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Fundamental View
AS OF 03 Nov 2022BDO Unibank (BDO) is the largest bank in the Philippines in terms of assets & market share and is rated Baa2 (stable)/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 low and much behind its first-tier peers, BPI and Metrobank.
Business Description
AS OF 03 Nov 2022- 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.
Risk & Catalysts
AS OF 03 Nov 2022The bank’s relatively low CET1 ratio of 13.3% provides less margin for error should there be unanticipated credit losses. However, we like the bank’s prudent increase of its management overlays and rebuilding the reserve cover back to pre-pandemic level of 150-170%.
Any downgrade of the Philippine sovereign ratings (Baa2/ BBB+/ BBB) would negatively impact BDO’s credit ratings.
The NIM is on its way up but the rapid rate hikes, coupled with peso depreciation and increasing growth headwinds, will likely pressure loan growth and asset quality. However, we see mitigating factors in the bank’s large corporates-focused book (51% of total loans) and the building up of loss absorption buffers.
Key Metrics
AS OF 03 Nov 2022| PHP mn | 9M22 | FY21 | FY20 | FY19 |
|---|---|---|---|---|
| NIM | 4.11% | 4.05% | 4.36% | 4.15% |
| Reported ROA (Cumulative) | 1.4% | 1.2% | 0.9% | 1.4% |
| Reported ROE (Cumulative) | 12.4% | 10.4% | 7.6% | 12.6% |
| Equity/Assets | 11.5% | 11.7% | 11.6% | 11.6% |
| CET1 Ratio | 13.3% | 13.6% | 13.2% | 12.7% |
| NPL ratio | 2.2% | 2.8% | 2.7% | 1.2% |
| Provisions/Loans | 0.65% | 0.72% | 1.34% | 0.29% |
| PPP ROA | 2.3% | 2.1% | 2.3% | 2.1% |
CreditSights View
AS OF 03 Nov 2022BDO 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 on its way up, non-interest income share is steady at a third of operating income given good fee generation, and overall core profitability is strong. Capital however is modest with its CET1 ratio at 13.3%, loan growth and asset quality are likely to see some pressure from the rapid pace of rate hikes and growth headwinds. However, we take comfort in the bank’s large corporates-focused book, as well as management turning more conservative with its rebuilding of the reserve cover back to the 150-170% range and increasing its overlays. We maintain BDO on Market perform.
Recommendation Reviewed: November 18, 2022
Recommendation Changed: August 19, 2022
Who We Recommend
Siam Commercial Bank
Bangkok Bank
Kasikornbank
