Full-year 2020 (FY2020) Core Net Income Slips 73% Year-on-Year (yoy); Behind our Estimates

PNB reported FY2020 core net income of Php2.6 billion, down 73% yoy, vs. Php9.7 billion in 2019. The decline in 2020 bottom-line was brought by the six-fold increase in provision for credit and impairment losses to Php16.9 billion to account for the potential impact of the pandemic. Php7.8 billion of the provisions was booked in the fourth quarter of 2020 (4Q2020), weighing down  fourth quarter (4Q)’s bottom-line. The bank booked a core net loss of Php1.3 billion in the 4Q.

Operating income climbed 12% yoy to Php45.6 billion. Net interest income rose 11% to Php35.8 billion. While NIM was flat at 3.31%, the bank’s average interest-earning asset base increased by 10% yoy. Meanwhile, deposits grew 8% to Php890.3 billion.

Non-interest income, on the other hand, grew 16% to Php9.7 billion brought by the increase in trading gains on favorable market opportunities during the second quarter (2Q). Operating expenses, excluding provisions, climbed 8% to Php27.9 billion.

Before loan loss provisions, the bank’s operating income increased by 17% to Php17.6 billion; however, to cover the spike in the NPL ratio to 10.2% from 3.1% a year ago, the bank hiked its provision for loan losses to Php16.9 billion, 5.8x higher yoy and equivalent to a credit cost of 275bps from 48bps a year ago. Despite elevated provisioning, NPL coverage ratio went down from 89% in 2019 to 47% in 2020.

Capital adequacy ratios were more than adequate at 14.5% for CET1 and 15.1% for CAR.

Targets 100% NPL cover by 2023; provisioning to remain elevated

PNB’s NPLs spiked 87% quarter-on-quarter (qoq) to Php 68.4 billion in the 4Q, bringing the NPL ratio 3.93ppts higher to 10.2%.  Majority of the NPLs (~67%) were from the corporate sector, as a number of loan accounts belonging to the most vulnerable sectors turned delinquent because of the prolonged pandemic. We also note that the bank’s NPL ratio for corporate loans (~9%) was significantly higher than those of other banks.

The bank has not provided guidance on future NPL formation, but believes that it would depend on how the inoculation program progresses. In our view, we expect additional NPLs moving forward to come from both consumer and corporate accounts.

We anticipate that provisions will likely remain elevated as the bank plans to raise NPL cover to 100% by 2023, from only 47% as of end-2020. We assumed loan loss provision of Php9.9 billion for 2021 and a lower provision of Php7.8 billion for 2022. Our assumptions for provisions translate to credit cost of 161bps and 120bps for 2021 and 2022, respectively. We estimate that these provisions would bring NPL cover to ~86% by end-2022. Further, for the bank to bring its NPL cover to 100% by 2023, we estimate that it will need to book Php7.2 billion in provisions in 2023.

Loan growth hinges on economic recovery

The bank has not provided loan growth guidance for 2021 but we expect economic recovery and private sector infra-related initiatives, if and when they happen, to support loan growth. We assumed loan growth of 5% this year, approximating our 2021 GDP forecast of 5 to 6%, and of 6.5% in 2022.

Forecast revisions

Considering PNB’s financial results, we are now looking at a core net income of Php4.1 billion, 56% higher yoy, for 2021 and a core net income of Php7.2 billion, 75% higher yoy for 2022. Our core net income forecasts already took into account the impact of CREATE.

For 2021, we forecast net interest income to climb by 5% to Php37.4 billion, reflecting an 8bps reduction yoy in NIM as we expect asset yields to fall by more than funding costs. For 2022, we forecast net interest income to grow by 11% to Php41.7 billion, driven by an assumed 29bps expansion in NIM.

Based on our forecasts and at its current price, PNB trades at 0.3x 2021F PBR, the lowest among banks in our coverage and significantly below the industry average of 0.7x.


We have a Target Price of Php33.50, based on a price-to-book ratio (PBR) of 0.35x, mid-way between the bank’s 12-month forward PBR and its 2019 average PBR. We retain our BUY recommendation.


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