Who will win the race for banking supremacy?
Maybank Kim Eng raised its 2013 earnings estimate on Bank of the Philippine Islands (BPI) following higher loan growth assumption of 18% from 13% previously on expectations of stronger domestic demand.
Here's more from Maybank Kim Eng:
As a result, our 2013 earnings forecast went up 6% to PHP17.6b (EPS: PHP4.95), suggesting 7% YoY growth. Likewise, our BPI price target has been upgraded to PHP86.50/sh, equivalent to 2.9x 2013F PBV relative to an average ROE of 17.4%.
Share price surge on merger talk. BPI’s share price has surged 12% after it confirmed negotiations of a potential merger with Philippine National Bank (PNB). Unconfirmed news is that BPI is offering PHP96/sh or equivalent to 1.7x PBV for the stakes of majority owner Lucio Tan in the soon-to-be-merged PNB and Allied Banking Corp (ABC). However, prevailing market talk is that the merger deal is still far from being finalized, with share-swap terms still fluid.
Ayala group seen to hold 33%. Should the deal materialize, BPI has ample authorized capital in a shares-only transaction to issue more than 1,300m new common shares. Control of the merged entity potentially could be divided among the Ayala group with 33%, DBS Holdings with 7.4%, Lucio Tan group with 20% and the remaining balance as public float.
Becoming the country’s top bank. If BPI pulls off the PNB-ABC acquisition, the triple merger of BPI-PNB-ABC would result in the country’s largest bank, overtaking BDO Unibank Inc (BDO – HOLD) and Metropolitan Bank and Trust Co (MBT – BUY). Eventually, the expected contribution of PHP6b in 2012/2013 from PNB-ABC equates to a 6% return on BPI’s probable PHP104b investment. This is higher than the bank’s average cost of funds of only 1.7%.
BPI pricey at 3.2x PBV but merger deal crucial. As in most M&A’s, there are consolidation costs and given the size of target PNB-ABC, these are bound to be significant and could last up to two years. While our view on BPI remains positive over the medium-term, valuations are currently on the high side at 3.2x 2013F PBV against a PER of 19.1x.
PNB benefits on possible tender offer. For PNB, we believe the ongoing talks benefit PNB minority shareholders as it could trigger a possible tender offer based on the negotiated price. Fundamentally, we have a target price of PHP75/sh, equivalent to 1.2x 2013F proforma PBV relative to a 9% ROE. We maintain our HOLD rating on both banks until the merger decision is announced. If the merger is finalized soon, the resulting greater size and profitability likely will bring about a re-rating for the two banks.
More banking consolidation soon?. BDO and MBT may not willingly let go of their industry rankings above BPI without a fight. Thus, we do not discount both banks joining a possible bidding war for PNB-ABC or triggering more M&A activity in the sector as the race for banking supremacy heats up. For one, the consolidation of Sy-affiliated banks BDO and China Banking Corp (CHIB) could be in the offing. Nevertheless, we keenly await further developments on what is shaping to be a major industry shake-up.
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