BDO Unibank, Inc.

WED 07 OCT 2020

Provisions and capital buffers

remain sufficient for the pandemic
Flattish loan growth in 2020. BDO expects loan growth to be flattish in 2020 amidst
the continued economic impact of the COVID-19 pandemic. This is slower than its earlier
guidance of mid-single digit growth during our previous meeting last June. The bank noted
BUY
that the demand pipeline of corporate loans is still not very strong. Similarly, loan releases
for consumer loans were also slower, particularly on mortgage and auto loans. While the TICKER: BDO
bank remains willing to lend to qualified borrowers, it has also tightened its credit standards FAIR VALUE: 129.00
as it is cautious on severely affected industries such as travel, tourism, restaurants, and
hotels, etc. Note that system loan growth in August eased to 4.7% y/y from 6.7% in July CURRENT PRICE: 86.55
despite the low interest rate environment and ample liquidity in the system. For 2021, we UPSIDE: 49.05
believe that loan growth for the bank and the sector will be largely dependent on the pace
of recovery of the economy as lockdown measures are eased and more business activities
resumes. SHARE PRICE MOVEMENT

Current provisions enough for 4-5% peak NPL ratio. BDO reiterated that current 110
provisions remain sufficient if NPL ratio peaks at 4-5% with an assumed loss given default
(LGD) of 50%. Recall that the bank booked Php22.4Bil provisions in the first half as the
bank booked upfront provisioning in anticipation of potential delinquencies due to the
COVID-19 pandemic. This, along with some excess provisions in its balance sheet, means
100

that total provisions allocated for COVID-related exposure amounts to ~Php37Bil. This is
equivalent to an unannualized credit cost of 163 bps. In terms of asset quality, we believe
that some NPLs will already start to show during the third quarter. However, some of the 90

NPL recognition will be delayed to first quarter of next year following the 60-day loan
moratorium of Bayanihan 2 for current accounts.
80
Maintain BUY rating. We currently have a BUY rating on BDO with a FV estimate of 8-Jul-20 8-Aug-20 8-Sep-20 8-Oct-20

Php129/sh based on a 1.35X 2021E P/BV. We believe there will be negative sentiment once BDO PSEi
the bank’s NPL ratio starts increasing in the third quarter. In addition, net interest margin
is expected to be pressured next year as loans gradually re-price amid the low interest rate
environment. Nevertheless, we believe most of the negatives have already been priced
in. We continue to like BDO as we expect it to be one of the major beneficiaries of the ABSOLUTE PERFORMANCE
economic growth after the effect of pandemic eases. At its current price, the bank is only
trading at 0.9X 2021E P/BV, significantly below its 5-year historical average of 1.9X. 1M 3M YTD
BDO -2.38 -10.20 -44.30
PSEi -1.15 -6.37 -24.92
FORECAST SUMMARY
Year to December 31 (Php Mil) 2017 2018 2019 2020E 2021E 2022E
Net Interest Income 81,753 98,292 119,891 133,296 137,882 144,305
MARKET DATA
% change y/y 24.58 20.23 21.97 11.18 3.44 4.66
Non-Interest Income 47,206 49,674 60,621 53,035 60,305 69,066 Market Cap 385,781.27Mil
% change y/y 14.52 5.23 22.04 -12.51 13.71 14.53 Outstanding Shares 4,383.84Mil
Income Before Tax 37,557 43,646 59,187 41,654 50,077 51,021 52 Wk Range 75.00 - 161.80
% change y/y 13.66 16.21 35.61 -29.62 20.22 1.88 3Mo Ave Daily T/O 261.90Mil
Net Income 28,070 32,708 44,194 29,175 37,480 38,186
% change y/y 7.00 16.52 35.12 -33.98 28.47 1.88
EPS (in Php) 6.42 7.40 10.02 6.58 8.48 8.64
% change y/y -9.66 15.39 35.30 -34.29 28.80 1.90

RELATIVE VALUE
P/E(X) 13.49 11.69 8.64 13.15 10.21 10.02
P/BV(X) 1.29 1.17 1.04 0.98 0.90 0.84 John Martin Luciano, CFA
ROAE(%) 10.92 10.47 12.69 7.66 9.18 8.67 Senior Research Analyst
Dividend Yield (%) 1.39 1.39 1.39 1.39 1.39 1.39
john.luciano@colfinancial.com
*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.
 FIELD NOTES I BDO: PROVISIONS AND CAPITAL BUFFERS REMAIN SUFFICIENT
FOR THE PANDEMIC

WED 07 OCT 2020

Flattish loan growth in 2020

BDO expects loan growth to be flattish in 2020 amidst the continued economic impact
of the COVID-19 pandemic. This is slower than its earlier guidance of mid-single digit
growth during our previous meeting last June. The bank noted that the demand pipeline
of corporate loans is still not very strong. Similarly, loan releases for consumer loans were
also slower, particularly on mortgage and auto loans. While the bank remains willing
to lend to qualified borrowers, it has also tightened its credit standards as it is cautious
on severely affected industries such as travel, tourism, restaurants, and hotels, etc. Note
that system loan growth in August eased to 4.7% y/y from 6.7% in July despite the low
interest rate environment and ample liquidity in the system. For 2021, we believe that
loan growth for the bank and the sector will be largely dependent on the pace of recovery
of the economy as lockdown measures are eased and more business activities resumes.

Current provisions enough for 4-5% peak NPL ratio

BDO reiterated that current provisions remain sufficient if NPL ratio peaks at 4-5% with
an assumed loss given default (LGD) of 50%. Recall that the bank booked Php22.4Bil
provisions in the first half as the bank booked upfront provisioning in anticipation of
potential delinquencies due to the COVID-19 pandemic. This, along with some excess
provisions in its balance sheet, means that total provisions allocated for COVID-related
exposure amounts to ~Php37Bil. This is equivalent to an unannualized credit cost of 163
bps. In terms of asset quality, we believe that some NPLs will already start to show during
the third quarter. However, some of the NPL recognition will be delayed to first quarter
of next year following the 60-day loan moratorium of Bayanihan 2 for current accounts.

Pressure on net interest margin

BDO believes the current low interest environment will persist for some time as the
economy recovers from the pandemic. In fact, the bank expects another 25 bps cut in the
policy rate late this year or early 2021. Recall that the BSP has been aggressively cutting
the policy rate in 2020 in a bid to boost the economy, reducing by a total of 175 bps to
2.25%. This translated to pressure on asset yields, particularly on corporate rates which
have gradually adjusted lower. Meanwhile, the recent cap in the annual rates for credit
cards to 24% will also affect the interest earned from revolvers. Based on the bank’s
assessment, this will translate to a 15 bps decline in net interest margin. On the other
hand, these will be partially mitigated by managing the bank’s funding cost. With the
continued growth in CASA, the bank has reduced time deposit levels and interest rates.
Note that the wholesale time deposit rate has gone down below 1%, while the CASA

COL Financial Group, Inc. 2

 FIELD NOTES I BDO: PROVISIONS AND CAPITAL BUFFERS REMAIN SUFFICIENT
FOR THE PANDEMIC

WED 07 OCT 2020

rate has also been reduced to 0.125% from 0.25% previously. However, we believe this
will not be enough to offset the decline in asset yields. We expect net interest margin to
compress next year as loans gradually re-price lower. Note that 75%-80% of the bank’s
loan portfolio are variable rate.

Capital buffers remain sufficient

BDO has the lowest capital ratios among the big banks. In particular, BDO’s CET1 ratio as
of end June 2020 amounts to only 12.7% (vs BPI’s 15.6% and MBT’s 18.7%). Nevertheless,
we don’t expect that the bank will need to raise capital in the near-term given the weak
loan growth outlook. In addition, recall that the BSP provided regulatory relief by allowing
banks to tap into their capital conservation buffer to absorb losses. This effectively reduced
the CET1 requirement to 8.0% from 10.5% for the big banks during the pandemic. Note
that the central bank mentioned that banks will be given a reasonable time period to
restore their capital positions to meet Basel III requirements after the crisis.

Maintain BUY rating

We currently have a BUY rating on BDO with a FV estimate of Php129/sh based on a

1.35X 2021E P/BV. We believe there will be negative sentiment once the bank’s NPL ratio
starts increasing in the third quarter. In addition, net interest margin is expected to be
pressured next year as loans gradually re-price amid the low interest rate environment.
Nevertheless, we believe most of the negatives have already been priced in. We continue
to like BDO as we expect it to be one of the major beneficiaries of the economic growth
after the effect of pandemic eases. At its current price, the bank is only trading at 0.9X
2021E P/BV, significantly below its 5-year historical average of 1.9X.

COL Financial Group, Inc. 3

 FIELD NOTES I BDO: PROVISIONS AND CAPITAL BUFFERS REMAIN SUFFICIENT
FOR THE PANDEMIC

WED 07 OCT 2020

BDO Unibank, Inc. INCOME STATEMENT (PHPMIL)

(BDO) Net Interest Income

2017
81,753
2018
98,292
2019
119,891
2020E
133,296
2021E
137,882
2022E
144,305
% Growth 24.6% 20.2% 22.0% 11.2% 3.4% 4.7%
COMPANY BACKGROUND Non-Interest Income 47,206 49,674 60,621 53,035 60,305 69,066
% Growth 14.5% 5.2% 22.0% -12.5% 13.7% 14.5%
Banco de Oro Unibank (BDO) is a universal
Provisions 6,537 6,286 6,166 22,453 12,256 10,724
bank that provides a wide range of
% Growth 71.3% -3.8% -1.9% 264.1% -45.4% -12.5%
corporate, commercial and retail services. Operating Expense 84,865 98,034 115,159 122,223 135,853 151,626
BDO is a member of the SM Group % Growth 21.3% 15.5% 17.5% 6.1% 11.2% 11.6%
of companies, one of the Philippines’ Net Income 28,070 32,708 44,194 29,175 37,480 38,186
largest conglomerates with business % Growth 7.0% 16.5% 35.1% -34.0% 28.5% 1.9%
interests in commercial centers, retail and EPS 6.4 7.4 10.0 6.6 8.5 8.6
% Growth -9.7% 15.4% 35.3% -34.3% 28.8% 1.9%
merchandising, financial services, real
estate development and tourism. As of end BALANCE SHEET (IN PHPMIL)
September 2019, BDO was the largest bank
2017 2018 2019 2020E 2021E 2022E
in terms of assets, loans, deposits, trust Cash & Reserve Assets 449,793 463,173 412,136 449,277 455,144 458,428
assets, and capital. It had a total of 1,392 Investment Securities 332,927 385,197 435,905 453,241 484,527 517,773
branches and offices and 4,428 ATMs. Loans and Receivables 1,791,786 2,071,834 2,225,777 2,352,786 2,560,949 2,843,673
Other Assets 93,598 102,043 115,040 121,255 127,876 134,931
LOAN BREAKDOWN Total Assets 2,668,104 3,022,247 3,188,858 3,376,560 3,628,497 3,954,804
Deposits 2,121,012 2,419,965 2,485,228 2,642,807 2,880,660 3,139,919
Bills Payable/ Subordinated Debt 140,514 153,653 177,554 180,935 158,485 187,827
2.0%
Other Liabilities 108,238 120,480 155,489 159,736 164,408 169,548
1.8%
22.2% Total Equity 298,340 328,149 370,587 393,082 424,943 457,510
21.3% Total Liabilities & Equity 2,668,104 3,022,247 3,188,858 3,376,560 3,628,497 3,954,804
BVPS 66.9 73.7 83.0 88.4 95.7 103.1
46.4%
44.9%
KEY RATIOS
2017 2018 2019 2020E 2021E 2022E
Loan Growth (%) 13.8% 15.6% 7.4% 5.7% 8.8% 11.0%
31.9%
29.4% Interest Earning Asset Growth (%) 14.7% 13.4% 5.3% 5.9% 7.5% 9.1%
Deposit Growth (%) 11.3% 14.1% 2.7% 6.3% 9.0% 9.0%
Loan to Deposit Ratio (%) 84.5% 85.6% 89.6% 89.0% 88.9% 90.6%
Corporate Middle Market Consumer Others Nonperforming Loan Ratio (%) 1.2% 1.0% 1.2% 1.4% 1.6% 1.8%
Corporate Middle Market Consumer Others
Coverage Ratio (%) 146.3% 128.5% 115.2% 110.0% 105.0% 100.0%
Average Asset Yield (%) 4.1% 4.7% 5.4% 5.2% 5.0% 4.8%
Average Funding Cost (%) 0.8% 1.3% 1.6% 1.1% 1.0% 1.0%
Net Interest Margin (%) 3.4% 3.6% 4.0% 4.2% 4.1% 3.9%
Cost to Income Ratio (%) 65.8% 66.3% 63.8% 65.6% 68.5% 71.1%
Credit Costs (%) 0.4% 0.3% 0.3% 1.0% 0.5% 0.4%
ROAE (%) 10.9% 10.5% 12.7% 7.7% 9.2% 8.7%
ROAA (%) 1.1% 1.1% 1.4% 0.9% 1.1% 1.0%
CET 1 Ratio (%) 12.9% 12.1% 12.7% 12.4% 12.3% 11.9%
Total CAR (%) 14.5% 13.8% 14.2% 13.9% 13.7% 13.3%

COL Financial Group, Inc. 4

 FIELD NOTES I BDO: PROVISIONS AND CAPITAL BUFFERS REMAIN SUFFICIENT
FOR THE PANDEMIC

WED 07 OCT 2020

INVESTMENT THESIS: MAJOR CORPORATE DEVELOPMENTS (5-YEARS)

Major beneficiary of economic recovery

Raised Php60Bil through stock rights offering at Php83.75 at an entitlement
We expect BDO be one of the major 01/16/2017
ratio of 1:5.095
beneficiaries of the investment driven
economic growth of the Philippines over Acquired the remaining 60% of the outstanding capital stock of BDO Life
06/30/2016
the next few years after the effect of from the Generali Group
pandemic eases. BDO, as the largest bank
Acquired 99.59% of the outstanding capital stock of ONB in exchange for
in the Philippines, is well positioned to 07/20/2015
64.5Mil BDO common shares
capitalize on this growth opportunity given
its strong and highly liquid balance sheet.
The bank has also been front-loading its
provisions in 2020 which should allow the
bank move forward quicker once economic
growth resumes.

Less exposure to higher risk segments

and higher NPL cover
BDO has less exposure to consumer loans at
22% of total loans vs the median exposure
of smaller banks at 30%. Recall that we view
auto, credit cards, and SME segments to be
the most at risk in asset quality during this
pandemic. In addition, its NPL cover is also
high at 107%, which should serve as buffer
for NPL formation during the pandemic.

High Earnings Quality

Relative to other banks, we believe that
BDO’s earnings quality is higher given a
larger portion of its revenues are generated
from recurring income. Note that in 2019
the bank’s net interest income and fee-
based revenues composed 86% of the its
revenues.

COL Financial Group, Inc. 5

 FIELD NOTES I BDO: PROVISIONS AND CAPITAL BUFFERS REMAIN SUFFICIENT
FOR THE PANDEMIC

WED 07 OCT 2020

Valuation RELATIVE VALUATION

Methodology
P/BV ROE
2020E 2021E 2020E 2021E
BPI 1.03 0.97 9.0% 8.9%
CHIB 0.57 0.54 8.3% 8.3%
EW 0.36 0.33 10.8% 10.3%
MBT 0.53 0.49 7.8% 8.5%
PNB 0.25 0.24 4.6% 4.3%
RCB* 0.40 0.39 6.6% 4.6%
SECB 0.55 0.52 8.2% 8.0%
UBP 0.77 0.73 8.3% 7.9%
BDO 0.98 0.90 7.7% 9.2%
Average ex-BDO 0.56 0.52 8.0% 7.6%
Median ex-BDO 0.54 0.51 8.2% 8.1%
*Co nsensus

VALUATION ASSUMPTIONS
Intrinsic P/BV multiple
Normalized ROE 15.9%
Risk-Free Rate 4.0%
Cost of Equity 13.0%
Long-Term Growth 4.8%
Justified Multiple 1.35
2021E BV 95.7
Fair Value Estimate 129.00

COL Financial Group, Inc. 6

 FIELD NOTES I BDO: PROVISIONS AND CAPITAL BUFFERS REMAIN SUFFICIENT
FOR THE PANDEMIC

WED 07 OCT 2020

I MP OR TA NT R AT ING 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.

I MP OR TA NT DISC L AIM ER
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.

C O L R E S EAR C H T EAM

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

C O L F INANC IAL G R O UP, I NC.

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. 7