Bank of the Philippine Islands MON 19 OCT 2020

Downgrading estimates on
higher provisions; Maintain BUY
No recovery in loan growth yet during 3Q20. BPI noted that there is no recovery in loan
growth yet during the third quarter. In fact, most loan segments showed a slight decrease
on a year-to-date basis as of end-August. The bank highlighted that auto, credit cards,
BUY
and personal loans were slightly down on a year-to-date basis, while corporate loans were
flattish as companies were mostly borrowing for just working capital. Nevertheless, the TICKER: BPI
bank is maintaining its flattish to low single-digit loan growth for the year as it remains FAIR VALUE: 81.00
hopeful that corporates would increase their borrowings towards the end of the year. Note
that system loan growth in August eased to 4.7% y/y from 6.7% in July despite the low CURRENT PRICE: 66.70
interest rate environment and ample liquidity in the system. Meanwhile, we believe that UPSIDE: 21.44
loan growth for 2021 will be largely dependent on the pace of recovery of the economy as
lockdown measures are eased and more business activities resumes. For our part, we are
forecasting BPI’s loans to expand by 3% in 2020 and 6% in 2021. SHARE PRICE MOVEMENT
Raising credit cost guidance for 2020. The bank plans to book Php8-10Bil additional
provisions in 2H20. This brings the total expected provisions for 2020 to Php23-25Bil after 110

the bank allocated Php15Bil provisions in the first half. This translates to a credit cost of
~155-170 bps for 2020, higher than the ~120 bps guidance last July. We continue to view
the aggressive provisioning positively as the bank is being proactive in increasing its NPL 100
coverage ratio (140.7% as of end-June 2020) despite having one of the highest in the
industry. Moreover, the bank will be able to focus on expanding its loan portfolio once
the situation normalizes. In terms of asset quality, the bank initially guided the doubling 90
of NPL ratio in 2020 of up to 4%. However, this was under the assumption that the loan
moratoriums would have ended with Bayanihan 1. The passage of Bayanihan 2, which
grants another 60 days grace period, delays the manifestation of the real NPL number to
early next year. The bank now estimates its NPL ratio to reach 2-3% this year and 4-6%
80
19-Jul-20 19-Aug-20 19-Sep-20 19-Oct-20
next year. BPI PSEi

Maintain BUY rating. We maintain our BUY rating on BPI with a FV estimate of Php81/
sh based on a 1.20X 2021E P/BV. Although we believe there could be negative sentiment
once the bank’s NPL ratio starts increasing in the third quarter and net interest margin ABSOLUTE PERFORMANCE
will be pressured next year as loans gradually re-price, we believe most of the negatives
have already been priced in. We continue to like BPI as we expect it to be one of the major 1M 3M YTD
beneficiaries of the economic growth after the effect of pandemic eases. BPI 2.14 -4.90 -23.89
PSEi 1.87 -1.14 -22.98
FORECAST SUMMARY

Year to December 31 (Php Mil) 2017 2018 2019 2020E 2021E 2022E
Net Interest Income 48,039 55,843 65,945 74,401 76,373 79,035 MARKET DATA
% change y/y 13.36 16.25 18.09 12.82 2.65 3.49
Non-Interest Income 22,981 22,681 28,389 29,297 25,942 28,515 Market Cap 301,926.42Mil
% change y/y -4.94 -1.31 25.17 3.20 -11.45 9.92 Outstanding Shares 4,513.10Mil
Income Before Tax 28,692 29,999 38,435 27,762 35,005 36,798 52 Wk Range 48.00 - 100.50
% change y/y 7.02 4.56 28.12 -27.77 26.09 5.12 3Mo Ave Daily T/O 135.27Mil
Net Income 22,416 23,078 28,803 20,621 26,001 27,333
% change y/y 1.66 2.95 24.81 -28.41 26.09 5.12
EPS (in Php) 5.69 5.29 6.40 4.58 5.77 6.06
% change y/y 1.66 -7.07 20.91 -28.48 26.09 5.12

RELATIVE VALUE
P/E(X) 11.71 12.61 10.43 14.58 11.56 11.00
P/BV(X) 1.45 1.21 1.12 1.07 1.00 0.94 John Martin Luciano, CFA
ROAE(%) 12.96 10.75 11.12 7.48 8.93 8.83 Senior Research Analyst
Dividend Yield (%) 2.70 2.70 2.70 2.70 2.70 2.70 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.
 COMPANY UPDATE I BPI: DOWNGRADING ESTIMATES ON HIGHER PROVISIONS;
MAINTAIN BUY

MON 19 OCT 2020

No recovery in loan growth yet during 3Q20

BPI noted that there is no recovery in loan growth yet during the third quarter. In fact,
most loan segments showed a slight decrease on a year-to-date basis as of end-August.
The bank highlighted that auto, credit cards, and personal loans were slightly down
on a year-to-date basis, while corporate loans were flattish as companies were mostly
borrowing for just working capital. Nevertheless, the bank is maintaining its flattish to
low single-digit loan growth for the year as it remains hopeful that corporates would
increase their borrowings towards the end of the year. Note that system loan growth in
August eased to 4.7% y/y from 6.7% in July despite the low interest rate environment
and ample liquidity in the system. Meanwhile, we believe that loan growth for 2021 will
be largely dependent on the pace of recovery of the economy as lockdown measures are
eased and more business activities resumes. For our part, we are forecasting BPI’s loans
to expand by 3% in 2020 and 6% in 2021.

Net interest margin to be pressured next year

The bank is targeting flattish to slightly higher net interest margin in 2020 as the
significant drop in funding cost is expected to offset the decline in asset yields. The bank
noted that net interest margin during the third quarter is still largely holding up q/q.
However, the bank believes that it will be difficult to maintain its net interest margin in
December next year as the drop in funding cost would have already been maxed out but
asset yields will continue to see downward pressure. Note that corporates and SME loan
rates have already fully incorporated the 175 bps cut in the policy rate. In fact, banks are
lending to top corporates at sub 3% as they flock to this segment amid the uncertainty
of the pandemic. Meanwhile, the recent cap in the annual rates for credit cards to 24%
will affect the interest earned from revolvers. Based on the bank’s assessment, this will
translate to ~Php2.3Bil forgone annual interest income. Given that the bank believes
that there is still room for the central bank to further reduce its policy rate by another 25
bps over the next 12 months, we believe this could further put pressure on loan yields.
While this could be partially offset by further reductions in reserve requirement ratio, we
still expect net interest margin to start compressing next year as loans gradually re-price
lower.

COL Financial Group, Inc. 2

 COMPANY UPDATE I BPI: DOWNGRADING ESTIMATES ON HIGHER PROVISIONS;
MAINTAIN BUY

MON 19 OCT 2020

Raising credit cost guidance for 2020

The bank plans to book Php8-10Bil additional provisions in 2H20. This brings the total
expected provisions for 2020 to Php23-25Bil after the bank allocated Php15Bil provisions
in the first half. This translates to a credit cost of ~155-170 bps for 2020, higher than the
~120 bps guidance last July. We continue to view the aggressive provisioning positively
as the bank is being proactive in increasing its NPL coverage ratio (140.7% as of end-
June 2020) despite having one of the highest in the industry. Moreover, the bank will
be able to focus on expanding its loan portfolio once the situation normalizes. In terms
of asset quality, the bank initially guided the doubling of NPL ratio in 2020 of up to
4%. However, this was under the assumption that the loan moratoriums would have
ended with Bayanihan 1. The passage of Bayanihan 2, which grants another 60 days grace
period, delays the manifestation of the real NPL number to early next year. The bank now
estimates its NPL ratio to reach 2-3% this year and 4-6% next year.

Factoring in higher provisions in our earnings forecast;

Maintain BUY rating

We revised our 2020 earnings forecast downwards largely to account for the bank’s
new credit cost guidance. We increased our 2020 credit cost to 167 bps from 123 bps
previously. Meanwhile, our 2021 earnings forecast was largely unchanged as the slight
decrease in our net interest income and non-interest income were offset by the slight
decline in our provisions and operating expenses. A summary of the changes in our
forecast is given below:

Exhibit 1: BPI Earnings Revisions

2020 2021
Old New Change Old New Change
Net interest income 73,625 74,401 1.1 77,107 76,373 -1.0
Non-interest income 29,733 29,297 -1.5 26,556 25,942 -2.3
Fee-based revenues 8,760 8,353 -4.7 9,562 9,106 -4.8
Trading gains 6,223 6,223 0.0 775 775 0.0
Other non-interest income 14,749 14,721 -0.2 16,219 16,062 -1.0
Provisions 18,322 24,870 35.7 11,484 11,065 -3.6
Operating expenses 51,159 51,067 -0.2 56,737 56,245 -0.9
Net income 25,162 20,621 -18.0 26,325 26,001 -1.2
source: COL estimates

COL Financial Group, Inc. 3

 COMPANY UPDATE I BPI: DOWNGRADING ESTIMATES ON HIGHER PROVISIONS;
MAINTAIN BUY

MON 19 OCT 2020

We maintain our BUY rating on BPI with a FV estimate of Php81/sh based on a 1.20X
2021E P/BV. Although we believe there could be negative sentiment once the bank’s
NPL ratio starts increasing in the third quarter and net interest margin will be pressured
next year as loans gradually re-price, we believe most of the negatives have already been
priced in. We continue to like BPI as we expect it to be one of the major beneficiaries of
the economic growth after the effect of pandemic eases.

COL Financial Group, Inc. 4

 COMPANY UPDATE I BPI: DOWNGRADING ESTIMATES ON HIGHER PROVISIONS;
MAINTAIN BUY

MON 19 OCT 2020

Bank of the Philippine INCOME STATEMENT

Islands (BPI) Net Interest Income

2017
48,039
2018
55,843
2019
65,945
2020E
74,401
2021E
76,373
2022E
79,035
% Growth 13.4% 16.2% 18.1% 12.8% 2.7% 3.5%
COMPANY BACKGROUND Non-Interest Income 22,981 22,681 28,389 29,297 25,942 28,515
Bank of the Philippine Islands (BPI) was % Growth -4.9% -1.3% 25.2% 3.2% -11.5% 9.9%
Provisions 3,795 4,923 5,822 24,870 11,065 7,513
incorporated on January 4, 1943 as a
% Growth -20.9% 29.7% 18.3% 327.2% -55.5% -32.1%
domestic commercial bank. It is currently
Operating Expense 38,533 43,602 50,077 51,067 56,245 63,240
the third largest commercial bank in the % Growth 10.3% 13.2% 14.9% 2.0% 10.1% 12.4%
country in terms of resources, having Net Income 22,416 23,078 28,803 20,621 26,001 27,333
Php2.2Tril as of end March 2020. It also % Growth 1.7% 3.0% 24.8% -28.4% 26.1% 5.1%
ranks third in loans and deposits. The bank EPS 5.7 5.3 6.4 4.6 5.8 6.1
currently has 1,172 branches and 2,779 % Growth 1.7% -7.1% 20.9% -28.5% 26.1% 5.1%

ATMs. BALANCE SHEET

2017 2018 2019 2020E 2021E 2022E
LOAN BREAKDOWN Cash & Reserve Assets 324,072 316,243 300,027 304,508 312,447 319,398
Investment Securities 311,098 341,498 353,115 349,744 375,128 402,274
Loans and Receivables 1,202,338 1,354,896 1,475,336 1,494,433 1,573,448 1,747,490
0.3%
Other Assets 66,397 72,591 76,552 79,679 82,991 86,498
23.6% Total Assets 1,903,905 2,085,228 2,205,030 2,228,365 2,344,014 2,555,659
Deposits 1,562,200 1,585,746 1,695,343 1,760,162 1,916,852 2,087,568
Bills Payable/ Subordinated Debt 89,523 174,780 156,660 101,252 39,545 58,000
Other Liabilities 68,631 73,164 79,993 81,208 83,734 86,722
Total Equity 183,551 251,538 273,034 285,743 303,884 323,370
Total Liabilities & Equity 1,903,905 2,085,228 2,205,030 2,228,365 2,344,014 2,555,659
76.1%
BVPS 45.9 55.2 59.8 62.6 66.6 70.8

KEY RATIOS

Corporate Cons/SME Microfinance 2017 2018 2019 2020E 2021E 2022E

Loan Growth (%) 15.5% 12.7% 8.9% 1.3% 5.3% 11.1%
Interest Earning Asset Growth (%) 10.4% 9.5% 5.8% 0.9% 5.2% 9.2%
Deposit Growth (%) 9.1% 1.5% 6.9% 3.8% 8.9% 8.9%
Loan to Deposit Ratio (%) 77.0% 85.4% 87.0% 84.9% 82.1% 83.7%
Nonperforming Loan Ratio (%) 1.3% 1.8% 1.7% 2.6% 4.9% 4.8%
Coverage Ratio (%) 127.1% 90.2% 104.6% 120.0% 70.0% 70.0%
Average Asset Yield (%) 3.8% 4.2% 4.9% 4.8% 4.6% 4.4%
Average Funding Cost (%) 1.1% 1.4% 2.0% 1.5% 1.3% 1.2%
Net Interest Margin (%) 2.7% 2.9% 3.2% 3.5% 3.5% 3.3%
Cost to Income Ratio (%) 54.3% 55.5% 53.1% 49.2% 55.0% 58.8%
Credit Costs (%) 0.3% 0.4% 0.4% 1.7% 0.7% 0.5%
ROAE (%) 13.0% 10.8% 11.1% 7.5% 8.9% 8.8%
ROAA (%) 1.2% 1.2% 1.3% 0.9% 1.1% 1.1%
CET 1 Ratio (%) 11.8% 15.2% 15.2% 14.5% 14.6% 14.2%
Total CAR (%) 12.7% 16.1% 16.1% 16.1% 16.4% 16.0%

COL Financial Group, Inc. 5

 COMPANY UPDATE I BPI: DOWNGRADING ESTIMATES ON HIGHER PROVISIONS;
MAINTAIN BUY

MON 19 OCT 2020

INVESTMENT THESIS: MAJOR CORPORATE DEVELOPMENTS (5-YEARS)

Major beneficiary of positive economic

growth outlook Raised Php25Bil through a SRO at Php67.50/sh with an entitlement ratio of
01/13/2014
We expect BPI to be one of the major 1:9.602 shares
beneficiaries of the investment driven
economic growth of the Philippines over Raised Php50Bil through a SRO at Php89.50/sh with an entitlement ratio of
04/03/2018
the next few years after the effect of 1:7.0594 shares
pandemic eases. BPI is well positioned to
capitalize on this growth opportunity given
its strong and highly liquid balance sheet.
As of end 2019, BPI has an NPL ratio of
1.66% and NPL cover of 104.6%. LDR was
at 86.5% while CET1 ratio was at 15.2%.
Meanwhile, we believe that loan growth for
2021 will be largely dependent on the pace
of recovery of the economy as lockdown
measures are eased and more business
activities resumes.

Net interest margin to be pressured next

year
The bank is targeting flattish to slightly
higher net interest margin in 2020 as the
significant drop in funding cost is expected
to offset the decline in asset yields. The
bank noted that net interest margin during
the third quarter is still largely holding up
q/q. However, the bank believes that it
will be difficult to maintain its net interest
margin in December next year as the drop
in funding cost would have already been
maxed out but asset yields will continue
to see downward pressure. Note that
corporates and SME loan rates have already
fully incorporated the 175 bps cut in the
policy rate. In fact, banks are lending to
top corporates at sub 3% as they flock to
this segment amid the uncertainty of the
pandemic. Meanwhile, the recent cap in
the annual rates for credit cards to 24% will
affect the interest earned from revolvers.

ECQ impact to asset quality still difficult

to measure
The bank initially guided the doubling of
NPL ratio in 2020 of up to 4%. However,
this was under the assumption that the
loan moratoriums would have ended with
Bayanihan 1. The passage of Bayanihan 2,
which grants another 60 days grace period,
delays the manifestation of the real NPL
number to early next year. The bank now
estimates its NPL ratio to reach 2-3% this
year and 4-6% next year.

COL Financial Group, Inc. 6

 COMPANY UPDATE I BPI: DOWNGRADING ESTIMATES ON HIGHER PROVISIONS;
MAINTAIN BUY

MON 19 OCT 2020

Valuation RELATIVE VALUATION

Methodology
P/BV ROE
2020E 2021E 2020E 2021E
BDO 0.99 0.91 7.7% 9.2%
CHIB 0.57 0.54 8.3% 8.3%
EW 0.38 0.34 10.8% 10.3%
MBT 0.56 0.52 7.8% 8.5%
PNB 0.26 0.25 4.6% 4.3%
RCB* 0.40 0.38 6.6% 4.6%
SECB 0.56 0.53 8.2% 8.0%
UBP 0.77 0.73 8.3% 7.9%
BPI 1.07 1.00 7.5% 8.9%
Average ex-BPI 0.56 0.53 7.8% 7.6%
Median ex-BPI 0.56 0.52 8.0% 8.1%
*Co nsensus

VALUATION ASSUMPTIONS
Intrinsic P/BV multiple
Normalized ROE 14.7%
Risk-Free Rate 4.0%
Cost of Equity 13.0%
Long-Term Growth 4.8%
Justified Multiple 1.20
2021E BV 66.6
Fair Value Estimate 81.00

COL Financial Group, Inc. 7

 COMPANY UPDATE I BPI: DOWNGRADING ESTIMATES ON HIGHER PROVISIONS;
MAINTAIN BUY

MON 19 OCT 2020

I MP OR TA NT 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 MP OR TA NT 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.

C O L R E S EAR C H T EAM

APRIL LYNN TAN, CFA

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

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

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

JOHN MARTIN LUCIANO, CFA FRANCES ROLFA NICOLAS JUSTIN RICHMOND CHENG
SENIOR RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com justin.cheng@colfinancial.com

ADRIAN ALEXANDER YU KERWIN MALCOLM CHAN

RESEARCH ANALYST RESEARCH ANALYST
adrian.yu@colfinancial.com kerwin.chan@colfinancial.com

C O L F INANC IAL G R O UP, I NC .

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. 8