FRI 09 JUL 2021

Top Story:

UBP: Manageable increase NPLs in May; Maintain HOLD (AS OF JUL 08, 2020)
INDICES

Close Points % YTD%

Other News:
PSEi 6,924.99 -18.01 -0.26 -3.01
All Shares 4,274.66 2.50 0.06 0.05
Financials 1,495.35 -7.41 -0.49 3.30

DD, JFC: DD, JFC partner for industrial REIT Holding Firms 6,947.72 -9.16 -0.13 -5.53
Industrial 9,635.58 -49.27 -0.51 2.58
Mining Sector: Mining industry seeks policy change Mining & Oil 9,836.49 65.65 0.67 3.24
Banking Sector: Banks’ bad loans hit 13-year high Property 3,335.23 -16.72 -0.50 -8.98
Services 1,615.47 8.50 0.53 6.70

Dow Jones 34,681.79 104 0.30 13.32

COVID-19 Update: S&P 500 4,358.13 14.59 0.34 16.03
Nasdaq 14,665.06 1.42 0.01 13.79
Total Cases Total Deaths Total Recoveries

Philippines 1,455,585 (+5,484) 25,650 (+191) 1,380,899 (+3,925) INDEX GAINERS

Ticker Company Price %
USA 34,674,836 (+35,743) 622,211 (+390) 29,202,364 (+36,268) BLOOM Bloomberry Resorts 6.91 6.47
DMC DMCI Hldgs Inc 6.60 2.80
Worldwide 186,299,570 (+491,169) 4,025,632 (+8,676) 170,450,452 (+382,917) GLO Globe Telecom Inc 1970.00 1.97
AP Aboitiz Power Corp 25.10 1.21
MBT Metrobank 48.90 1.14

Market Summary: INDEX LOSERS

Ticker Company Price %
The local stock market sustained its decline for the third straight day on Thursday. BPI Bank of the Phil Islands 87.00 -1.69
RRHI Robinsons Retail Hdlgs 55.20 -1.43
MER Manila Electric Co 281.00 -1.40
The PSEi dropped 18.01 points or 0.25% to close at 6,924.99. The main drags were BPI FGEN First Gen Corp 29.40 -1.34

(-1.69%), RRHI (-1.43%), MER (-1.40%), FGEN (-1.34%), and JGS (-1.28%). Meanwhile, the JGS JG Summit Hldgs Inc 61.70 -1.28

top movers were BLOOM (+6.47%), DMC (+2.80%), GLO (+1.97%), AP (+1.21%), and MBT
(+1.14%). TOP 5 MOST ACTIVE STOCKS
Ticker Company Turnover
ALI Ayala Land Inc 374,807,700
Value turnover went up to Php5.0Bil from the Php4.5Bil traded in the previous session. SM SM Investments Corp 158,730,500
Meanwhile, net foreign selling soared to Php838.9Mil from the Php212.0Mil registered GTCAP GT Capital Hldgs Inc 157,274,200
SECB Security Bank Corp 149,707,900
in the previous day.
BDO BDO Unibank Inc 140,982,900

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.

FRI 09 JUL 2021
John Martin Luciano, CFA
Senior Research Analyst
Union Bank of the Philippines
HOLD
Php75.50
COL Financial Group, Inc.
DAILY NOTES I PHILIPPINE EQUITY RESEARCH
Top Story:
UBP: Manageable increase NPLs in May; Maintain
HOLD
Manageable increase NPLs in May; NPL cover remains adequate. Non-performing
loans (NPL) rose sequentially in May following the re-imposition of lockdowns this year.
Nevertheless, the bank noted that the uptick remains manageable, maintaining that its
NPL ratio likely already peaked in 4Q20 at 5.1%. Note that lockdowns this year were
less stringent compared to last year which allowed more businesses to remain open.
The visibility of NPL formation also did not deteriorate given that there was no loan
moratorium this year.
UBP believes that its current level of NPL cover remains adequate at 67% despite being
below the median of the sector at 88%. Despite its relatively high exposure to consumer
loans at 30% of its loan portfolio, the bank explained that salary and mortgage loans
account for a large portion of its exposure. These have very low historical loss given
default (LGD) levels, translating to low expected credit losses (ECL). In addition, compared
to other banks, UBP has fewer loans classified under stage 2, which are accounts that
experienced a significant increase in credit risk but are not yet considered NPLs. According
to UBP, this partially distorts the NPL cover of other banks as they must provide more
provisions to stage 2 accounts despite not being as classified as NPLs.
Exhibit 1: Loan stages
Source: Banks
2
 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 09 JUL 2021

Muted loan growth outlook. UBP expects its loan growth to be flattish this year as it
noted that pre-pandemic level of economic output will not be achieved until 2H22. Recall
that the average daily balance of its loan portfolio fell 6% y/y during the first quarter,
dragged by weaker middle market (-6% y/y) and corporate (-13% y/y) segments. The
bank noted that should economic recovery remain slow, then corporate loan demand will
likely remain weak. On the positive side, the bank is already seeing an uptick in consumer
and middle market loans. Growth in consumer loans was driven by steady loan releases in
mortgage, motorcycle, and salary loans. The bank noted that there is still a lot of demand
for mortgage outside Metro Manila. Meanwhile, the bank is also seeing some demand
in the SME segment, but it noted that it tightened its credit policies given that a lot of
sectors remained at risk. On the other hand, the credit card segment remained weak
following the shift in spending to essential needs. In our view, we expect the acceleration
in the government’s vaccination rollout as well as the government’s efforts to contain the
new COVID-19 variants to determine the pace of loan growth recovery.

Flattish net interest margin. UBP believes that its net interest margin will be flattish at
worst this year despite pressure on asset yields given that it still anticipates its funding
cost to improve. The bank’s CASA growth remained strong, expanding by 29% y/y during
the first quarter. This allowed the bank to reach its CASA target for the year. In addition,
this brought its CASA ratio to 49% from 41% during the same quarter last year.

On the other hand, the 200 bps cumulative rate cuts last year have also translated to
lower loan yields, particularly corporate yields which declined by 30-40 bps. We believe
excess liquidity in the system coupled with the absence of loan demand also contributed
to the lower yields. UBP’s decision to sell its investment securities will also likely drag
its asset yields as they replenish their portfolio with lower-yielding securities. On the
positive side, the BSP’s credit card cap rate, which was imposed last November, had a
minimal impact to UBP given that its ~Php7Bil credit card portfolio only represents ~2%
of total loans.

Overall, the weak loan growth outlook coupled with pressure on net interest margin will
likely drag net interest income growth this year.

Trading gains to normalize. Aside from weak the net interest income outlook, trading
gains would also likely normalize going forward. After booking robust trading gains over
the last two years (Php8.9Bil in 2020 and Php9.4Bil in 2019 vs Php1.5Bil in 2018), we
anticipate UBP’s trading income to decline in the succeeding periods as the recent rise in
bond rates will likely limit trading gains to client-related flows from spreads. Note that on
average, benchmark rates have increased by 52 bps since the start of the year.

COL Financial Group, Inc. 3

 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 09 JUL 2021

Maintain HOLD. We maintain our HOLD rating on UBP with a FV estimate to Php75.7/
sh based on a 0.95X 2021E P/BV (adjusted for goodwill). The weak loan growth outlook
coupled with pressure on net interest margin will likely drag net interest income growth
this year. On the positive side, the bank believes that NPL ratio has already peaked
as it saw gradual repayments and restructuring following the expiration of the loan
moratorium of Bayanihan 2. At its current price, the bank is trading at 1.0X 2021E P/BV,
above the industry average of 0.7X.

Other News:

Research Analysts DD, JFC: DD, JFC partner for industrial REIT

John Martin Luciano, CFA DD and JFC are planning to create the country’s first and largest industrial real estate
Frances Rolfa Nicolas investment trust (REIT), with a planned initial public offering (IPO) in 2022. The REIT
Justin Richmond Cheng listing will be done through DD’s industrial leasing unit, CentralHub Industrial Centers,
Adrian Alexander Yu
Inc. Its portfolio includes industrial warehouse complexes for warehousing, commissary,
Kerwin Malcolm Chan
cold storage facilities, and logistics distribution center. In a separate disclosure, JFC’s
board of directors approved a plan to invest land properties worth around Php2.0Bil and
cash investment of Php1.9Bil. JFC’s board approved the cash investment in exchange
for 1,564,410,000 common shares of CentralHub. As part of its investment plan, JFC
intends to infuse its 16.4 Ha of industrial properties currently utilized as its commissaries
in exchange for additional common shares of CentralHub. JFC mentioned that it plans to
reduce assets tied to real estate properties by converting some of them into securities
in REIT and by selling others directly to third parties. The company will use the proceeds
from the eventual IPO of CentralHub to finance real estate investments for its new stores
and commissaries which will be convert again into more investments and shares in the
REIT. Additional commissary assets from JFC will bump up CentralHub’s total industrial
land portfolio to 39.8 Ha. (Source: Businessworld, JFC, DD)

Mining Sector: Mining industry seeks policy change

The mining industry is pushing for key policy changes that will boost the sector’s growth
and support the economic recovery from the COVID-19 pandemic. PX President and CEO
Eulalio Austin Jr. said that although national law allows mining operations, there are still
some LGUs that issue resolutions against mining in their respective areas. On top of this,
FNI President Dante Bravo mentioned that the government should consider providing
stable incentives for major mining projects. He added that the current tax regime is
almost prohibitive to the industry and if more taxes were to be imposed, then it would
attract less investments in the country. Note that in 2020, the mining sector contributed
Php102.3Bil, equivalent to 0.6% of the country’s GDP growth.

COL Financial Group, Inc. 4

 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 09 JUL 2021

Mr. Austin Jr. also noted that there is a need to lift the foreign ownership restriction
of up to 40% on mining firms so that this would attract more foreign investors in the
mining sector. By doing so, PX could potentially find investors to move forward with its
Silangan Project in Surigao del Norte, which requires a US$758Mil capital investment.
(Source: Bworldonline)

Banking Sector: Banks’ bad loans hit 13-year high

Non-performing loans (NPL) held by Philippine banks continued to rise in May, bringing
the industry’s NPL ratio to the highest in 13 years amid the prolonged pandemic. Gross
NPLs surged by 83% y/y in May to Php479.5Bil. This is also higher by 3.4% m/m. This
brought the industry’s gross NPL ratio to 4.49% in May, higher compared to the 2.43%
during the same month last year and the 4.35% in April. Meanwhile, past due loans
increased by 3.3% m/m to Php593.3Bil. This brought the ratio of past due loans to
total loans to 5.56%, up from 5.39% in the previous month. Similarly, restructured loans
increased by 8.9% m/m to Php263.5Bil. This brought the ratio of restructured loans to
total loans to 2.47%, up from 2.27% in the previous month. With the increase in NPLs,
the banks’ NPL coverage ratio declined to 79.96% from 81.48% in the previous month.
(Source: Businessworld, BSP)

COL Financial Group, Inc. 5

 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 09 JUL 2021

Date of Acquired or Price per

Stock Volume Person (Designation)
Disclosure Disposed share
110,000 5.50
Gerard H. Brimo
06-Jul NIKL 60,000 D 5.51
(Chairman of the Board of Directors)
30,000 5.52
3,000 4.42 Alexander C. Yu
08-Jul COL D
3,000 4.43 (Vice Chairman)
2,000 4.29
Alexander C. Yu
08-Jul COL 32,000 A 4.30
(Vice Chairman)
2,000 4.40
44,000 4.40
3,000 4.42 Edward K. Lee
08-Jul COL A
3,000 4.43 (Chairman & Founder)
8,000 4.44
Source: PSE

COL Financial Group, Inc. 6

 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 09 JUL 2021

I M P O R TA N T 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 M P O R TA N T 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.

CO L R E S EAR C H T EAM

APRIL LYNN TAN, CFA

CHIEF EQUITY STRATEGIST
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

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, CFA
SENIOR RESEARCH ANALYST RESEARCH ANALYST SENIOR RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

SENIOR RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@colfinancial.com

C OL F INANC IAL G R O UP, IN C.

24/F EAST TOWER, TEKTITE TOWERS,
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. 8