Lehman Bros bullish on BPI

The unaudited net profit of the Bank of the Philippine Islands (BPI) dropped 35 percent to P1.64 billion in 2000, according to global investment and portfolio management agency, Lehman Brothers.

Nonetheless, Lehman Bros. said BPI is still the only bank in the Philippines that they will recommend to investors.

Lehman Bros. cited BPI’s non-performing loan (NPLs) ratio which was better than expected at 12 percent versus early estimates of 12.9 percent. Furthermore, BPI’s reserve coverage of NPLs at 61 percent was higher than the agency’s estimate of 51 percent.

Lehman Bros. said BPI’s asset quality has stabilized and majority of NPLs currently on the books arose during the 1998 meltdown.

"Management does not expect any further surprises and that loan loss provisions will come down over the next two years to between P1 billion to P2 billion per annum, significantly lower than that taken this year. Should this be the case, then this will be the key driver to earnings over the next two years," it added.

Deposit growth also performed well as it increased 9.2 percent with almost all of this growth coming in the last quarter. Consequently, the loan-to-deposit ratio declined slightly to 65 percent.

"This is a very liquid bank with an advantageous deposit mix, whereby 80 percent of customer deposits are savings deposit," the global player said.

Net interest income declined approximately 3.5 percent due to the higher level of NPLs and accrual adjustments.

However, the bank posted a net interest margin of 4.9 percent, which is better than last year’s 4.4 percent. Interest rates have been trending upwards, and because of its highly liquid balance sheet. "BPI benefits from rising interest rates."

Non-interest income was down 11 percent primarily due to a one-time charge of P406 million for restructuring its insurance operations. Also, the bank realized less gains on the sale of foreclosed real estate. Excluding these one-off items, non-interest income would have been qite respectable, with fees and commissions increasing 10 percent and foreign exchange (forex) trading increasing five percent. These two components account for 41 percent and 26 percent, respectively of total non-interest income.

Lehman Brothers said BPI’s operating expenses were flat at P13.2 billion. However, P1.24 billion are merger-related expenses. Thus, excluding the amount, expenses would have been down nine percent.

It added that the bank streamlined its workforce from 13,021 at the beginning of 2000 to only 10,934 at the end of the year. "This is the level that management would like to maintain."

BPI’s share price increased 21 percent trading at almost 30 times prospective earning and 2.1 times current book value last year. These multiples are higher than the other banks, but it is justified given its superior balance sheet, well-regarded management team, and respected major shareholders groups.