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UnionBank of the Philippines
- Sector: Financial Services
- Sub Sector: Banks
- Region: Philippines
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Fundamental View
AS OF 27 Dec 2024The bank has historically generated higher returns than peers, but it geared its focus significantly towards the retail segment by acquiring Citi’s Philippine retail portfolio in 2022 and through organic growth, which brought retail loans to more than half the total book.
Returns have suffered despite the good boost to core revenues, as asset quality has been poorly managed resulting in high credit costs which we have forewarned. Continued rounds of capital infusions from shareholders have thus been required. The reserve cover is maintained relatively thin.
Business Description
AS OF 18 Nov 2024- UnionBank of the Philippines was incorporated in 1968, and listed on the Philippine Stock Exchange in June 1992. Principal shareholders are Aboitiz Equity Ventures (49.66%), Insular Life (16%), & Social Security System (18%).
- UBP undertook mergers with International Corporate Bank in 1994 and International Exchange Bank in 2006. City Savings Bank (a thrift bank) was purchased in Jan 2013. City Savings received merger approval with PR Savings (a bank engaged in motorcycle, agri-machinery, & teachers' salary loans) in Dec 2018 from the BSP. It acquired the Citi Philippines retail franchise in 2022.
- The loan book is broadly split 40% wholesale loans and 60% retail loans (comprising 33% credit cards, 22% mortgages, 33% salary loans and 12% others including teachers loans, salary loans and motorcycle loans by the thrift bank subsidiary, City Savings Bank, and 3% UnionDigital) at 3Q24.
Risk & Catalysts
AS OF 27 Dec 2024Any rating downgrade of the Philippine sovereign or reduction of shareholding by Aboitiz Equity Ventures would negatively impact UBP.
The bank’s aggressive retail expansion has improved the NIM, but negatively impacted overall profitability because of high credit costs (particularly since 2H23) which we have forewarned. We continue to disfavor its focus on riskier retail given the brisk growth pace and current macro backdrop. It is now focusing on lower risk, shorter term loans at UnionDigital, as well as payroll and credit card loans, but the improvement in credit costs have been slow to come through.
The bank however benefits from good shareholder support; it successfully completed a third stock rights offering of PHP 10 bn in 2Q24 (2023: PHP 12 bn; 2022: PHP 40 bn) to shore up capital. Lower opex from 2Q24 onwards will also aid the bottomline.
Key Metric
AS OF 18 Nov 2024| PHP mn | FY20 | FY21 | FY22 | FY23 | 3Q24 |
|---|---|---|---|---|---|
| Net Interest Margin | 4.50% | 4.60% | 4.80% | 5.50% | 5.90% |
| Reported ROA (Cumulative) | 1.5% | 1.6% | 1.3% | 0.8% | 1.0% |
| Reported ROE (Cumulative) | 11.5% | 11.5% | 9.7% | 5.6% | 6.1% |
| PPP ROA | 2.68% | 2.59% | 2.17% | 2.31% | 2.87% |
| CET1 Ratio | 15.0% | 16.3% | 11.3% | 13.9% | 14.8% |
| Total Equity/Total Assets | 13.6% | 13.5% | 13.6% | 15.3% | 16.8% |
| Gross NPL Ratio | 5.10% | 5.00% | 4.80% | 6.27% | 7.20% |
| Net LDR | 64.3% | 63.1% | 67.4% | 73.8% | 80.2% |
| Liquidity Coverage Ratio | 207% | 272% | 148% | 163% | n/m |
| Net Stable Funding Ratio | 133% | 149% | 124% | 124% | n/m |
CreditSight View Comment
AS OF 20 Nov 2024UBP’s NIM and core revenue generation have remained strong despite the challenging funding environment thanks to its pivot towards higher yielding retail via organic growth and acquiring Citi’s local retail portfolio. However, the asset quality repercussions which we have forewarned from its aggressive growth pace and riskier retail focus amid the current macro backdrop have come through, with elevated credit costs since 2H23 taking a toll on profitability. The reserve cover is maintained relatively thin. Continued shareholder support with yet another stock rights offering in 2Q24 has ensured sufficient capital for now, and AQ should see a slight improvement from here. Still, we maintain U/P as it trades tight for its size and risk, given its asset quality issues and weak fundamentals.
Recommendation Reviewed: November 20, 2024
Recommendation Changed: April 17, 2020
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