FRI 13 JAN 2023

Top Story:
(AS OF JAN 12, 2023)
Banking Sector 2023 Outlook: Strong performance to continue on loan INDICES
growth and margin improvement Close Points % YTD%
PSEi 6,833.53 124.19 1.85 4.07
All Shares 3,588.04 48.58 1.37 3.64
Financials 1,715.14 36.61 2.18 4.26
Other News: Holding Firms 6,676.06 99.80 1.52 3.77
Industrial 9,704.61 97.73 1.02 3.78
Mining & Oil 11,445.48 -131.05 -1.13 5.89
Economy: US consumer prices falls 0.1% m/m in December, in line with Property 3,048.99 107.34 3.65 4.11
forecasts Services 1,705.96 16.60 0.98 4.39

Economy: Banks’ NPL ratio continues to decline in November Dow Jones 34,189.97 217 0.64 3.15
Economy: BSP chief hopes to cut rates in 2024 S&P 500 3,983.17 13.56 0.34 3.74
Nasdaq 11,001.10 69.43 0.64 5.11

Market Summary: INDEX GAINERS

Ticker Company Price %
SMPH SM Prime Hldgs INc 37.90 4.55
The local stock market rallied on Thursday, tracking gains in US markets ahead of the WLCON Wilcon Depot Inc 32.00 4.23
BDO BDO Unibank Inc 114.00 3.73
release of the US CPI report overnight.
GTCAP GT Capital Hldgs Inc 462.00 3.73
AC Ayala Corporation 732.00 3.46
The PSEi climbed 124.19 points or 1.85% to close at 6,833.53. The top gainers were SMPH
(+4.55%), WLCON (+4.23%), BDO (+3.73%), GTCAP (+3.73%), and AC (+3.46%). On the INDEX LOSERS
other hand, the only decliners were SCC (-1.97%), MPI (-1.30%), TEL (-1.06%), and ACEN Ticker Company Price %
(-0.86%). SCC Semirara Mining Corp 34.90 -1.97
MPI Metro Pacific Inv Corp 3.79 -1.30
TEL PLDT Inc 1405.00 -1.06
Value turnover declined to Php7.7Bil from Php7.9Bil traded in the previous session. ACEN AC Energy Corp 6.95 -0.86
Meanwhile, net foreign buying reached Php182.5Mil, reversing the Php1.1Bil net selling EMI Emperador Inc 20.15 0.00

on Wednesday.
TOP 5 MOST ACTIVE STOCKS
Ticker Company Turnover
BDO BDO Unibank Inc 577,439,900
SM SM Investments Corp 415,110,700
ICT Intl Container Term 391,013,000
JFC Jollibee Foods Corp 336,044,700
URC Universal Robina Corp 321,528,600

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 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 13 JAN 2023

Top Story:

Charles William Ang, CFA Banking Sector 2023 Outlook: Strong performance
Head of Research
to continue on loan growth and margin
Charmaine Co improvement
Research Analyst
We are optimistic on the banking sector in 2023 as we expect earnings to grow by 12.7%
y/y on the back of continued loan growth and improvement in the banks’ net interest
margins.

In our view, loan growth should continue as businesses carry on recovering from the
pandemic. That being said, economic headwinds, in the form of slower GDP growth and
rising interest rates, are expected to slightly dampen loan demand. Economists expect
the Philippines’ GDP to grow by 5-6% this year, slower than the projected 7.1% growth in
2022. Data released by the BSP last November also shows that bank lending growth has
begun to slow in the previous few months. With this, we are forecasting the sector’s loan
portfolio to expand by 11% y/y in 2023. Note that the sector’s y/y loan growth stood at
12.7% in 9M22 and at 12.2% as of Nov 2022.

With sustained loan growth and improved net interest margins, we expect most banks
to post double-digit growth in lending income. As such, we are forecasting the sector’s
net interest income to grow by 12.5% y/y in 2023. We also expect steady growth in the
banks’ fee income as economic activity continues to pick up. Based on our estimates, the
sector’s fee income could grow by 9.1% y/y in the coming year.

Exhibit 1: 2023 Growth Forecasts

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 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 13 JAN 2023

Exhibit 2: Loan growth continues

Source: BSP

Net interest margins to improve

We expect the sector’s net interest margin to improve by 8bps this year, on the back of
higher asset yields and a narrower increase in funding cost. The increase in asset yields
can be attributed to the BSP’s monetary policy tightening, which saw the central bank
raise its key policy rate by 350bps to 5.5% in 2022. In the coming year, we expect to see
the full effect of rate hikes come into place as banks continue to reprice loans. We also
expect the banks to benefit from additional rate hikes that the BSP has signalled will take
place in 2023. Based on the US Federal Reserve’s signals, interest rates could be increased
by another 75bps in the first half of 2023 and could remain at that level for the remainder
of the year. We expect the BSP to largely track the Fed’s policy actions for 2023.

Meanwhile, we expect funding costs to increase at a slower pace given the liquidity in
the system. The industry’s loan-to-deposit ratio, for example, despite the recent increase
from a low of 70.1% as of September 2021 to 71.8% as of November 2022, remains
significantly lower than pre-pandemic levels of 82.2%. Average CASA ratio of the banks
also remains significantly higher at 71.3% compared to pre-pandemic levels of 59.7%.

COL Financial Group, Inc. 3

 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 13 JAN 2023

Exhibit 3: Interest Rate Hikes in 2

022

Source: Bloomberg

Asset quality to remain healthy

Asset quality improved in 2022 as mobility restrictions were lifted and the economy
reopened. Banks saw sequential decreases in non-performing loans, with the industry’s
gross NPL ratio dropping to near pre-pandemic levels at 3.4% as of end-October 2022.
Given such, we believe that the banks’ asset quality will continue to remain healthy this
year.

In terms of provisioning, we estimate that credit cost in 2023 will decline slightly compared
to the previous year, thanks to the banks’ pre-emptive provisioning and improving asset
quality outlook. With banks having decreased provisioning significantly in 2022, we
estimate that credit cost will inch downwards to 61bps in 2023, closer to the 52bps credit
cost booked by the sector prior to the pandemic. Furthermore, we believe that the banks’
NPL coverage ratios remain adequate as the system’s NPL coverage ratio improved to
104% as of end-October 2022.

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FRI 13 JAN 2023

Exhibit 4: Asset quality improves

Exhibit 5: Asset Quality Metrics

Source: Banks, COL estimates

*Estimated NPL (Ex-equity reserves)

Trading gains expected to recover

The sector booked minimal trading gains in 2022 as rising bond rates caused the banks’
bond portfolios to decline in value. With bond rates falling from their peak in November,
trading gains could potentially recover closer to normalized levels in 2023. Nevertheless,
we are conservatively forecasting the sector’s trading income in 2023 to account for 0.7%
of total revenues, just up slightly from 0.5% in 2022 and still significantly lower than the
3.4% and 10.3% in 2021 and 2020, respectively.

COL Financial Group, Inc. 5

 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 13 JAN 2023

Banks remain well-capitalized

In terms of capital, we believe that the banks remain generally well-capitalized to support
asset growth and take advantage of the economic recovery prospects of the country.

Meanwhile, UBP is planning to raise up to Php12Bil in capital through the issuance of a

stock rights offering (SRO). Based on our estimates, this will increase UBP’s CET1 ratio
from 11.9% as of 3Q22 to ~13.2%, above its minimum CET1 ratio of 10%. With our
current loan growth assumptions, we do not expect other banks to raise capital in the
near-term.

Exhibit 6: Banks are well-capitalized

Source: Banks, COL estimates

Top Pick: MBT

Although all banks should benefit from the continued recovery of the economy and the
rising interest rate environment, we prefer MBT on account of its strong and highly liquid
balance sheet (LDR of 67%), substantial low-cost deposits (CASA ratio of 71.2%), and high
capital ratios. The bank’s high CET1 ratio gives it flexibility in giving dividends, while also
supporting the bank’s growth objectives as the economy continues to recover from the
pandemic.

Exhibit 7: Valuations and Ratings

Source: Bloomberg, COL estimates

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 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 13 JAN 2023

Other News:

Research Analysts Economy: US consumer prices falls 0.1% m/m in December, in

line with forecasts
Frances Rolfa Nicolas
Denise Joaquin
Consumer prices in the US fell 0.1% m/m in December, in line with expectations and
Carlos Matthew De Leon
posting the largest drop since April 2020. Excluding volatile food and energy prices, core
Charmaine Co
CPI rose 0.3% m/m and also fell within expectations. On an annual basis, headline CPI rose
6.5% y/y, while core CPI rose 5.7% y/y. Inflation eased due to lower pump prices, which
slipped by 9.4% m/m and 1.5% y/y. Fuel oil dropped 16.6% m/m, contributing to a total
4.5% decline in the energy index. Food prices rose 0.3% m/m December, while shelter
posted another sharp gain up 0.8% m/m. Furthermore, used vehicle prices slid 2.5% m/m,
and are now down 8.8% y/y. Market pricing pointed to an increased probability that the
Fed would raise rates by 0.25 ppts during its February 1 meeting. (Source: CNBC)

US markets closed with modest gains following the news.

Economy: Banks’ NPL ratio continues to decline in November

The Philippine banking industry’s bad debt continued to fall in November, bringing the
industry’s gross non-performing loan (NPL) ratio to 3.35%. This is lower than the 3.41%
reported in October and the 4.31% in the same month of 2021. BSP Governor Felipe
M. Medalla said he does not expect a further rise this year. According to data from the
central bank, soured loans declined 15.3% y/y and 0.9% m/m to Php408Bil in November.
Loan loss reserves increased 2.7% y/y to Php432Bil in November, and the industry’s NPL
coverage ratio rose to 105.73% from 87.13% last year. (Source: BusinessWorld)

Economy: BSP chief hopes to cut rates in 2024

BSP chief Felipe Medalla said the central bank may cut rates in 2024 and lower the reserve
requirements for banks in the first of 2023. Nevertheless, he reiterated that the BSP’s
actions will depend on what the US Federal Reserve does, noting that policy tightening
in the US ‘is far from over.’ Medalla hopes that additional rate hikes this year would cool
inflation and prevent second-round effects. In addition, the BSP aims to bring the big
banks’ reserve requirements ratio (RRR) from 12% down to the single digits this year.
Economists see the RRR cut as a step in the right direction and should benefit bank
customers as it lowers borrowing costs. (Source: BusinessWorld)

COL Financial Group, Inc. 7

 DAILY NOTES I PHILIPPINE EQUITY RESEARCH

FRI 13 JAN 2023

I M P O R TA N T R AT ING 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.

I M P O R TA N T DISC L AIM ER
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 COL’s 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.

CO L R E S EAR C H T EAM

APRIL LYNN TAN, CFA

FIRST VICE PRESIDENT & CHIEF EQUITY STRATEGIST
[email protected]

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
[email protected] [email protected] [email protected]

FRANCES ROLFA NICOLAS DENISE JOAQUIN CARLOS MATTHEW DE LEON

RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
[email protected] [email protected] [email protected]

CHARMAINE CO
RESEARCH ANALYST
[email protected]

C OL F INANC IAL G R O UP, IN C.

24/F EAST TOWER, TEKTITE TOWERS,
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. 8