Completion Of Citi Integration Will Enable Focus On Growth Initiatives By 2025

Key Takeaways

• Focus on consumer loans and strategic shifts aim to sustain high net interest margins, enhancing future revenue growth and profitability.
  
• Improved operational efficiency and increasing non-interest income from transaction services are expected to enhance earnings quality and net margins.
  
• Sustained high NPL ratios and digital challenges could affect future asset quality, profit margins, and earnings stability.

Catalysts

Provides commercial banking products and services in the Philippines.

• The expected improvement in Union Digital's operational issues and focus on lower-risk segments could enhance profitability, potentially boosting Union Bank's earnings by 2025 or 2026.
  
• Strategic shift to consumer loans, especially credit cards, is anticipated to sustain high net interest margins, positively impacting future revenue growth.
  
• Anticipated rate cuts by BSP and the Fed may create a favorable interest rate environment, contributing to net revenue growth through expanded net interest margins.
  
• The completion of Citi integration has stabilized operating expenses, enabling the bank to divert resources toward growth initiatives, potentially improving future net margins.
  
• Increasing customer base and elevated fee income from transaction banking services are expected to drive up non-interest income, further enhancing earnings quality.

Union Bank of the Philippines Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Union Bank of the Philippines's revenue will grow by 23.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.6% today to 19.2% in 3 years time.
• Analysts expect earnings to reach ₱20.9 billion (and earnings per share of ₱6.16) by about February 2028, up from ₱9.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₱13.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, down from 12.6x today. This future PE is greater than the current PE for the PH Banks industry at 5.8x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.4%, as per the Simply Wall St company report.

Union Bank of the Philippines Future Earnings Per Share Growth

Risks

• Concerns regarding sustained high NPL (Non-Performing Loan) ratios, especially in the consumer lending sector, could affect the bank’s future asset quality and operating profit margins.
  
• The challenges and credit costs associated with Union Digital, which have negatively impacted the group’s financials, may continue to be a drag on net earnings until its projected breakeven by late 2025 or early 2026.
  
• The decline in noninterest income, particularly fees impacted by Union Digital, could pose a risk to revenue and profit margins if digital operations do not improve as projected.
  
• Competitive pressure to reduce or eliminate transfer fees could negatively impact Union Bank’s P&L, reducing fee income that has been a source of revenue.
  
• The bank’s strategic focus on consumer lending, while yielding higher interest margins, involves greater risk and potentially higher default rates, possibly affecting future credit costs and earnings stability.

Valuation

• The analysts have a consensus price target of ₱43.682 for Union Bank of the Philippines 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 ₱53.79, and the most bearish reporting a price target of just ₱40.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₱109.0 billion, earnings will come to ₱20.9 billion, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 12.4%.
  
• Given the current share price of ₱36.2, the analyst price target of ₱43.68 is 17.1% 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.