Expanding Digital Services And Fintech Will Create Future Opportunities

Key Takeaways

• Expansion into digital platforms and agency banking aims to enhance customer engagement, increase transactions, and boost revenue from new client growth.
  
• Focus on higher-yielding non-institutional loans and fintech solutions targets improved margins, diversified income, and strong deposit growth.
  
• Rising non-performing loans and increased credit loss provisions highlight potential asset quality issues and risks to future earnings and margins.

Catalysts

Provides various financial products and services to retail and corporate clients in the Philippines.

• Expansion into agency banking and digital platforms is expected to significantly increase customer engagement and new client growth, which should boost revenue through increased transactions and deposits.
  
• There is a strong focus on growing higher-yielding non-institutional loans, such as personal loans and credit cards. This strategic shift in loan mix is likely to improve net interest margins and drive net interest income growth.
  
• The bank is pursuing aggressive growth in fee-based income through wealth management, cards, and digital channels. This is expected to diversify income sources and improve overall revenue stability.
  
• Initiatives to offer innovative fintech solutions like Salary On-Demand and QR payments are expected to enhance client relationships and capture a larger share of transactions, driving higher deposit volumes and fee income.
  
• The bank's strong capital position, with a CET1 ratio of 14.7%, provides a cushion to support further loan growth and strategic investments, which could boost earnings over the medium to long term.

Bank of the Philippine Islands Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank of the Philippine Islands's revenue will grow by 11.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 37.9% today to 35.3% in 3 years time.
• Analysts expect earnings to reach ₱80.9 billion (and earnings per share of ₱15.73) by about April 2028, up from ₱62.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.6x on those 2028 earnings, up from 11.4x today. This future PE is greater than the current PE for the PH Banks industry at 4.8x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.24%, as per the Simply Wall St company report.

Bank of the Philippine Islands Future Earnings Per Share Growth

Risks

• The rise in the NPL (Non-Performing Loan) ratio to 2.26%, driven by expansion in the noninstitutional loan book, suggests asset quality concerns that could impact net margins negatively.
  
• Provisions for credit losses doubled to ₱3 billion compared to the previous year, which tempered net income growth to 9%, indicating potential risks to future earnings.
  
• Trading and Forex income experienced declines due to challenging market conditions, impacting overall revenue diversification and indicating vulnerability in non-interest income sources.
  
• Operating expenses grew by 12.7% due to increases in costs such as manpower, technology, and volume-related expenses, which, despite strong revenue growth, could pressure net margins if not managed effectively.
  
• A downward trend in the CASA (Current Account, Savings Account) ratio to 62.5% highlights reduced stability in low-cost funding sources, which could affect interest margins if reliance on higher-cost funding increases.

Valuation

• The analysts have a consensus price target of ₱157.067 for Bank of the Philippine Islands based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₱176.8, and the most bearish reporting a price target of just ₱144.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₱229.4 billion, earnings will come to ₱80.9 billion, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 12.2%.
  
• Given the current share price of ₱134.0, the analyst price target of ₱157.07 is 14.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.