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Country: Philippines
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Fundamental View
AS OF 17 May 2023Security Bank is rated Baa2 (stable) by Moody’s; MUFG is a 20% shareholder.
Capital ratios have fallen as the bank refocused on loan growth, but levels remain comfortable and are one of the highest among Philippine bank peers.
Rapid expansion of the retail book pre-pandemic led to a large hit to asset quality when COVID-19 struck. The bank completed working through its risk issues around end-2021 and resumed growth in the retail book since, a positive development after two years of ceding market share.
The bank has a less well-established deposit franchise than most peers, resulting in a lower NIM uplift despite rising rates. This has led it to focus growth on higher yielding segments to improve the NIM, and has formed a new business banking segment in 2022 to cater to MSMEs.
Business Description
AS OF 17 May 2023- Security Bank was established in 1951 and obtained its universal banking license from the BSP in 1994. It is today the 9th largest bank in the Philippines.
- The bank is majority-owned by longtime owner Frederick Y. Dy (23.7%) and MUFG Bank (20%), which acquired its stake in April 2016.
- SB Finance, a joint venture between Security Bank and Thailand's Bank of Ayudhya (Krungsri), a consolidated subsidiary of MUFG, was launched in 2019. The unit is a consumer finance company formed to engage in the unsecured loans business in the Philippines, focusing on the lower mass retail segment.
- Security Bank's loan portfolio has a 26% retail and 74% wholesale split as of 1Q23.
Risk & Catalysts
AS OF 17 May 2023Any downgrade of the Philippine sovereign ratings (Baa2/ BBB+/ BBB) would have a negative impact on Security Bank’s credit ratings.
The bank’s weaker deposit franchise has meant greater funding cost pressure and NIM compression despite the higher rate environment. As such, it is approaching growth more selectively this year, focusing on higher yielding customers which includes its newly formed business banking segment that caters to MSMEs, and trimming expensive deposits. We are watchful of how quickly this segment grows given the bank’s past mishap in its retail expansion pre-pandemic.
Persistent inflation and the BSP’s steep rate hikes are likely to put some pressure on growth and asset quality this year.
Key Metrics
AS OF 17 May 2023| PHP mn | 1Q23 | FY22 | FY21 | FY20 | FY19 |
|---|---|---|---|---|---|
| Net Interest Margin | 4.06% | 4.23% | 4.43% | 4.71% | 3.93% |
| ROA | 1.2% | 1.4% | 1.0% | 1.0% | 1.3% |
| ROE | 7.4% | 8.4% | 5.6% | 6.2% | 8.9% |
| PPP ROA | 1.79% | 2.17% | 2.30% | 4.24% | 2.13% |
| CET1 Ratio | 16.7% | 16.1% | 19.1% | 19.2% | 16.9% |
| Total Equity/Total Assets | 16.22% | 14.94% | 17.88% | 18.89% | 14.92% |
| Gross NPL Ratio | 3.12% | 2.95% | 3.94% | 3.90% | 1.17% |
| Net LDR | 93.1% | 83.0% | 85.7% | 99.6% | 89.8% |
CreditSights View
AS OF 18 May 2023Security Bank has historically been a wholesale focused bank, but it has grown in retail in the years leading up to the pandemic. Rapid expansion however led to a large asset quality hit when COVID-19 struck. Management turned conservative and built up the CET1 ratio which is a key credit strength. Retail growth has resumed in 2022 after a revision of its underwriting processes. However, the expected NIM uplift has been slow to come through despite rising rates as funding cost pressure is higher due to SECB’s weaker deposit franchise. To protect NIM, management is shifting the loan mix towards higher yielding segments, including via a newly formed MSME unit, which makes us cautious. Persistent inflation and steep rate hikes are also likely to put some pressure on AQ. We have an U/P reco.Â
Recommendation Reviewed: May 18, 2023
Recommendation Changed: November 18, 2022
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Fundamental View
AS OF 17 May 2023We remain highly concerned about refinancing and extension risk for SMC GP’s $3.3 bn of perps that have their first call dates in 2024-2026.
SMC GP enjoys strong parental backing from San Miguel Corporation (SMC) and enjoys high revenue visibility (most of its contracts entail long-term power supply agreements with distribution utilities and other industrial firms).
But only ~35% of SMC GP’s off-take contracts benefit from a cost pass-through mechanism, meaning ~65% of power generation is exposed to a rise in thermal coal input costs that could squeeze its EBITDA margins.
SMC GP incurs sizable capex that has led to additional debt incurrence and elevated credit metrics.
Over 88% of its power generation capacity is coal or gas-fired, which may be viewed unfavorably from an ESG perspective.
Business Description
AS OF 17 May 2023- SMC GP is a leading power generation and distribution company in the Philippines. As at 31 December 2021, its total generation capacity stood at 4.7 GW, accounting for ~20% of the national grid.
- The bulk of its revenues is derived from power generation (~82%), with the remainder from electricity distribution and retailing (~18%).
- It operates 7 power generating plants across diversified energy sources, comprising coal (~62%), natural gas (~25%), hydro (~12%) and battery energy storage (~1%).
- Through long-term power supply agreements and retail supply contracts, SMC GP either sells electricity directly to customers (including large Philippines power distribution company Manila Electric Company, distribution utilities and other industrial customers), or through the Philippine Wholesale Electricity Spot Market.
- SMC GP acts as the Independent Power Producer Administrator (IPPA) for three power plants (~54% of total capacity), where it has the right to sell electricity generated by the IPPs without having to bear large upfront capital expenditures for plant construction and maintenance.
- SMC GP also distributes and retails electricity services through its wholly-owned subsidiary Albay Power and Energy, which distributes power in the province of Albay, Luzon.
- SMC GP is a wholly-owned unlisted subsidiary of San Miguel Corporation, one of the largest and most diversified conglomerates in the Philippines based on total revenues and assets.
Risk & Catalysts
AS OF 17 May 2023We remain highly concerned about refinancing and extension risk for SMC GP’s $3.3 bn of perps that have their first call dates in 2024-2026. While domestic loan and bond markets could remain open, we are uncertain if adequate funds can be raised at acceptable costs. While parental support from SMC should be forthcoming, it would be difficult to rely on this funding route indefinitely without straining SMC’s own credit health.
A sizable portion of SMC GP’s off-take contracts (~65%) do not contain cost pass-through mechanisms. This exposes the company to a rise in thermal coal input costs that could squeeze its EBITDA margins.
SMC GP incurs sizable capex that has spurred additional debt incurrence. Consequently, its credit metrics remain elevated.
Over 88% of SMC GP’s power generation capacity is thermal coal or gas-fired, which may be viewed unfavorably from an ESG perspective.
Key Metrics
AS OF 17 May 2023| PHP bn | FY20 | FY21 | FY22 | 1Q22 | 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 68.8% | 66.7% | 69.2% | 66.8% | 65.9% |
| Net Debt to Book Cap | 53.6% | 57.7% | 66.4% | 59.1% | 63.8% |
| Debt/Total Equity | 220.7% | 199.9% | 224.6% | 201.6% | 193.2% |
| Debt/Total Assets | 81.9% | 79.2% | 79.0% | 78.6% | 76.1% |
| Gross Leverage | 10.5x | 10.5x | 19.4x | 10.9x | 18.2x |
| Net Leverage | 8.2x | 9.1x | 18.6x | 9.7x | 17.7x |
| Interest Coverage | 2.4x | 2.5x | 1.4x | 2.4x | 1.5x |
| EBITDA Margin | 41.3% | 35.9% | 13.2% | 22.5% | 25.6% |
CreditSights View
AS OF 17 May 2023We have an Underperform recommendation on SMC GP. We remain highly concerned of its frail credit profile and perp call uncertainties. High thermal coal input costs have kept its leverage metrics extremely elevated (FY22: 19.4x/18.6x) and free cash flows in negative territory. We are also concerned of refinancing/extension risk for SMC GP’s chunky wall of perps totalling $3.3 bn from FY24-FY26. We think SMC GP could tap the domestic loan and bond markets to refinance a part of the perps outstanding and has other funding alternatives, but we are uncertain if it can access the debt markets or raise the quantum of funds needed at acceptable costs. Parental support from holdco SMC could be counted on, but it will be difficult to rely on this funding route indefinitely.
Recommendation Reviewed: May 17, 2023
Recommendation Changed: February 06, 2023
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Search topics about wealth insights and investments.San Miguel Corporation
- Sector: Manufacturing
- Sub Sector: Diversified Conglomerates
- Country: Philippines
- Region: Philippines
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): O/P
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Fundamental View
AS OF 16 May 2023SMC holds a dominant market position in various sectors of the Philippine economy, has a long operating track record, and a diversified business profile that provides greater earnings resilience.
SMC incurs significant capex, particularly in its power/energy and infrastructure businesses. This could keep SMC’s credit metrics elevated and free cash flows negative.
We remain concerned about the weak credit profile of its power arm SMC Global Power (SMC GP), and see heightened extension/refinancing risk for its $3.3 bn of perpetual bonds that are first callable in 2024-2026.
Business Description
AS OF 16 May 2023- SMC is a massive conglomerate in the Philippines with business interests across six business segments: Food & Beverage (F&B), fuel refining and retailing, power, packaging, infrastructure, and others.
- Its F&B business is operated through San Miguel Food & Beverage, the largest F&B company in the Philippines with three main divisions: Beer and Non-alcoholic Beverage (including beers and juices), Spirits (gin and Chinese wine), and Food (including packaged foods, animal feeds, poultry and fresh meats).
- SMC’s fuel refining and retailing business is operated through Petron Corporation (~68% stake), the largest oil refining and retailing company in the Philippines, and one of the largest in Malaysia. Petron has a total refining capacity of ~268k barrels/day.
- SMC’s power business is operated through SMC Global Power Holdings (SMC GP, 100% stake), one of the largest power generating companies in the Philippines. It maintains a diversified portfolio across coal (62%), natural gas (26%), and renewable energy (12%) sources.
- Through its packaging business, it manufactures glass containers, plastic crates, pellets, bottles and caps, aluminium cans, and other types of packaging products.
- It operates its Infrastructure business through San Miguel Holdings Corp (SMHC), in which it holds a 100% stake. It currently operates ~190 km of toll roads in the country, connecting high-traffic, arterial routes in Luzon.
Risk & Catalysts
AS OF 16 May 2023SMC’s revenues are concentrated in the Philippines (~80%), which poses geographical concentration risk.
SMC incurs significant capex, particularly in its power/energy and infrastructure businesses. In October 2020, SMC began construction of the mega New Manila International Airport (requires ~PHP 750 bn of capex spread over 5-7 years). This could keep SMC’s credit metrics elevated and free cash flows in negative territory.
As a holding company, SMC is reliant on dividend upstreaming from its operating subsidiaries to service its debt, which can be difficult should the operating subsidiaries face cash flow difficulties. We are particularly concerned about SMC GP’s weak financial profile and extension/refinancing uncertainties of its $3.3 bn perpetuals that are first callable from 2024-2026.
SMC operates in the businesses of thermal power generation and fuel refining, which may be looked at unfavourably by some ESG-focused investors.
Key Metrics
AS OF 16 May 2023| PHP bn | FY20 | FY21 | FY22 | 1Q22 | 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 65.2% | 66.4% | 72.3% | 66.6% | 70.9% |
| Net Debt to Book Cap | 46.7% | 51.7% | 58.5% | 51.9% | 60.0% |
| Debt/Total Equity | 187.0% | 197.9% | 261.3% | 199.1% | 243.9% |
| Debt/Total Assets | 64.1% | 65.7% | 69.8% | 65.4% | 68.0% |
| Gross Leverage | 10.9x | 8.1x | 9.1x | 7.8x | 8.8x |
| Net Leverage | 7.8x | 6.3x | 7.4x | 6.1x | 7.4x |
| Interest Coverage | 2.1x | 3.1x | 2.8x | 3.3x | 2.4x |
| EBITDA Margin | 15.5% | 17.6% | 12.2% | 14.7% | 12.3% |
CreditSights View
AS OF 16 May 2023We have a Market perform recommendation on SMC. SMC’s Jul-2025 perp (mid-YTW: 10.1%) trades 400 bp wider than Ayala Corp’s c.Oct-2024 perp (mid-YTW: 6.1%), which we think is fair given SMC’s poorer net leverage (7.4x vs. 6.6x), worse liquidity position and heightened extension/refinancing risk of subsidiary SMC GP’s $3.3 bn of perps that negate SMC’s larger scale of EBITDA. We like SMC’s dominant market position in multiple sectors, long operating track record and diversified operations. Yet we acknowledge it incurs sizable capex that would likely keep its credit metrics elevated and free cash flows negative. We are also concerned about how SMC GP intends to refinance its wall of perps that are first callable in 2024-2026, which we think will be aided largely by parental support from SMC.
Recommendation Reviewed: May 16, 2023
Recommendation Changed: April 05, 2023
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Bank Rakyat Indonesia
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State Bank of India
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Search topics about wealth insights and investments.Petron
- Sector: Energy
- Sub Sector: Oil and Gas
- Country: Philippines
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): M/P
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Fundamental View
AS OF 11 May 2023While Petron’s credit metrics remain elevated, we see a stable FY23 credit outlook owing to moderating crude oil prices and resilient fuel demand aided by the company’s dominant market share in 2 markets.
Petron is fairly insulated against high crude oil input costs as about two-third of its total revenues are indexed to Dubai crude prices, which allows for cost pass-throughs in Philippines.
Liquidity remains tight, though we expect its stable fundamentals and strong SMC group reputation to facilitate debt rollover and refinancing.
We see low non-call risk for Petron’s $478 mn c.Jul-2023 perp given its punitive 250 bp coupon step-up, its desire to avoid reputational risk and contagion risk to other SMC perps, and that it can be covered by its unrestricted cash balance or be refinanced.
Business Description
AS OF 11 May 2023- Petron is the largest oil refining and retailing company in the Philippines, and the third largest player in Malaysia. It maintains a 24% market share in the Philippines (followed by Shell and Caltex) and a 20% market share in Malaysia (largest being Petronas), based on total fuel sales volumes.
- Petron has a total refining capacity of 268k barrels/day (bpd) and accounts for about 30% of the Philippines' fuel needs. Its petroleum refining facilities include the Limay Refinery in Bataan, Philippines (capacity of 180k bpd; 67% of total) and the Port Dickson Refinery in Negeri Sembilan, Malaysia (capacity of 88k bpd; remaining 33% of total).
- Petron's refineries process crude oil into a full range of petroleum products including gasoline, diesel, LPG, jet fuel, kerosene and petrochemicals.
- It further markets and retails these fuel products through its fuel service stations located across the Philippines (2,400 outlets) and Malaysia (700 outlets).
- Petron sources its crude oil supplies from third-party suppliers, namely Saudi Aramco, Kuwait Petroleum Corporation and Exxon Mobil, which are bought on the basis of term contracts and in the spot market.
- Petron mainly supplies its petroleum and fuel products to customers in Malaysia and the Philippines (~95% of annual revenue).
- Petron is 68% owned by San Miguel Corporation (SMC), one of the largest and most diversified conglomerates in the Philippines based on total revenues and assets. SMC's CEO, Mr. Ramon Ang, is also Petron's CEO.
Risk & Catalysts
AS OF 11 May 2023Petron holds 55 days of inventory, which is on the high side relative to industry standards. This exposes the company to inventory losses attributable to potential short-term swings in crude oil prices.
Prices of fuel products are adjusted on a weekly basis in the Philippines, according to international crude oil prices.
Petron operates in low-margin business (EBITDA margins ~5%) and maintains elevated credit metrics.
Petron is highly dependent on its Limay petroleum refining complex that makes up two-thirds of its total refining capacity (67%). Any events that disrupt the refinery’s operations could adversely affect Petron’s total revenues.
Key Metrics
AS OF 11 May 2023| PHP bn | FY20 | FY21 | FY22 | 1Q22 | 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 74.3% | 72.3% | 74.0% | 71.9% | 72.7% |
| Net Debt to Book Cap | 66.3% | 63.3% | 65.5% | 63.5% | 65.2% |
| Debt/Total Equity | 289.4% | 261.6% | 284.2% | 256.0% | 266.4% |
| Debt/Total Assets | 71.3% | 71.2% | 70.2% | 70.0% | 68.1% |
| Gross Leverage | 65.4x | 11.2x | 10.9x | 9.3x | 10.2x |
| Net Leverage | 58.3x | 9.8x | 9.7x | 8.2x | 9.1x |
| Interest Coverage | 0.3x | 2.5x | 2.2x | 3.0x | 1.9x |
| EBITDA Margin | 1.3% | 5.9% | 3.4% | 6.4% | 5.8% |
CreditSights View
AS OF 11 May 2023 We maintain our Market perform recommendation on Petron. Its c.Apr-2026 perp trades 15 bp wider than SMC GP c.Jan-2026 perp, that rightly reflects its slightly longer tenor. We think Petron is fundamentally stronger than SMC GP, as it enjoys cost pass-through mechanism, has modestly better leverage metrics and has manageable perps turning callable. We think it is SMC GP that has room to widen. Overall, we see a stable credit outlook for Petron amid resilient fuel demand and lower crude oil prices, and its cost pass-through mechanism in Philippines. Its leverage metrics remain elevated, negated partly by its relatively low capex. We see low non-call risk for its $478 mn c.Jul-2023 perp given Petron’s ability to tap its cash balance, refinance, and its desire to avoid reputational risk.
Recommendation Reviewed: May 11, 2023
Recommendation Changed: January 26, 2022
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Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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Search topics about wealth insights and investments.International Container Terminal Services (ICTSI)
- Sector: Transportation
- Sub Sector: Shipping and Infrastructure
- Country: Philippines
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Fundamental View
AS OF 10 May 2023We believe ICTSI’s FY23 credit metrics could improve even amid growth slowdown concerns, owing to anticipated yield improvements, inorganic EBITDA accretion and China’s post-pandemic reopening.
ICTSI has deleveraged consistently over the past 5 years, which is indicative of prudent financial management.
While ICTSI is exposed to material EM-related geopolitical, regulatory and operating risks, we think the impact is mitigated by its geographically diversified revenue base across 20 countries that limits country-specific risks.
ICTSI’s bonds tend to experience greater volatility from exogenous events.
While sizable capex and high dividend payouts could strain ICTSI’s credit profile, we take comfort in ICTSI’s robust operating cash flow generation.
Business Description
AS OF 10 May 2023- ICTSI develops and operates common user container terminals, with a focus on those within Origin and Destination (O&D) ports based in emerging markets.
- ICTSI provides integrated ports services that facilitate the receiving, handling and storage of cargo. These are broadly split into four streams: vessel charges (i.e. services relating to moving cargo on and off ships), yard charges (i.e. services relating to moving cargo in the container and storage yards), storage fees (i.e. services relating to cargo and container storage), and other ancillary fees.
- ICTSI currently operates across 33 port concessions in 20 countries. As of end-FY22, ICTSI's revenues are well diversified across the Philippines (34% of total), Other Asia (12%), EMEA (21%) and the Americas (34%).
- ICTSI operates its container terminals under long-dated concession agreements (typically ~25 years) with the relevant local port authorities or governments. For some concessions, fees charged to customers are regulated by the authorities that prescribe maximum price limits and, in some cases, allow for CPI-linked tariff hikes. For other concessions, fees charged are unregulated and allow for greater price-setting flexibility and volatility too.
- ICTSI is required to make periodic fee payments to the respective authorities for the right to operate the concessions. These payments are typically a combination of fixed charges and variable charges based on cargo traffic volume or gross revenues.
Risk & Catalysts
AS OF 10 May 2023ICTSI is exposed to material EM-related geopolitical, regulatory and operating risks. That said, we think the impact is mitigated by its geographically diversified revenue base across 20 countries that limits country-specific risks.
Being an EM-focused port container terminal operator, ICTSI’s bonds tend to experience greater volatility from exogenous events.
Sizable post-pandemic capex and high dividend payouts could strain ICTSI’s free cash flows and credit metrics, though we think the impact is mitigated by ICTSI’s robust operating cash flow generation.
ICTSI has sizable exposure to FX depreciation risks, as it derives most of its revenues and cash expenses in EM currencies, while a bulk of its debt is pegged to the $.
Key Metrics
AS OF 10 May 2023| $ mn | FY20 | FY21 | FY22 | 1Q22 | 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 69.5% | 73.7% | 71.9% | 78.3% | 73.7% |
| Net Debt to Book Cap | 57.5% | 62.2% | 58.2% | 67.5% | 64.5% |
| Debt/Total Equity | 228.2% | 279.7% | 255.3% | 361.1% | 279.8% |
| Debt/Total Assets | 68.6% | 67.5% | 62.5% | 68.0% | 63.4% |
| Gross Leverage | 4.8x | 3.7x | 3.1x | 3.6x | 3.1x |
| Net Leverage | 4.0x | 3.1x | 2.5x | 3.1x | 2.7x |
| Interest Coverage | 3.4x | 3.9x | 4.6x | 4.1x | 4.5x |
| EBITDA Margin | 58.2% | 61.1% | 62.8% | 64.0% | 61.9% |
CreditSights View
AS OF 10 May 2023We have an Outperform recommendation on ICTSI. We think ICTSI’s Jun-2030 bond should trade 40-50 bp tighter than Aboitiz’s Jan-2030 bond (current: 3 bp wider) and ICTSI’s Nov-2031 bond should trade 20-30 bp tighter than Globe Telecom’s Jul-2030 bond (current: 13 bp wider). We believe ICTSI’s credit metrics could stay resilient amid growth slowdowns owing to anticipated yield improvements and disciplined financial management. While ICTSI is exposed to EM-related geopolitical, regulatory and operating risks, we believe these are mitigated by its highly geographically diversified revenues and expectations of a weakening $ that would support EM currencies. We also expect ICTSI’s robust cash-generative business to drive positive free cash flows, even amid higher capex and persistent dividends.
Recommendation Reviewed: May 10, 2023
Recommendation Changed: April 18, 2023
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Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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Search topics about wealth insights and investments.Bank of Philippine Islands
- Sector: Financial Services
- Sub Sector: Banks
- Country: Philippines
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Fundamental View
AS OF 09 May 2023Bank of the Philippine Islands (BPI), the 3rd largest bank in the Philippines by assets, is rated Baa2(stable)/BBB+(stable)/ BBB-(neg).
We view the bank as too big to fail given its systemic importance in the country. There is also a strong probability of support from the government in addition to its main shareholder, the Ayala Corporation if needed.
BPI has a long history, and we view it as a fundamentally sound bank with prudent capitalization, well-managed asset quality, stable profitability, and comfortable liquidity.
Business Description
AS OF 09 May 2023- The history of the Bank of the Philippine Islands traces back to 1851. It is the oldest bank in the Philippines and South East Asia. It was first listed on the Philippine Stock Exchange in 1971, and became a universal bank in 1982.
- Ayala Corporation, one of the biggest conglomerates in the country, became BPI's dominant shareholder in 1969. Ayala Corp still holds a 49% stake in the bank.
- BPI has been acquisitive across the years. It merged with Far East Bank and Trust Company and acquired Ayala Insurance Holdings Corp in 2000. It acquired DBS Bank Philippines in 2001 and Prudential Bank Philippines in 2005. DBS was a shareholder of BPI but exited its position in 2013. More recently in 2022, it announced the acquisition of the Gokongwei conglomerate's Robinsons Bank.
- The bank is predominantly a corporate bank with 79% of its loan book outstanding to corporates and SMEs and 21% to retail as of 1Q23. The longer term target is to grow the retail and SME segment to a 30% share of loans.
Risk & Catalysts
AS OF 09 May 2023Any downgrade of the Philippine sovereign ratings (Baa2/ BBB+/ BBB) would have a negative impact on BPI’s credit ratings.
BPI’s loan growth and asset quality have remained resilient but rising macro headwinds and rapid rate hikes will dampen growth and increase asset quality pressures. That said, BPI’s corporate-focused loan book is a key credit strength that mitigates the downside risk and strong loss absorption buffers have also been built-up.
The bank has set an ROE target of 15% by 2026, which it intends to reach by (1) expanding loans at 15% CAGR over the period (2) shifting the loan mix towards higher yielding retail and SME loan segments (from a current combined share of ~25% to 30% by 2025) and (3) growing digital channels to boost fee and overall income streams.
Key Metrics
AS OF 16 May 2023| PHP mn | 1Q23 | FY22 | FY21 | FY20 |
|---|---|---|---|---|
| PPP ROA | 2.52% | 2.41% | 2.01% | 2.42% |
| Reported ROA (Cumulative) | 1.88% | 1.59% | 1.10% | 0.98% |
| Reported ROE (Cumulative) | 15.4% | 13.1% | 8.4% | 7.7% |
| Net Interest Margin | 3.94% | 3.59% | 3.30% | 3.49% |
| CET1 Ratio | 15.7% | 15.1% | 15.8% | 16.2% |
| Total Equity/Total Assets | 12.4% | 12.2% | 12.1% | 12.5% |
| NPL Ratio | 1.82% | 1.76% | 2.49% | 2.68% |
| Provisions/Loans | 0.24% | 0.58% | 0.91% | 1.94% |
CreditSights View
AS OF 18 May 2023Fundamentally, BPI is sound with comfortable capital (CET1 ratio of 15.7%) and liquidity levels (70% CASA ratio, 77% LDR). The bank’s traditionally more measured and conservative approach has led to a loss of market share in loans and deposits in the past, as well as a lower net interest margin than BDO and Metrobank. However, the bank has taken a well-balanced approach towards business growth during and emerging from the pandemic and has improved its NIM and profitability. It is continuing to invest in digital initiatives which have driven growth and efficiency. The rapid rate hikes could temper growth momentum, but we see BPI’s asset quality remaining particularly resilient relative to peers as a result of its large corporate-focused loan book. We maintain BPI on Market perform.
Recommendation Reviewed: May 18, 2023
Recommendation Changed: August 19, 2022
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Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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Fundamental View
AS OF 09 May 2023BDO Unibank (BDO) is the largest bank in the Philippines in terms of assets & market share and is rated Baa2(stb)/NR/BBB-(neg). Fitch revised its outlook on BDO to negative from stable in July 2021 while affirming its BBB- rating, citing the sustained challenges posed to the Philippine banking sector by the slower than expected economic recovery.
Given its size and systemic importance, BDO is considered too big to fail and is strongly likely to be supported by its controlling shareholder SM Investments, as well as the Philippine government in times of stress.
BDO is widely viewed as the soundest bank in the country given its strong fundamentals, well-diversified businesses, and good management. Its CET1 ratio however is lower than its first-tier peers, BPI and Metrobank.
Business Description
AS OF 09 May 2023- BDO Unibank was established as Acme Savings Bank in 1968, and was then acquired by SM Investments in 1976. It became a commercial bank in 1994 and a universal bank in 1996.
- BDO was listed in May 2002. SM Investments remains the bank's largest shareholder with a 41% stake.
- BDO has expanded through a series of M&As. Among its key transactions, it merged with Dao Heng Bank Philippines in 2001, Banco Santander Philippines in 2003, UOB Philippines in 2005, Equitable PCI Bank in 2007, GE Money Bank in 2009, Citibank Savings, DB Trust and Real Bank in 2014, One Network Bank in 2015 (the largest rural bank in the Philippines), and RB Pandi's banking business in 2019. It also acquired the insurance business of Generali in the Philippines in 2016.
- BDO has the largest distribution network in the country and is ranked the largest bank in terms of consolidated resources, total assets, loans, deposits and trust funds under management.
- Its loan book is split 50% large corporates, 26% middle market, and 24% consumer at end-March 2023. 49% of the consumer book comprises mortgages, 21% are credit cards, while the rest are auto and personal loans.
Risk & Catalysts
AS OF 09 May 2023The bank’s relatively low CET1 ratio provides less margin for error should there be unanticipated credit losses. However, we like the bank’s prudent management overlays and rebuilding the reserve cover back to the 150-170% level which provides sufficient buffer in our view. Internal capital generation ability has also improved meaningfully with profitability at much stronger levels now than during the pandemic.
Any downgrade of the Philippine sovereign ratings (Baa2/ BBB+/ BBB) would negatively impact BDO’s credit ratings.
The NIM is still on its way up but persistent inflation and the rapid rate hikes will likely put some pressure on loan growth and asset quality. However, we see mitigating factors in the bank’s large corporates-focused book (50% of total loans) and its build up of loss absorption buffers.
Key Metrics
AS OF 09 May 2023| PHP mn | 1Q23 | FY22 | FY21 | FY20 |
|---|---|---|---|---|
| NIM | 4.58% | 4.14% | 4.05% | 4.36% |
| Reported ROA (Cumulative) | 1.6% | 1.5% | 1.2% | 0.9% |
| Reported ROE (Cumulative) | 14.5% | 12.9% | 10.4% | 7.6% |
| Equity/Assets | 11.6% | 11.3% | 11.7% | 11.6% |
| CET1 Ratio | 13.7% | 13.4% | 13.6% | 13.2% |
| NPL ratio | 2.0% | 2.0% | 2.8% | 2.7% |
| Provisions/Loans | 0.48% | 0.64% | 0.72% | 1.34% |
| PPP ROA | 2.4% | 2.3% | 2.1% | 2.3% |
CreditSights View
AS OF 18 May 2023BDO is the largest bank in the Philippines. Management is well-regarded, the business is well-diversified and it is the market leader in many of the business lines. Asset quality and liquidity are well-managed. The NIM is still on its way up, non-interest income is a third of operating income given good fee generation, and overall core profitability is strong. Capital however is slightly modest with its CET1 ratio at 13.7%, and loan growth and asset quality could see some pressure from the sharp rate hikes and persistent inflation. However, we take comfort in the bank’s large corporates book, as well as management turning more conservative with its rebuilding of the reserve cover back to the 150-170% range. We maintain BDO on Market perform.
Recommendation Reviewed: May 18, 2023
Recommendation Changed: August 19, 2022
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
How may we help you?
Search topics about wealth insights and investments.Globe Telecom
- Sector: TechnologyTechnology Media and Telecommunications
- Sub Sector: Telecommunications
- Country: Philippines
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Fundamental View
AS OF 09 May 2023Globe’s 1Q23 revenues and EBITDA grew modestly YoY as strong mobile and enterprise data revenues outweighed poorer broadband revenues. Credit metrics worsened slightly to 4.0x/3.8x.
We see a challenging FY23 for Globe in view of high domestic inflation and strong competition, mitigated by Globe’s leading mobile market position and new entrant DITO’s tight liquidity. We expect low-to-mid single digit % YoY revenue growth in FY23.
We anticipate a mild improvement in Globe’s FY23 credit metrics in view of: 1) Residual PHP 52 bn of tower sales that should conclude by end-FY23 and enlarge Globe’s capex funding and deleveraging buffer; 2) Reduced FY23E capex that is ~22% YoY lower than FY22 actual capex spending.
Business Description
AS OF 09 May 2023- Globe is a leading telecom operator in the Philippines, competing alongside its main rival PLDT in a duopoly setting.
- Globe provides 2G/3G/4G mobile, fixed-line, broadband, enterprise data, and other digital services to retail and corporate customers.
- Globe operates through 2 main business segments – “Mobile Services” and “Fixed Line and Home Broadband Services”.
- Its “Mobile Services” segment offers mobile voice, mobile SMS and mobile data services to retail customers in the Philippines. These services are marketed under the “Globe Postpaid”, “Globe Prepaid” and “TM” brands.
- Its “Fixed Line and Home Broadband Services” segment provides fixed line voice, corporate data and home broadband services to retail and corporate customers in the Philippines.
- Globe commercially launched 5G services on a small-scale basis in Jun-2019. It currently maintains 5G coverage of 96% of the National Capital Region, with over 2,000 5G sites nationwide.
- Globe maintains dominant market shares in the mobile data, voice and SMS space (FY21 revenue market share [RMS] of 52% vs PLDT 47%) and home broadband space (FY21 RMS of 31% vs PLDT 45%). It loses out heavily to PLDT in the fixed line voice space (FY21 RMS of 10% vs PLDT 90%).
- Globe is largely owned by two established corporate groups – Ayala Corporation (~47 stake) and Singtel (~43% stake).
Risk & Catalysts
AS OF 09 May 2023We see a challenging FY23 for Globe in view of high domestic inflation and strong competition, mitigated by Globe’s leading mobile market position and new entrant DITO’s tight liquidity. We expect low-to-mid single digit % YoY revenue growth in FY23.
Aggressive expansion by new entrant DITO over the next 2-4 years could chew away at Globe’s market share and restrain recoveries in average revenues per user (ARPU).
Globe incurs significant capex that has pressurized its leverage metrics and free cash flows. That said, management believes capex has peaked and guided towards lower FY23E capex (~22% YoY lower than FY22 actual capex spending).
Consistent dividend payouts could worsen Globe’s already negative free cash flows.
Key Metrics
AS OF 09 May 2023| PHP bn | FY20 | FY21 | FY22 | 1Q22 | 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 67.2% | 69.4% | 67.5% | 68.5% | 67.6% |
| Net Debt to Book Cap | 59.4% | 63.0% | 63.7% | 64.8% | 64.3% |
| Debt/Total Equity | 204.5% | 227.2% | 208.1% | 217.7% | 208.9% |
| Debt/Total Assets | 49.8% | 56.7% | 57.1% | 56.2% | 56.3% |
| Gross Leverage | 2.2x | 3.3x | 3.9x | 3.4x | 4.0x |
| Net Leverage | 1.9x | 3.0x | 3.7x | 3.2x | 3.8x |
| Interest Coverage | 9.3x | 7.6x | 5.9x | 7.2x | 5.5x |
| EBITDA Margin | 48.7% | 46.7% | 46.7% | 47.5% | 48.2% |
CreditSights View
AS OF 09 May 2023We have a Market perform recommendation on Globe Telecom. Globe’s Jul-2030 bond trades 49 bp tighter than PLDT’s Jan-2031 bond. We think Globe should trade 25-30 bp wider as its unrated credit status and poorer net leverage outweigh its lower FY23E capex and lower corporate governance uncertainties. While we acknowledge the risks of rising inflation and mounting competitive pressures from new entrant DITO, we think this is mitigated by Globe’s leading mobile market position and DITO’s debt woes that could impede its rapid expansion. Further ~PHP 56 bn of tower sales closures and lower capex could support Globe’s credit profile. We anticipate Globe’s credit metrics to improve mildly in the next 3 quarters.
Recommendation Reviewed: May 09, 2023
Recommendation Changed: December 19, 2022
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
How may we help you?
Search topics about wealth insights and investments.PLDT
- Sector: Media and TelecommunicationsTechnologyTechnology Media and Telecommunications
- Sub Sector: Telecommunications
- Country: Philippines
This article is exclusive to Metrobank preferred clients.
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Fundamental View
AS OF 09 May 2023PLDT’s 1Q23 results were solid. Earnings growth was buoyed by sustained broadband and enterprise data demand that outweighed strong mobile competition and higher fuel/typhoon-related expenses. Credit metrics improved slightly to 2.8x/2.5x.
We anticipate its FY23 earnings to grow modestly YoY as strong broadband and enterprise data revenue growth outweigh strong mobile competition and hot domestic inflation. We take comfort in PLDT’s leading market position in the higher-margin broadband space.
While its capex overrun should keep FY23 capex elevated, we draw mild comfort that it was likely not due to fraud but rather a management misstep. The impact is also mitigated by PLDT’s robust operating cash flows and a further PHP 33 bn of tower sales closures by end-2023.
Business Description
AS OF 09 May 2023- PLDT is a leading telecom operator in the Philippines, competing alongside its main rival Globe Telecom in a predominant duopoly.
- PLDT provides 2G/3G/4G mobile, fixed-line, broadband, enterprise data, and other digital services to retail and corporate customers.
- PLDT operates through 2 main business segments – “Wireless Services” and “Fixed Line Services”.
- Its “Wireless” segment offers mobile voice, mobile SMS, mobile data and mobile broadband services to retail customers in the Philippines. These services are marketed under the “Smart Postpaid”, “Smart Prepaid”, "Sun Postpaid" and “TNT Prepaid” brands.
- Its “Fixed Line Services” segment provides fixed line voice, corporate data and home broadband services to retail and corporate customers in the Philippines.
- PLDT commercially launched 5G services on a small-scale basis in Jul-2020. It currently has over 3,000 5G sites nationwide.
- PLDT maintains dominant market shares in the mobile data, voice and SMS space (FY21 revenue market share [RMS] of 47% vs Globe 52%), the fixed line voice space (FY21 RMS of 90% vs Globe 10%), and the home broadband space (FY21 RMS of 45% vs Globe 31%).
- PLDT is backed by three established corporate groups, namely First Pacific (~15% stake), NTT Corporation (~12% stake) and JG Summit Holdings (~7% stake).
Risk & Catalysts
AS OF 09 May 2023Aggressive expansion by new entrant DITO over the next 2-4 years could chew away at PLDT’s market share and restrain recoveries in average revenues per user (ARPU).
PLDT incurs significant capex that has restrained improvements in its leverage metrics and free cash flows. This is worsened by a recent capex overrun that has induced mild corporate governance uncertainties. Such uncertainties have eased since.
Consistently high dividend payouts could worsen PLDT’s already negative free cash flows.
PLDT is exposed to $/PHP depreciation risks ($300 mn 2050 bond is fully unhedged).
Key Metrics
AS OF 09 May 2023| PHP bn | FY20 | FY21 | FY22 | 1Q22 | 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 67.0% | 68.3% | 71.9% | 68.6% | 72.2% |
| Net Debt to Book Cap | 55.9% | 62.3% | 65.7% | 62.2% | 65.7% |
| Debt/Total Equity | 202.9% | 215.2% | 256.2% | 218.7% | 260.3% |
| Debt/Total Assets | 42.2% | 43.8% | 46.8% | 43.9% | 46.4% |
| Gross Leverage | 2.7x | 2.8x | 2.9x | 2.9x | 2.8x |
| Net Leverage | 2.2x | 2.6x | 2.7x | 2.6x | 2.5x |
| Interest Coverage | 7.8x | 8.2x | 7.3x | 7.8x | 7.4x |
| EBITDA Margin | 50.4% | 50.7% | 48.4% | 43.7% | 48.6% |
CreditSights View
AS OF 09 May 2023We have a Market perform recommendation on PLDT. PLDT’s Jan-2031 bond trades 38 bp tighter than Globe’s Jul-2030 bond. We think PLDT should trade 25-30 bp tighter than Globe as PLDT’s IG rated status and stronger net leverage could outweigh its mild corporate governance flaws and higher capex. The concluded capex overrun audit helps to ease corporate governance fears and aid free cash flow recovery. Further clarity on US SCA lawsuits and management replacements are welcome too. Residual PHP 33 bn of tower sales would provide greater financial flexibility for capex funding and some mild deleveraging. While we acknowledge the risks of hot domestic inflation and strong competition, we think the impact is negated by its leading broadband market position and DITO’s debt woes.Â
Recommendation Reviewed: May 09, 2023
Recommendation Changed: May 31, 2022
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India