Financial Adviser: 5 Cheapest Bank Stocks to Watch in 2022 and How to Profit from Them

Legendary investor Warren Buffett used to say the time to get interested in stocks is when no one else is.

Since the start of 2021, bank stocks have been struggling to survive, with the financial sector index falling by as much as 2.9 percent at the end of third quarter, higher than the PSE index’s 2.6 percent loss.

One of the key factors that affected bank stocks last year, aside from the uncertainties from renewed spike in COVID cases, was the rise in inflation and interest rates.

Rising inflation and interest rates hurt bank stocks because of fears that higher funding costs may lower profitability.

Historically, bank stocks are negatively correlated with interest rates about 38 percent of the time. This means that when interest rates go up, there is a 38 percent chance that bank stocks will fall.

But ever since inflation started to drop during the last quarter of 2021, interest rates began to fall, too.

The decline in inflation and interest rate have enabled the financial sector index to recover by 18 percent to date, outperforming the PSE Index, which increased by 4.9 percent so far.

The best performing bank stocks to date are Union Bank (PSE: UBP), which has gone up by 50.5 percent since September last year; Metrobank (PSE: MBT), up 31.1 percent; BDO Unibank (PSE: BDO), up 17 percent and Bank of the Philippine Islands (PSE: BPI), up 16.3 percent.

Currently, the banking sector has median Price-to-Earnings (P/E) ratio of 12.9 times, which is 25 percent lower than market average of 17.3 times.

Despite the strong recovery of the top tier bank stocks in the sector, about two-thirds or 67 percent of banks in the stock are still trading below their historical book values, which could offer an opportunity for value investing.

The book value of a bank is the net difference between its total assets and total liabilities, representing the total accounting net worth of a bank that its shareholders would receive if it were to be liquidated.

With a stable inflation and interest rates coupled with a recovery in the economy this year, bank stocks should start to pick up soon.

Let’s look at the top five cheapest bank stocks that trade below their book values today and how you can possibly profit from them:

1| Philippine National Bank

Price: P20.40

Discount to Book Value: 79.4 percent

Philippine National Bank (PSE:PNB) is one of the country’s largest private universal banks in terms of assets, loans and deposits with 703 branches and 1,500 ATMs strategically located nationwide.

PNB’s revenues from interest income have been growing by an average of 13 percent annually, from P11.6 billion in 2008 to P50.5 billion in 2019.

This consistent growth in revenues brought net income to increase by nine times or an average of 20 percent per year from P1.1 billion in 2008 years ago to P9.7 billion in 2019.

During the 2020 pandemic, total interest revenues went down by 7.1 percent to P46.9 billion, but total net income fell by 73 percent to P2.6 billion due to large provision for credit losses amounting to P16.9 billion.

Last year, PNB’s total interest revenues for the first nine months continued to fall by 10.4 percent to P31.5 billion from P35.1 billion in the same period the previous year.

But total net income recovered to P24.3 billion due to the one-time booking of P33.6 billion gain from transfer of its properties to another company.

Without the extraordinary gain, PNB would have reported operating loss before tax of P7.2 billion due to the additional provision for credit losses of P20.4 billion.

The stock has fallen by 33.7 percent from its 52-week high of P30.80 and is trading at a huge 79.4 percent discount to its book value of P98.9 per share.

At this discount, PNB is trading at Price-to-Book Value (PBV) of only 0.20 times.

If we assume the stock to regress eventually to its average PBV ratio of 0.45 times, the stock should easily double in due time.

2| East West Banking Corporation

Price: P9.40  

Discount to Book Value: 64.5 percent

East West Banking Corporation (PSE: EW) is one of the fastest-growing universal banks in the country with a total of 468 branches. It provides a wide array of products and services focused on consumer and middle market segments.

EW is majority owned and controlled by Filinvest Development Corporation of the Gotaniun Family, one of the country’s leading conglomerates with diversified interests in real estate development, banking, sugar, and power generation.

Total interest revenues of EW have grown by over six times with 18 percent growth per year from P5.2 billion in 2009 to P30.7 billion in 2020.

This increased EW’s total net income by more than 10 times from P621 million 11 years ago to P6.5 billion in 2020.

Last year, EW’s nine-month total interest revenues declined by 23.3 percent to P18 billion from P23.6 billion in the same period in 2020.

The fall in revenues caused its net income to lose 13.9 percent to P5.1 billion from P5.9 billion in previous year.

EW’s trailing return on equity (ROE) is 9.6 percent, which is higher than the banking sector’s average of 6.0 percent. EW’s five-year ROE average is about 11.57 percent, which is also better than sector’s average of 8.2 percent.

EW is one of the most underpriced bank stocks in the market with Price-to-Earnings (P/E) ratio of only 3.7 times.

EW is also trading at a huge discount of 64.5 percent to its book value of P26.45 per share, translating to Price-to-Book Value ratio of 0.36 times.

If we compare EW to its historical PBV ratio average prior to pandemic at 0.67 times and average PE of 5.6 times, the stock should recover by least 50 percent of its value in the long-term.

3| Rizal Commercial Banking Corporation

Price: P20.00  

Discount to Book Value: 62.8 percent

Rizal Commercial Banking Corporation or RCBC (PSE: RCB) is among the top largest private domestic banks in terms of assets, with 434 branches and 2,809 ATMs all over the Philippines.

RCB is majority-owned and controlled by the Yuchengco Group of Companies (YGC), one of the oldest and largest conglomerates in Southeast Asia covering over 60 businesses.

RCB’s total interest revenues for the past 10 years prior to pandemic has been limited only to a single digit growth of eight percent per year from P15.8 billion in 2008 to P37.6 billion in 2019.

The slow growth in interest revenues also limited its net income growth by nine percent from P2.1 billion in 2008 to P5.4 billion in 2019.

At the onset of the pandemic in 2020, RCB’s total net income fell by 6.8 percent to P5.0 billion as its total interest revenues declined by 1.7 percent to P36.9 billion.

Last year, RCB’s nine-month total interest revenues continued to fall to P27.4 billion from P28.3 billion in 2020, but its total net income recovered by 33 percent to P5.3 billion from P4.0 billion the previous year due to lower provision for loan loss.

RCB is trading at a trailing Price-to-Earnings (P/E) ratio of 6.41 times, which is 50 percent discount to the banking sector’s average of 12.89 times.

RCB is also trading at a huge discount of 62.8 percent to its book value of P53.78 per share.

Unlike PNB and EW, RCB pays cash dividends annually. Last year, RCB paid P0.485 per share, 12.7 percent lower than what it paid in 2020 at P0.556 per share.

Based on its latest cash dividend, RCB’s current dividend yield stands at 2.42 percent. 

4| Asia United Bank

Price: P44.50     

Discount to Book Value: 41.4 percent

Asia United Bank Corporation (PSE: AUB) is majority owned and controlled by a consortium of investors led by Jacinto Ng of Republic Biscuit Corporation.

AUB is one of the newest players in the sector that has been granted universal banking status. It has a market capitalization of P21.6 billion, similar to EW, but has a lower number of branches at 216.

AUB has been growing steadily its total interest revenues for the past nine years prior to the pandemic at an impressive 21 percent growth per year from P2.4 billion in 2010 to P13.9 billion in 2019.

This revenue growth enabled AUB to increase its net income by more than four times from P975 million in 2010 to P4.4 billion in 2019.

In 2020, AUB’s net income declined by 32 percent to P3.8 billion, despite flat growth in total interest revenues, due to larger provision for credit losses.

Last year, AUB’s nine-month total interest revenues fell by 8.6 percent to P9.6 billion from P10.4 billion in the same period last year. This fall in revenues caused AUB’s net income to drop by 21.8 percent to P2.9 billion from P3.7 billion in 2020.

AUB is trading at Price-to-Earnings (PE) ratio of only 9.8 times, which is 24 percent lower than sector’s average of 12.9 times.

It is also trading at a significant discount of 41.4 percent to its book value of P75.96 per share.

Like RCB, AUB is a consistent cash dividend payer. Last year, the bank paid P2.00 per share.

Based on this cash dividend at current share price, AUB has an attractive dividend yield of 4.5 percent, which is higher than the banking sector’s average yield at 3.3 percent.

5| China Banking Corporation

Price: P25.65  

Discount to Book Value: 39.4 percent

China Banking Corporation (PSE:CHIB) is one of the leading private universal banks in the Philippines with 631 branches and 1,026 ATMs strategically located all over the country.

A member of the SM Group, the country’s largest conglomerate, CHIB has one of the highest five-year average returns on equity at 10 percent, higher than the sector’s average of 8.2 percent.

CHIB’s trailing ROE is 13.2 percent, which is better than the sector’s average of 6.0 percent.

CHIB’s net income has been growing by an average of 14 percent per year from P2.9 billion in 2008 to P12 billion in 2020 on the strength of 13 percent annual growth in interest revenues.

Last year, CHIB’s nine-month total interest revenues declined by 5.3 percent to P33.7 billion from P35.7 billion in 2020, but total net income recovered by 35 percent to P11.1 billion due to lower interest expenses.

CHIB’s is trading at significant discount of 39.4 percent to book value  of P42.3 per share, which translates to Price-to-Book Value (P/BV) ratio of 0.60.

Moreover, CHIB is also trading at a very low Price-to-Earnings (P/E) ratio of only 4.61 times, which is 64 percent discount to sector PE average.

CHIB is also a consistent cash dividend payer. Last year, it paid a cash dividend of P1.00 per share. Based on this dividend, CHIB enjoys an attractive dividend yield of 3.9 percent.

Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected] or follow him on Twitter @henryong888