Financial Adviser: 5 Things to Know About Ramon Ang's Bank of Commerce's IPO and How to Profit from It

San Miguel Corporation banking unit Bank of Commerce (PSE: BNCOM) will be the third company that will go public this year after it recently obtained approvals from regulators to raise up to P3.4 billion in an initial public offering (IPO).

BNCOM will sell up to 280 million primary shares, comprising about 20 percent of its total shares outstanding, at a price of P12.00 per share.

The offering period of shares will run from March 16 to 22, with a target listing date on March 31, 2022.

BNCOM will have a projected total market capitalization of P16.8 billion after the offering, making it the third publicly listed bank in the market with the smallest market capitalization.

The other two banks in the group are Philippine Bank of Communications (PSE: PBC), which has market cap of P8.7 billion and Philippine Business Bank (PSE: PBB) with market cap of P6.0 billion.

Investing in an IPO is like investing in a business. It is always good to spend some time understanding the business of BNCOM and evaluate its growth opportunities.

Once you are aware of the fundamentals of the company, you will have a better handle on the risk and return that you can expect from investing in the stock.

Here are the top five things every investor needs to know about Bank of Commerce’s IPO:

1| Know the background of the company

Bank of Commerce is one of the country’s most progressive commercial banks with a network of 140 branches and 257 Automated Teller Machines (ATMs) strategically located nationwide.

BNCOM is majority owned and controlled by San Miguel Corporation (PSE: SMC), the largest and most diversified conglomerate in the country led by its president and chief operating officer, Ramon S. Ang.

SMC’s subsidiaries, San Miguel Properties and SMC Equivest Corp collectively own 46 percent of BNCOM, while SMC affiliate, San Miguel Corp Retirement Plan owns 39.9 percent for total equity stake of 85.9 percent.

BNCOM is conducting an IPO as part of the requirement by the Bangko Sentral ng Pilipinas to upgrade its banking license from commercial bank to universal bank.

With a universal banking license, BNCOM will be able to expand its range of products from the traditional working capital lines and term loans to project finance and investment acquisitions, thereby generating more income.

2| Know the earnings prospects of the bank

BNCOM’s total interest revenues has been increasing by an average of 9.7 percent per year in the past three years from P5.2 billion in 2018 to P6.3 billion in 2020.

The steady increase in total interest revenues has enabled the bank to improve its profitability from net loss of P16.5 million in 2018 to P784.4 million in 2020.

BNCOM’s net income in 2020 would have been higher if not for the aggressive provisions made by its management amounting to P962 million to anticipate for credit losses brought about by the coronavirus pandemic.

Last year, BNCOM’s nine-month total interest revenues slightly fell by 4.3 percent to P4.5 billion from P4.7 billion in 2020 due to lower interest income earned from loans and receivables.

But despite the fall in total revenues, BNCOM still managed to increase its net income by 26 percent to P625 million from P495 million in 2020 due to lower funding costs and higher operating margins. 

If we annualize BNCOM’s net income based on its nine-month results, the bank should be able to achieve a conservative full year income of P833 million by end of 2021.

3| Know the financial strength of the company

Studies have shown that well-capitalized banks emerging from an economic crisis can expand its lending activities more quickly than those with limited capital.

BNCOM recently raised a total capital of P10.5 billion from issuing unsecured long-term negotiable certificates of time deposits and convertible preferred shares to expand its loan portfolio.

The bank first raised P5.0 billion in 2020 by issuing five-year certificates of time deposits with 4.5 percent fixed interest maturing on September 2025.

In 2021, the bank again raised P5.5 billion by issuing convertible preferred shares to its affiliate, SMC Equivest Corporation.

The preferred shares are convertible to BNCOM shares at 1:1 ratio at the option of the shareholder after five years.

BNCOM’s total capital adequacy ratio (CAR), which measures its stability and efficiency to protect depositors, has been increasing from 15.1 percent in 2018 to 16.6 percent in 2020.

Last year, BNCOM’s total capital ratio further improved to 16.8 percent by the end of third quarter, almost doubling the minimum regulatory threshold of 10 percent.

4| Know the risks and opportunities

BNCOM intends to use a bulk of the total proceeds in earnings assets.

The bank will invest about P1.8 billion or 54 percent of the total in lending activities, which will primarily target corporate borrowers, to support its revenue and income growth.

The bank will also use P606 million from the proceeds or 18 percent of the total for acquisition of investment securities as part of its liquidity management program.

For the remaining proceeds, BNCOM will invest P942 million, representing 28 percent of the proceeds, in upgrading its existing ATMs and core banking system.

5| Know the pricing multiple comparables

BNCOM’s Price-to-Earnings (PE) ratio based on its earnings for the past 12 months stands at 18 times, which is way higher than the current banking sector PE ratio of 11.2 times.

The top three biggest banks in the sector are priced only at an average PE ratio of 13.6 times, which is comparably cheaper than BNCOM.

For example, BDO Unibank (PSE: BDO) has PE ratio of 13.8 times, while Metrobank (PSE: MBT) is only at 10.8 times.

Bank of the Philippine Islands (PSE: BPI), which has the highest PE ratio in the sector, is priced only at 16.2 times.

It is interesting to note that BNCOM’s offer price of P12 per share is 18 percent lower than post-IPO book value per share of P14.64. This gives the stock a Price-to-Book ratio (PBV) of 0.82 times.

But if we compare this to the banking sector PBV average of only 0.7 times, BNCOM will still come out pricey.

There are many bigger banks that are trading at much cheaper PBV ratios than BNCOM. For example, Metrobank (PSE: MBT) is only trading at 0.72 times PBV ratio. Security Bank (PSE: SECB) is trading at 0.65 times PBV, while Philippine National Bank (PSE: PNB) is priced at a bargain sale of only 0.19 times PBV ratio, or 81 percent discount.

One of the reasons why banks trade at low PBV ratio is because of the low return on equity.

BNCOM’s return on equity as of September last year was only 4.2 percent, which is lower than banking sector’s average of 6.8 percent.

By comparison, Asia United Bank (PSE: AUB), which has a similar number of branches with BNCOM, has a better return on equity of 8.6 percent with PBV ratio of only 0.6 times.