Bigger banks expected to perform better

Larger domestic banks are expected to perform better than their smaller counterparts in an uncertain business environment highlighted by higher inflation and interest rates, a Fitch Group unit said in a report by Manila Times.

CreditSights affirmed a neutral or "market perform" recommendation for three "first tier" banks — BDO Unibank Inc., Metropolitan Bank and Trust Co. (Metrobank), Bank of the Philippine Islands (BPI) — and "second tier" Rizal Commercial Banking Corp. (RCBC).

An "underperform" outlook, meanwhile, was retained for three other "second tier" institutions: Security Bank Corp., Union Bank of the Philippines (UnionBank) and Philippine National Bank (PNB).

"Among the Philippine banks, we prefer the first tier banks over the second tier names in the current environment," CreditSights said.

"The persistent inflation and aggressive rate hikes are likely to put some pressure on loan growth and asset quality in the quarters to come, but we see the first tier banks managing fine due to their larger more resilient corporate books, ability to grow and protect their NIMs (net interest margins) as a result of their stronger competitive position and better established franchises, good capital and loss absorption buffers," it added.

The separation between first and second tier banks, CreditSights said, is "increasingly clear" given their 2022 earnings results.

The former, given their bigger and more established businesses, were said to have kept fund cost pressures relatively well controlled as liquidity tightened in 2022. NIMs were subsequently expanded throughout last year.

Net interest income and core operating growth were also better compared to second tier banks. NIM growth is expected to continue in the first half of 2023 and the Fitch unit also noted that first tier asset quality was "more benign," and that credit costs were lower and on a more stable trajectory.

"The second tier banks, on the other hand, are in a tough spot; pronounced NIM pressure due to their weaker deposit franchises and competition in the term loan market due to still lackluster corporate demand have driven them further into the higher yielding but riskier lending segments," it said.

"Asset quality remains weaker at the second-tier banks with gross NPL (non-performing loan) ratios still fairly high, and the lower credit costs for some were aided by significant writebacks which are unlikely to be repeated in FY23 (fiscal year 2023)," CreditSights added.

"A deterioration in the macroenvironment would also lead to a sharper spike in general provisioning levels at the second-tier banks due to their riskier books, as we saw play out to some extent in 4Q22 (fourth quarter 2022)."

Outlooks on securities issued by the banks were cited with regard to the "market perform" and "underperform" recommendations.

For RCBC, in particular, CreditSights noted that Sumitomo Mitsui Banking Corp.'s increased stake in the bank was a "significant credit positive."

As for PNB, the Fitch unit noted "fundamental concerns" given weak growth and that last year's operating performance had been driven by one-off asset sales.

Comments were not immediately available from the seven banks.

BPI, BDO, Metrobank, PNB and UnionBank all saw their share prices rise on Tuesday while those for RCBC and Security Bank were unchanged.

The benchmark Philippine Stock Exchange index, meanwhile, also gained as concerns over a global banking crisis eased.