Narratives

PROS

  • The five-year average (2016 – 2020) price-to-earnings (P/E) ratio for BDO is 18.60, against a price-to-earnings ratio of 15.10 as of Wednesday (May 28, 2021). For the same day, the price-to-book ratio is now at 1.13x, which is much below its 5-year average of 1.82x. BDO’s market attractiveness is shown by the fact that from a historical perspective, it is trading at appealing levels.
  • Programs to increase the immunization rate for COVID-19 are predicted to result in increased confidence in the country’s economy in the second half of 2021. This is anticipated to result in more lending from banks, and BDO is predicted to have a better financial performance in 2021 as a result.
  • The Financial Institutions Strategic Transfer Law (FISTL) may help lower BDO’s non-performing loans.

CONS

  • Thus far, the foreign investors have been dumping BDO’s shares with year-to-date net withdrawals of P2.81 billion.
  • According to researchers, implementing the more strict National Capital Region quarantine measures and other regions throughout the nation by the second quarter of 2021 would have a marked effect on debt-servicing capabilities. BDO’s non-performing loans might be an issue if this additional lending pressure is placed on them. BDO may have a greater level of non-performing loans as a result of the lack of debt moratoriums.

    A likely comeback of COVID-19 infections and the reinstatement of stricter quarantine restrictions is projected to impact the economy, resulting in less loan demand. This might lead to an additional fall in economic confidence, which might result in more economic losses for BDO.

Financial Key Notes

BDO’s net loans and advances fell 1.8 percent year to date and 0.7 percent year on year in Q1 2021, as borrowing was constrained by pandemic-induced economic worries. The decline in loan demand, along with low interest rates, led net interest income to decrease by 2.9 percent year on year in Q1 2021. BDO’s commercial banking business contributes 97.4 percent of its overall net interest income, or P31.18 billion, a 2.8 percent decrease year on year. BDO’s net interest margin was 4.1 percent, down from 4.4 percent in the same time last year but still higher than the five-year average of 3.8 percent, indicating that the bank’s lending operations are still efficient on a historical basis. Due to the continued danger of payment default, BDO increased its loan loss provisions for the quarter by 29.7 percent year on year to P2.93 billion.

Non-interest revenue increased 20.7 percent year on year, owing to higher contributions from insurance premiums, foreign currency gains, trust fees, and other revenue. The bank’s trading position also shifted from a loss of P847 million in Q1 2020 to a gain of P68 million in Q1 2021. Non-interest income-boosted revenues, together with a slowing in other operating expenditure growth and a 29 percent decrease in tax charges as a result of the CREATE Law, resulted in an 18.9 percent year-on-year gain in Q1 2021 net income.

BDO’s deposit liabilities increased 0.8 percent year to date, owing to 6.5 percent and 1.9 percent increases in demand and savings deposits, respectively. With this, the bank’s CASA ratio was 82.8 percent in Q1 2021, higher than the previous 5-year average of 73.9 percent. Time deposits fell by 6.7 percent year to date as depositors sought to be as liquid as possible during these difficult times.

The rise in deposits, along with the fall in lending, resulted in a loans-to-deposit ratio of 84.3 percent, which is lower than the end-of-2020 ratio of 86.7 percent. Despite the pandemic-induced slowdown, this was greater than the previous 5-year average of 83.9 percent, demonstrating that BDO is still efficient in deploying its resources for its loan operations.

BDO’s non-performing loans ratio was 2.81 percent as of Q1 2021, up from 2.65 percent at the end of 2020, as the recession continued to test customers’ debt payment abilities, resulting in additional debt delinquencies. The bank’s NPL coverage as of Q1 2021 was 107.10 percent, lower below the end-of-2020 figure of 109.5 percent and the previous 5-year average of 152.2 percent. Meanwhile, its capital adequacy ratio for the quarter was 14.67 percent, which was higher than the 10 percent limit set by the Bangko Sentral ng Pilipinas. This also exceeds the end-of-2020 level of 14.37 percent, as well as the previous 5-year average of 13.8 percent. This demonstrates that BDO is well-protected from liquidity shocks.

BDO reported a 7.7 percent return on average equity for the trailing 12-months (TTM) ending in Q1 2021, down from 12.2 percent in the same time previous year. The biggest issue here is the P4.5 billion net loss it suffered in the second quarter of 2020. TTM net margin fell from 0.20x in Q1 2020 to 0.14x primarily owing to greater loan loss provisions. Asset turnover fell from 0.07x to 0.06x, owing to a drop in bank lending. Finally, since total equity took up more space in asset funding, the bank’s asset to equity ratio was reduced from 8.87x to 8.64x.

Assumptions

  • Interest revenue is forecast to rise 9.8 percent year on year to P83.64 billion in the second half of 2021, owing to an anticipated improvement in loan demand. This is predicated on the idea that the Philippines immunization program would pick up steam and limitations would be loosened further in the second semester of the year.
  • Net income attributable to equity holders of the parent for the year is expected to increase 42.8 percent year on year, owing mostly to its second quarter performance for the year, in which net income attributable to equity holders of the parent is expected to record P5.29 billion, reversing a net loss of P4.48 billion in the same period previous year. Improvements in banking operations in the second half are expected to benefit the full-year bottom line.
  • The net margin is predicted to increase to 18.7 percent in 2021, up from 13.3 percent in 2020. However, this would be less than BDO’s 2015-2019 net margin average of 20.5 percent, given loan loss provisions for the year are likely to remain high.

Technical analysis

BDO is currently trading with an initial support seen at the 99.00 – 101.20 range, and an initial resistance at its 10-day exponential moving average (EMA). The share’s 50-day and 200-day EMA have already formed a Death Cross last April 14, 2012. This is a bearish sig-nal implying a possible downtrend towards the medium to long term.

Currently, BDO is also trading below the two said EMAs. If the stock manages to get above the aforementioned moving averages, its next obstacle is seen at its downward sloping resistance which stretches back to its December 16, 2020 peak. Breaching and sustaining position above this may give BDO a better chance of moving towards its 113.50 – 115.50 resistance range.

BDO’s MACD line is currently moving below the signal line implying bearish momentum. The gap between the two has narrowed however amid BDO’s 3.35% rally last Friday. If it’s MACD line manages to cross above the signal line, then we may see bullish movements from BDO in the short run moving forward.

Recommendation

With a target price of P135.53 and a holding duration of 9 to 12 months, we propose a BUY on BDO Unibank, Inc. [PSE: BDO]. The share is expected to rise 33.13 percent from its closing price of P101.80 on May 28, 2021. It would be preferable if we could purchase the stock between 99.00 and 101.20, as the potential upside from that level would be 33.92 percent – 36.90 percent.

BDO may have a better year in 2021 than in 2020, since bank lending may begin to rebound in the second part of this year. This is based on the anticipation that confidence in the economy would grow in the second semester of 2021 when vaccinations are rolled out more quickly and limitations are eased more. However, non-performing loans for the year may remain higher owing to economic downturn in the first half, particularly in the second quarter, when harsh quarantine restrictions were reintroduced in the National Capital Region Plus. However, BDO may overcome this by using the Financial Institutions Strategic Transfer Law.

Material in this article is obtained from sources we believe to be reliable, but its reliability or precision cannot be guaranteed. This is for the sole purpose of providing details and does not provide an offer from us to buy or sell securities mentioned in this document.

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