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Metropolitan Bank & Trust THU 09 NOV 2017

Earnings miss estimates on higher


provisions and effective tax rate
Earnings miss estimates on higher provisions and effective tax rate. MBT reported Php3.7Bil
in earnings during the third quarter, up 5% y/y. This brought the banks 9M17 earnings to
Php13.2Bil, up by 5% y/y from 9M16. Compared to estimates, 9M17 earnings ended below
BUY
both COL and consensus forecasts, accounting for just 65.4% and 66.4% of full-year forecasts,
respectively. The underperformance was mainly caused by higher-than-expected provisions TICKER: MBT
(+126% y/y in 3Q17), which we believe was driven by the one-time increase in provisions related FAIR VALUE: 120.00
to the recent fraud incident. This was further dragged by higher effective tax rate which increased
to 33.5% in 3Q17 from 23.7% in 3Q16. Meanwhile, net interest income in 9M17 grew 16% y/y to CURRENT PRICE: 95.30
Php45.3Bil. The 9M17 performance translates to an annualized ROE of 8.6%. UPSIDE: 25.92

Higher volumes and slight margin improvement lead lending income. MBTs lending
business continued to perform well with net interest income during the third quarter growing SHARE PRICE MOVEMENT
17% y/y to Php15.7Bil. This is largely in line with its 1H17 growth (+16% y/y) but is significantly
faster than its growth in 3Q16 (+8% y/y). The growth was driven by both higher volumes and 120
slight improvement in margins. The bank reported that its loans grew 20% with corporate,
middle market, and consumer expanding 22%, 18%, and 17%, respectively. This drove total
110
interest earnings assets up by 17% y/y. Additionally, we estimate that net interest margins
slightly improved by ~5 basis points to ~3.3%. This came as the increase in asset yields more
than offset the increase in funding costs. For 9M17, net interest income climbed 16% y/y to 100
Php45.3Bil. This ended slightly above our estimates, accounting for 75% of our 2017 forecast.
Note this historically accounts for 73-74% of the full-year total.
90

Provisions jump on one-off item. As mentioned above, the banks provisions in 3Q17 jumped
126% y/y to Php3.4Bil. The sharp increase includes the full one-off provision related to the fraud 80
incident. This brought the year-to-date total to Php5.9Bil, up 26% y/y. Compared to our estimates, 9-Aug-17 9-Sep-17 9-Oct-17 9-Nov-17

which already includes a one-time increase of ~Php900Mil for 2017 (the reported amount of MBT PSEi

the fraud incident), provisions still ended above expectations. Nevertheless, we believe this is a
positive development to the bank given that this removes the uncertainty created by the fraud.
We expect provisions to normalize in the fourth quarter and next year.
ABSOLUTE PERFORMANCE
Maintaining BUY rating. We currently have a BUY rating on MBT with an FV estimate of 1M 3M YTD
Php120.00/sh based on 1.60X 2018E P/BV. We continue to like Metrobank as it is expected to be
one of the major beneficiaries of the growing demand for loans given its size, and highly liquid MBT 8.30 10.62 31.27
and healthy balance sheet. Nevertheless, we will be reviewing our earnings estimates on the PSEi 1.93 6.80 24.68
bank in light of the weaker-than-expected 3Q17 performance.

FORECAST SUMMARY
MARKET DATA
Year to December 31 (Php Mil) 2014 2015 2016 2017E 2018E 2019E
Net Interest Income 45,763 48,974 52,946 60,425 69,963 80,103 Market Cap 303,070.47Mil
% change y/y 19.58 7.02 8.11 14.13 15.78 14.49 Outstanding Shares 3,180.17Mil
Non-Interest Income 29,131 18,428 25,225 23,710 25,315 26,990
52 Wk Range 69.00 - 96.50
% change y/y -28.35 -36.74 36.88 -6.01 6.77 6.62
3Mo Ave Daily T/O 221.92Mil
Income Before Tax 29,121 25,471 26,677 30,030 36,191 41,816
% change y/y -1.04 -12.53 4.73 12.57 20.51 15.55
Net Income 20,113 18,625 18,086 20,166 24,257 27,994
% change y/y -10.56 -7.40 -2.89 11.50 20.29 15.40
EPS (in Php) 7.15 5.86 5.60 6.34 7.63 8.80 CHARLES WILLIAM ANG, CFA
% change y/y -10.90 -18.00 -4.38 13.17 20.29 15.40
DEPUTY HEAD OF RESEARCH
RELATIVE VALUE
charles.ang@colfinancial.com
P/E(X) 13.15 16.04 16.78 14.82 12.32 10.68
P/BV(X) 1.79 1.60 1.53 1.40 1.26 1.13 JOHN MARTIN LUCIANO
ROAE(%) 14.77 11.25 9.43 9.86 10.78 11.14 RESEARCH ANALYST
Dividend Yield (%) 1.06 1.06 1.06 1.06 1.06 1.06 john.luciano@colfinancial.com
*So urce: COL estimates

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
EARNINGS ANALYSIS I MBT: EARNINGS MISS ESTIMATES ON HIGHER PROVISIONS AND EFFECTIVE TAX RATE

THU 09 NOV 2017

Earnings miss estimates on higher provisions and effective


tax rate

MBT reported Php3.7Bil in earnings during the third quarter, up 5% y/y. This brought the
banks 9M17 earnings to Php13.2Bil, up by 5% y/y from 9M16. Compared to estimates,
9M17 earnings ended below both COL and consensus forecasts, accounting for just 65.4%
and 66.4% of full-year forecasts, respectively. The underperformance was mainly caused by
higher-than-expected provisions (+126% y/y in 3Q17), which we believe was driven by the
one-time increase in provisions related to the recent fraud incident. This was further dragged
by higher effective tax rate which increased to 33.5% in 3Q17 from 23.7% in 3Q16. Meanwhile,
net interest income in 9M17 grew 16% y/y to Php45.3Bil. The 9M17 performance translates to
an annualized ROE of 8.6%.

Exhibit 1: Results Summary


% FY17E
In PhpMil 3Q16 3Q17 % Change 9M16 9M17 % Change
COL Consensus
Net interest income 13,407 15,695 17.1 39,016 45,314 16.1 75.0 NA
Non-interest income 4,962 6,512 31.2 17,427 17,633 1.2 74.4 NA
Provisions 1,509 3,409 125.9 4,708 5,912 25.6 94.3 NA
Operating expenses 11,466 12,005 4.7 33,262 35,763 7.5 74.8 NA
Net income 3,516 3,695 5.1 12,578 13,191 4.9 65.4 66.4

source: MBT, COL estimates

Higher volumes and slight margin improvement lead lending


income

MBTs lending business continued to perform well with net interest income during the third
quarter growing 17% y/y to Php15.7Bil. This is largely in line with its 1H17 growth (+16% y/y)
but is significantly faster than its growth in 3Q16 (+8% y/y). The growth was driven by both
higher volumes and slight improvement in margins. The bank reported that its loans grew 20%
with corporate, middle market, and consumer expanding 22%, 18%, and 17%, respectively. This
drove total interest earnings assets up by 17% y/y. Additionally, we estimate that net interest
margins slightly improved by ~5 basis points to ~3.3%. This came as the increase in asset yields
more than offset the increase in funding costs. For 9M17, net interest income climbed 16%
y/y to Php45.3Bil. This ended slightly above our estimates, accounting for 75% of our 2017
forecast. Note this historically accounts for 73-74% of the full-year total.

Higher trading gains and fees boost earnings

The banks fee-based revenues in the third quarter increased 17% y/y to Php2.9Bil. For 9M17,
total fees rose 6% y/y to Php8.1Bil. This slightly underperformed our forecast, accounting
for just 71% of our full-year estimate. Meanwhile, trading gains was strong during the third
quarter, expanding 130% y/y to Php1.6Bil. The sharp growth was buoyed by the low base set
in 3Q16 (accounts for 8% of full-year). Meanwhile, the year-to-date trading gains declined 5%
y/y to Php4.0Bil. Nevertheless, this is on track to meet our forecasts at 77% of our 2017 forecast.

COL Financial Group, Inc. 2


EARNINGS ANALYSIS I MBT: EARNINGS MISS ESTIMATES ON HIGHER PROVISIONS AND EFFECTIVE TAX RATE

THU 09 NOV 2017

Provisions jump on one-off item

As mentioned above, the banks provisions in 3Q17 jumped 126% y/y to Php3.4Bil. The sharp
increase includes the full one-off provision related to the fraud incident. This brought the year-
to-date total to Php5.9Bil, up 26% y/y. Compared to our estimates, which already includes a one-
time increase of ~Php900Mil for 2017 (the reported amount of the fraud incident), provisions
still ended above expectations. Nevertheless, we believe this is a positive development to the
bank given that this removes the uncertainty created by the fraud. We expect provisions to
normalize in the fourth quarter and next year.

Maintaining BUY rating

We currently have a BUY rating on MBT with an FV estimate of Php120.00/sh based on 1.60X
2018E P/BV. We continue to like Metrobank as it is expected to be one of the major beneficiaries
of the growing demand for loans given its size, and highly liquid and healthy balance sheet.
Nevertheless, we will be reviewing our earnings estimates on the bank in light of the weaker-
than-expected 3Q17 performance.

COL Financial Group, Inc. 3


EARNINGS ANALYSIS I MBT: EARNINGS MISS ESTIMATES ON HIGHER PROVISIONS AND EFFECTIVE TAX RATE

THU 09 NOV 2017

Metropolitan Bank & INCOME STATEMENT (IN PHPMIL)

Trust (MBT) Net Interest Income


FY14
45,763
FY15
48,974
FY16
52,946
FY17E
60,425
FY18E
69,963
FY19E
80,103
% Growth 19.6% 7.0% 8.1% 14.1% 15.8% 14.5%
COMPANY BACKGROUND Non-Interest Income 29,131 18,428 25,225 23,710 25,315 26,990
Metropolitan Bank and Trust Company % Growth -28.3% -36.7% 36.9% -6.0% 6.8% 6.6%
Provisions 4,849 2,059 7,342 6,269 6,942 7,896
(MBT) is a universal bank incorporated in the
% Growth -54.8% -57.5% 256.6% -14.6% 10.7% 13.8%
Philippines on April 6, 1962. MBT is the second
Net Income 20,113 18,625 18,086 20,166 24,257 27,994
largest bank in terms of total assets, loans, % Growth -10.6% -7.4% -2.9% 11.5% 20.3% 15.4%
and deposits. Its primary business activities EPS 7.15 5.86 5.60 6.34 7.63 8.80
include borrowing and lending, trade and % Growth -10.9% -18.0% -4.4% 13.2% 20.3% 15.4%
finance, remittances, treasury, investment
BALANCE SHEET (IN PHPMIL)
banking, and savings banking. The bank had
total resources of Php1.9Tril and deposits of FY14 FY15 FY16 FY17E FY18E FY19E
Cash & Reserve Assets 408,235 320,222 401,320 468,639 540,702 620,173
Php1.4Tril as of end 2016. Meanwhile, the
Investment Securities 382,722 492,446 354,069 366,659 385,733 399,636
banks total loans stood at Php1.1Tril.
Loans and Receivables 759,481 887,202 1,060,868 1,273,555 1,479,368 1,697,992
Other Assets 54,102 60,822 59,752 60,238 60,793 61,417
LOAN BREAKDOWN Total Assets 1,604,540 1,760,692 1,876,009 2,169,091 2,466,596 2,779,219
Deposits 1,184,454 1,257,970 1,389,302 1,616,761 1,865,372 2,139,540
Bills Payable/ Subordinated Debt 172,922 210,423 195,512 238,054 257,608 262,226
24% Other Liabilities 88,379 88,989 85,642 87,367 89,297 91,503
24%
Total Equity 158,785 203,310 205,553 226,910 254,319 285,950
Total Liabilities & Equity 1,604,540 1,760,692 1,876,009 2,169,091 2,466,596 2,779,219
BVPS 52.4 58.9 61.6 67.0 74.6 83.4

KEY RATIOS
76% FY14 FY15 FY16 FY17E FY18E FY19E
76%
Loan Growth (%) 24.3% 16.8% 19.6% 20.0% 16.2% 14.8%
Interest Earning Asset Growth (%) 17.2% 9.6% 6.8% 16.1% 14.1% 13.0%
Deposit Growth (%) 16.5% 6.2% 10.4% 16.4% 15.4% 14.7%
Commercial Consumer Loan to Deposit Ratio (%) 64.1% 70.5% 76.4% 78.8% 79.3% 79.4%
Commercial Consumer
Nonperforming Loan Ratio (%) 1.0% 1.0% 0.9% 0.9% 0.8% 0.8%
Coverage Ratio (%) 165.2% 110.7% 112.8% 110.0% 110.0% 110.0%
Average Asset Yield (%) 4.1% 4.0% 3.9% 3.9% 4.0% 4.0%
Average Funding Cost (%) 1.1% 1.2% 1.0% 1.0% 1.0% 1.0%
Net Interest Margin (%) 3.2% 3.0% 3.0% 3.1% 3.1% 3.1%
Cost to Income Ratio (%) 54.6% 59.2% 56.5% 56.9% 54.7% 53.6%
Credit Costs (%) 0.7% 0.3% 0.8% 0.5% 0.5% 0.5%
ROAE (%) 14.8% 11.2% 9.4% 9.9% 10.8% 11.1%
ROAA (%) 1.3% 1.1% 1.0% 1.0% 1.0% 1.1%
CET 1 Ratio (%) 12.1% 14.2% 12.5% 11.6% 11.3% 11.0%
Total CAR (%) 16.0% 17.8% 15.4% 14.1% 13.4% 12.9%

COL Financial Group, Inc. 4


EARNINGS ANALYSIS I MBT: EARNINGS MISS ESTIMATES ON HIGHER PROVISIONS AND EFFECTIVE TAX RATE

THU 09 NOV 2017

INVESTMENT THESIS: MAJOR CORPORATE DEVELOPMENTS (5-YEARS)

Beneficiary of growing demand for loans Raised Php32Bil in stock rights offfering at Php73.50/sh 3/23/2015
Metrobank is expected to be one of the major
beneficiaries of growing demand for loans
given its position as the second largest bank
with Php1.9Tril in assets and a network of 704
branches. Aside from the advantage brought
about by its size, Metrobank has a strong
balance sheet, with an NPL ratio of only 0.94%
and and NPL cover of 112.8%. Finally, it has
a very liquid balance sheet with a loans to
deposit ratio of 76%.

Adequate capital to support growth


In terms of capital, MBT said that they will
be adopting PFRS 9 (as required by the BSP;
together with all banks that did not do the
early adoption) starting 2018. This entails
shifting its existing AFS securities to held-to-
collect (HTC) securities at their acquisition
cost. This will effectively reverse the banks
recent marked-to-market losses (and any
potential losses for the rest of 2017) and thus
boost MBTs capital ratios next year. Note that
that MBTs CET1 level as of end-2016 ended
at 12.5% on a consolidated basis and 11.2%
on a parent level. Based on our estimates,
this should improve to 13.3% and 12.0%
respectively following the reversal of the
marked-to-market losses. We believe that this
should allow MBT to fund its growth without
having to undergo a capital raising activity
until at least 2019.

Cheapest among the big banks


MBT remains the cheapest among the big
banks. At its current price of Php86.40, the
bank is trading at 1.31X 2017E P/BV. This is
significantly lower than BDOs 1.77X and BPIs
2.32X. Note that this is also below the industry
average of 1.45X.

COL Financial Group, Inc. 5


EARNINGS ANALYSIS I MBT: EARNINGS MISS ESTIMATES ON HIGHER PROVISIONS AND EFFECTIVE TAX RATE

THU 09 NOV 2017

Valuation RELATIVE VALUATION


P/BV ROE
Methodology 2017E 2018E 2017E 2018E
BDO 2.08 1.90 11.0% 10.5%
BPI 2.13 1.92 13.4% 13.9%
CHIB 1.00 0.93 9.7% 10.5%
EW 1.24 1.09 12.2% 14.2%
PNB 0.74 0.70 7.5% 7.9%
RCB* 1.22 1.15 6.6% 6.9%
SECB 1.82 1.66 10.1% 11.3%
UBP 1.52 1.35 14.9% 15.5%
MBT 1.40 1.26 9.9% 10.8%
Average ex-MBT 1.47 1.34 10.7% 11.3%
Median ex-MBT 1.38 1.25 10.6% 10.9%
*Co nsensus

VALUATION ASSUMPTIONS

Intrinsic P/BV multiple


Normalized ROE 14.4%
Risk-Free Rate 5.0%
Cost of Equity 10.5%
Long-Term Growth 4.0%
Justified Multiple 1.60
2018E BV 74.60
Fair Value Estimate 120.00

COL Financial Group, Inc. 6


EARNINGS ANALYSIS I MBT: EARNINGS MISS ESTIMATES ON HIGHER PROVISIONS AND EFFECTIVE TAX RATE

THU 09 NOV 2017

IMPORTANT RATING DEFINITIONS


BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to
12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor
or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve
months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be
incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the report and are subject to change
without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/
or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade
them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA


VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAEDA, CFA


DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

FRANCES ROLFA NICOLAS ANDY DELA CRUZ JUSTIN RICHMOND CHENG


RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
rolfa.nicolas@colfinancial.com andy.delacruz@colfinancial.com justin.cheng@colfinancial.com

KYLE JEMMRIC VELASCO JOHN MARTIN LUCIANO ADRIAN ALEXANDER YU


RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
kyle.velasco@colfinancial.com john.luciano@colfinancial.com adrian.yu@colfinancial.com

COL FINANCIAL GROUP, INC.


2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 7