HEARD IN ASIA Investors Bank on Change As BPI Plans a Merger
May 04, 2011
Investors have had good reason to ignore Bank of the Philippine Islands, or BPI. Its stock is illiquid. It is close to hitting the limit on foreign ownership of its shares. And few analysts cast more than a cursory glance over the stock. But now some investors are banking on changes, and betting that BPI -- which claims to be the third-largest bank in the Philippines in terms of assets -- will realize its full potential. Shares in BPI are tightly held by a small group of shareholders including Philippine conglomerate Ayala Corp. (which owns about 40%) and U.S. bank J.P. Morgan (which owns about 20%). However, BPI has taken steps to improve liquidity by boosting the number of shares available through a share split late last year. Liquidity may improve further following BPI's recent decision to merge with another Philippine bank, Citytrust Banking. As part of the deal, BPI plans to issue 115.8 million new shares. According to the terms of the merger, Citytrust shareholders will receive 11 BPI shares for each Citytrust share they own, putting more BPI shares into more hands. In addition, BPI has applied to the country's central bank for permission to raise the ceiling on foreign ownership of its shares from 30% to 40%, a senior BPI official says. Analysts consider it likely that permission will be granted. Such improvements should help to kindle investor interest in BPI's shares, some fans of the stock say. ``BPI is underrated, partly because of the liquidity problem,'' says Raylene Mccutchen, director and senior portfolio manager at Indosuez Asset Management, who runs the company's Manila Fund. He says he is adding to the fund's stake in BPI, which he regards as a long-term holding. Philippine banking issues have been very much in vogue this year, thanks to strong loan growth and a buoyant economy. But the first-half rally in banking stocks is unlikely to be repeated during the second half of 2011, Mr. Mccutchen says. He has cleared banking stocks out of his fund's portfolio -- with the exception of BPI. ``Investors (in BPI) who are patient will be rewarded,'' he declares. What is BPI's appeal? For one, both Citytrust and BPI have strong consumer-finance operations, so the merged bank is likely to be a powerhouse in that area, says a recent report from ING Barings Securities. ``Citytrust is known for the strength of its retail business,'' says Riley Nestor, an analyst at Philippine Asia Equity Securities in Manila. He says that BPI, traditionally viewed as conservative, is showing signs of becoming more aggressive -- for example, through its efforts to expand its credit-card business. The BPI official agrees that the merger, which had been expected for some time, will boost the bank's consumer and corporate business. Citytrust is very profitable, boasting the highest return on equity of all the Philippine banks, she adds. Mr. Nestor also says that BPI's relatively low loan-to-deposit ratio, at 70%, looks attractive, especially at a time when many banks have loan-to-deposit ratios of about 100% and are tapping the capital markets for funds. However, because of the stock's poor liquidity, he recommends only a ``hold'' on BPI shares for now. BPI shares don't look especially cheap at Wednesday's closing price of 130 pesos ($4.96). Based on consensus forecasts published in the August edition of the Estimate Directory, the bank's shares are trading at 22 times forecast-2011 earnings per share. The Philippine stock market is trading on an average prospective 2011 P/E ratio of nearly 20, according to forecasts from Salomon Brothers. But Mr. Mccutchen says the bank's potential makes it worth buying. He calls the bank's credit-card, consumer-banking and leasing operations ``exciting and valuable assets'' that BPI is likely to develop further. ``We haven't seen the full potential of the earnings stream yet,'' he says.
VastPress 2011 Vastopolis
