Rising Credit Risks And Integration Setbacks Will Burden Philippine Banking But Spark Cautious Optimism

Key Takeaways

• High exposure to consumer lending and integration challenges from recent acquisitions increase credit and operational risks, potentially undermining earnings and efficiency gains.
  
• Intensifying fintech competition and slow middle-class growth may restrict long-term revenue opportunities despite digital expansion and regulatory support for financial inclusion.
  
• Strategic shifts toward consumer lending and digital banking heighten risk exposures, while integration and economic headwinds threaten profitability, margin improvement, and competitiveness.

Catalysts

Provides commercial banking products and services in the Philippines.

• While UnionBank's customer base has grown by more than 3 million year-on-year, driven by digital adoption and effective acquisition strategies, its elevated exposure to consumer lending-especially unsecured credit cards and personal loans-raises credit risk; if macroeconomic conditions worsen or execution in risk management lags, higher defaults could erode net interest margin and compromise earnings quality.
  
• Although the integration of Citibank Philippines' consumer business provides UnionBank with a higher-value customer segment and cross-sell potential, the complexity of merging systems and cultures heightens operational risk; any post-merger disruptions or customer attrition may result in persistent cost overruns and muted revenue synergies.
  
• While UnionBank's digital initiatives and fintech partnerships position it to benefit from the rising trend of online and mobile banking in the Philippines, increasing competition from nimble fintech startups and digital-only banks may limit UnionBank's ability to further expand its fee-based income and could compress margins as market share is contested.
  
• While recent reductions in operating expenses and the normalization of one-off integration costs have improved the cost-to-income ratio, ongoing heavy investments in technology and customer experience-if not resulting in adequate revenue payoff or operational efficiency-could stall further improvement in profitability and potentially reverse gains in net margins.
  
• Despite a favorable regulatory push for digital payments and financial inclusion that should expand UnionBank's addressable market, persistent economic inequality and slow middle-class growth in the Philippines are likely to constrain long-term lending opportunities and could dampen revenue growth if credit demand from high-quality borrowers does not materialize as expected.

Union Bank of the Philippines Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Union Bank of the Philippines compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Union Bank of the Philippines's revenue will grow by 23.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 18.9% today to 18.8% in 3 years time.
• The bearish analysts expect earnings to reach ₱21.2 billion (and earnings per share of ₱6.4) by about July 2028, up from ₱11.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.1x on those 2028 earnings, down from 9.3x today. This future PE is greater than the current PE for the PH Banks industry at 6.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.8%, as per the Simply Wall St company report.

Union Bank of the Philippines Future Earnings Per Share Growth

Risks

• The bank's aggressive pivot towards consumer lending, especially credit cards and personal loans, increases exposure to higher credit risk and nonperforming loan ratios-if consumer defaults rise again or macroeconomic conditions deteriorate, this could drive up credit costs and reduce net income.
  
• Persistent losses in UnionDigital are cited as a drag on group results, and the turnaround depends on newly implemented risk controls and shorter-tenor lending; should these measures fail or digital competitors outpace UnionDigital, the group could see ongoing net losses and margin pressure in digital banking.
  
• While management expects improvements, gross loan growth has been purposefully below industry average as the bank shifts its capital allocation, risking lost market share to faster-growing competitors and potential stagnation in revenue if institutional lending fails to rebound as expected.
  
• There is a reliance on operational efficiencies and the realization of synergies from the Citi acquisition and other partnerships to drive margin improvement-yet integration risks, customer attrition, or failure to achieve intended cross-selling synergies could stall the improvement in cost-to-income ratio and limit earnings growth.
  
• The operating environment remains vulnerable to volatile interest rates, inflationary pressures, and shifting regulatory conditions; unexpected rate hikes, higher funding costs, or stricter regulatory requirements could squeeze net interest margins or require increased provisioning, materially impacting profitability and liquidity.

Valuation

• The assumed bearish price target for Union Bank of the Philippines is ₱35.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Union Bank of the Philippines's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 ₱35.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₱112.6 billion, earnings will come to ₱21.2 billion, and it would be trading on a PE ratio of 8.1x, assuming you use a discount rate of 13.8%.
  
• Given the current share price of ₱31.85, the bearish analyst price target of ₱35.0 is 9.0% 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.