gains. In addition, CHIB and EW reported lower than expected operating PHP67.00
expenses. On the other hand, only PNB performed worse than expected on the back of
weaker than expected fees and gains on ROPA as well as higher than expected provisions. Philippine National Bank
BUY
PHP39.00
Exhibit 1: Sector Earnings Summary
%FY20E Security Bank Corporation
in PhpMil 2Q19 2Q20 % Change 1H19 1H20 % Change COL Consensus BUY
BDO 10,389 -4,479 -143.1 20,152 4,287 -78.7 14.8 13.6 PHP169.00
BPI 7,015 5,292 -24.6 13,737 11,677 -15.0 46.3 49.3
Union Bank of the Philippines
CHIB 2,358 3,000 27.2 4,217 5,218 23.7 63.6 NA
HOLD
EW 1,412 2,199 55.7 2,702 4,453 64.8 81.9 115.7
PHP56.00
MBT 6,277 3,008 -52.1 13,030 9,130 -29.9 36.5 42.0
PNB 2,044 39 -98.1 3,920 1,357 -65.4 19.6 19.8
SECB 2,569 2,772 7.9 4,950 5,661 14.4 56.6 64.8
UBP 2,633 1,864 -29.2 4,804 4,506 -6.2 70.2 63.8
RCB 1,355 803 -40.7 2,661 3,113 17.0 NA 73.0
source: Banks, COL estimates

John Martin Luciano, CFA

Senior Research Analyst
john.luciano@colfinancial.com

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.
 BANKING SECTOR I PROACTIVE PROVISIONING DRAG 2Q EARNINGS AS EXPECTED

WED 26 AUG 2020

Provisions remain elevated

Banks continued booking substantial upfront provisions in the second quarter as they
build up their NPL cover in anticipation of higher non-performing loans (NPL) in the
succeeding periods. As previously mentioned, we believe banks that have high exposure
on SME, credit cards, and auto will be the most at risk of credit quality deterioration
amidst the pandemic. Note that the sector’s provisions during the quarter increased by
more than 8X to Php75.7Bil vs the same period last year. As a result, the banks’ median
unannualized credit cost increased to 150 bps vs the 50 bps booked in the full-year 2019.
This caused the banks’ median NPL coverage ratio to improve to 126% from 103% during
the start of the year. Meanwhile, compared to our forecast, all of the banks’ first half
provisions except for BDO, BPI, and EW have exceeded our full-year target.

While we expect the magnitude of provisions in the second half to be lower, we believe
the situation remains very fluid. Recall that the Bayanihan Act made it difficult for banks
to determine the borrowers’ ability to pay in light of the 30 days grace period of principal
and interest payments during the enhanced community quarantine. We expect this
difficulty to be repeated after the passage of Bayanihan 2 Act as this includes a 60 days
grace period for outstanding loans falling due before December 31, 2020. As such, we
believe this will delay the visibility of NPL formation for loan payments going forward to
sometime next year.

Exhibit 2: Provisions

in PhpMil 2Q19 2Q20 % Change 1H19 1H20 % Change %FY20E

BDO 1,702 20,174 1085.3 2,988 22,434 650.8 100.5
BPI 1,679 10,783 542.2 3,482 15,009 331.0 88.6
CHIB 65 4,345 6625.5 338 4,758 1307.7 133.2
EW 787 3,029 284.7 1,660 5,467 229.4 65.7
MBT 2,196 17,741 707.9 4,598 22,781 395.5 158.7
PNB 463 5,085 998.1 809 8,440 943.5 138.7
SECB 344 5,298 1441.0 639 10,985 1618.9 136.8
UBP 190 5,667 2887.3 364 6,994 1819.6 188.7
RCB 1,550 3,602 132.4 2,684 5,203 93.9 NA

source: Banks, COL estimates

COL Financial Group, Inc. 2

 BANKING SECTOR I PROACTIVE PROVISIONING DRAG 2Q EARNINGS AS EXPECTED

WED 26 AUG 2020

Exhibit 3: Credit Costand NPL Coverage Ratio

Credit cost (bps) NPL coverage ratio
FY19 1H20* FY20E FY19 1H20
BDO** 29 99 98 116% 112%
BPI 41 104 123 102% 141%
CHIB 48 82 61 129% 146%
EW 157 212 372 50% 78%
MBT 70 165 157 103% 188%
PNB 47 135 130 94% 75%
SECB 97 241 271 129% 174%
UBP 52 188 183 58% 109%
Median 50 150 143 103% 126%

source: Banks, COL estimates

*Unannualized

**Estimated NPL Cover (Ex-equity reserves)

Lending income remains strong

The banks’ lending operations sustained their growth during the second quarter, with all
banks registering double-digit growth in net interest income. In fact, the smaller banks
such as CHIB, EW, and UBP, who rely heavily on high cost funding, reported growth rates
in excess of 30% as they greatly benefitted from the decline in funding cost. As a whole,
the sector’s net interest income expanded 21.0% y/y during the quarter, driven by higher
interest earning assets and net interest margin y/y. Compared to estimates, all banks
performed in line with our expectations.

Exhibit 4: Net Interest Income

in PhpMil 2Q19 2Q20 % Change 1H19 1H20 % Change %FY20E

BDO 29,199 33,418 14.4 56,926 66,395 16.6 50.8
BPI 16,309 18,266 12.0 32,362 36,402 12.5 49.0
CHIB 5,814 8,305 42.8 11,743 16,231 38.2 52.1
EW 4,994 6,773 35.6 9,684 13,409 38.5 52.0
MBT 18,421 23,069 25.2 36,522 44,486 21.8 52.2
PNB 7,645 8,630 12.9 14,702 17,481 18.9 50.2
SECB 6,124 7,754 26.6 11,843 15,839 33.7 49.7
UBP 5,180 7,013 35.4 9,836 13,839 40.7 52.3
RCB 5,341 6,494 21.6 10,630 12,794 20.4 NA

source: Banks, COL estimates

COL Financial Group, Inc. 3

 BANKING SECTOR I PROACTIVE PROVISIONING DRAG 2Q EARNINGS AS EXPECTED

WED 26 AUG 2020

Loan growth slows down; Net interest margin improves

Most banks reported growth in their loan portfolio during the second quarter. However,
MBT reported a contraction on their loan portfolio, while EW and PNB reported flattish
growth. Meanwhile, the pace of growth was generally slower. In fact, only RCB reported
faster loan growth y/y vs the previous quarter. The remaining banks booked slower or
similar pace of growth. As a result, the banks’ median loan growth slowed to 5.9% during
the second quarter from 11.0% in the first quarter. Overall, the weakness in the loan
growth is in with our expectations in light of the duration of the ECQ and MECQ in Luzon.
Furthermore, we believe banks are prioritizing asset quality over market share. As such,
they remain cautious in lending amid the uncertainty of the pandemic.

In terms of margins, we estimate that the banks’ median net interest margin (NIM)
improved y/y and q/q, increasing ~73 bps y/y and ~31 bps q/q. All banks reported
better margins q/q as the decline in funding cost outpaced the drop in asset yields.
Note that interest-bearing liabilities generally re-prices faster than interest-earning
assets. Nevertheless, we expect some pressure on net interest margin going forward as
we believe that loan yields will eventually decline following the central bank’s decision
to reduce its policy rate by a total of 175 bps so far this year. Meanwhile, this could be
partially tempered by further cuts in the reserve requirement ratio.

Exhibit 5: Loan Growth and Margins

Loan Growth Net Interest Margins
3Q19 4Q19 1Q20 2Q20 3Q19 4Q19 1Q20 2Q20
BDO 6.0 9.0 11.0 11.0 4.2 4.1 4.2 4.2
BPI 8.2 8.9 7.3 5.9 3.2 3.3 3.4 3.4
CHIB 10.5 12.5 15.0 10.4 3.1 3.2 3.4 3.5
EW 13.2 8.9 6.1 0.2 6.0 6.7 7.1 7.5
MBT 6.5 6.7 5.5 -4.6 3.5 3.6 3.7 4.1
PNB 17.1 13.1 10.6 1.4 3.3 3.3 3.4 3.4
SECB 10.8 7.8 11.9 5.4 3.6 4.1 4.3 4.2
UBP 9.8 20.6 25.0 7.1 3.7 3.9 3.8 4.0
RCB 11.8 12.8 16.4 17.9 3.6 3.5 3.5 3.8
Median 10.5 9.0 11.0 5.9 3.58 3.58 3.66 3.97
source: Banks, COL estimates

COL Financial Group, Inc. 4

 BANKING SECTOR I PROACTIVE PROVISIONING DRAG 2Q EARNINGS AS EXPECTED

WED 26 AUG 2020

Robust trading gains more than offsets weaker fees

All banks reported robust trading gains in the second quarter with the sector’s trading
gains surging to Php39.4Bil from Php7.4Bil in the same period last year. Overall, banks took
advantage of the significant decline in bond rates and sold a portion of their investment
securities. Note that the 10-year Philippine government bond rate fell to 2.8% as of end-
June 2020 from 4.9% as of end-March 2020. We believe the magnitude of trading gains
in the second half will be dependent on whether banks will choose to further sell their
bond holdings or just collect the interest income. Compared to our forecast, all banks
have exceeded our target as we were conservative in forecasting our trading gains.

Exhibit 6: Trading Gains

in PhpMil 2Q19 2Q20 % Change 1H19 1H20 % Change %FY20E

BDO 664 6,357 857.4 1,990 1,795 -9.8 -43.0
BPI 826 4,065 392.1 1,318 5,642 328.1 176.3
CHIB 710 2,928 312.1 886 2,762 211.8 1200.5
EW 198 1,214 511.5 523 2,933 460.5 183.2
MBT 2,158 11,705 442.4 3,609 13,083 262.5 329.1
PNB 292 1,113 281.8 968 3,173 227.7 125.8
SECB 376 3,700 884.1 1,047 7,192 586.7 146.4
UBP 454 4,785 954.0 1,643 6,535 NA 260.8
RCB 1,707 3,497 104.9 3,158 5,673 79.6 NA

source: Banks, COL estimates

On the other hand, all banks also reported weaker than expected fee-based revenues
during the second quarter. In fact, the sector’s fees declined by 34% y/y following the
waiver of some fees during the enhanced community quarantine. At the same time,
economic activity also slowed as seen in the contraction of 2Q GDP results, likely affecting
volume-related fees.

Exhibit 7: Fee Income

in PhpMil 2Q19 2Q20 % Change 1H19 1H20 % Change %FY20E

BDO 8,502 5,342 -37.2 16,681 13,421 -19.5 36.5
BPI 2,290 1,782 -22.2 4,358 4,047 -7.1 43.2
CHIB 780 507 -35.1 1,549 1,260 -18.7 40.5
EW 1,425 714 -49.9 2,739 1,825 -33.4 33.1
MBT 3,431 2,152 -37.3 6,563 5,493 -16.3 36.1
PNB 888 731 -17.8 1,856 1,696 -8.6 41.9
SECB 1,003 629 -37.3 1,860 1,680 -9.7 38.9
UBP 436 401 -7.9 966 956 -1.0 44.6
RCB 1,050 785 -25.2 2,106 1,749 -17.0 NA

source: Banks, COL estimates

COL Financial Group, Inc. 5

 BANKING SECTOR I PROACTIVE PROVISIONING DRAG 2Q EARNINGS AS EXPECTED

WED 26 AUG 2020

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

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG
SENIOR RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@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
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WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 6