CreditSights: First-tier Philippine banks expected to continue outperforming smaller rivals

Philippine banks are experiencing a clear divergence in performance, according to CreditSights, a subsidiary of FitchSolutions.

The first tier banks, including the Sy family’s BDO Unibank Inc., Ayala-led Bank of Philippine Islands (BPI), Metropolitan Bank and Trust Company (MBT) of the Tys, and Rizal Commercial Banking Corporation (RCBC) of the Yuchengco family, are expected to outperform their smaller second tier counterparts.

Meanwhile, Security Bank (SECB), Union Bank of the Philippines (UBP), and Philippine National Bank (PNB) are expected to underperform due to weaker deposit franchises and a higher concentration of riskier lending segments.

The first tier banks have managed to control their funding costs and expand their net interest margins (NIMs) sequentially throughout the year, resulting in stronger net interest income (NII) and core operating income growth.

While RCBC and UBP are focusing on higher yield retail, SECB is targeting MSMEs via a newly formed business unit, and RCBC is targeting SMEs outside metro Manila.

However, loan growth has been underwhelming at RCBC and PNB, and both banks have relied on one-off gains from asset sales to pad their bottom lines.

Looking ahead, the first tier banks are expected to continue their NIM expansion in the first half of the year, albeit at a more moderate pace, while RCBC and SECB expect their NIM to be flat.

UBP’s NIM, on the other hand, should see upside from its first full year of consolidation of income from the Citi portfolio.

CreditSights analysts remain comfortable with the first-tier banks due to their bigger size, good capital and loan loss buffers, ability to withstand funding cost pressure, larger corporate books, and relative stability in operating performance.

However, they remain cautious towards the second-tier banks due to their weaker competitive position, expansion in riskier lending segments, thinner capital, and loss absorption buffers.

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