Banco de Oro’s (BDO – P44.50) universe; why it should trade at par with Bank of Philippine Island (BPI – P67.50)
Some of the best investment ideas that I have were derived from anecdotal evidences on how companies are transforming or reinventing themselves. More than news articles, press releases and analysts’ reports, it pays to have your ears on the ground.
A good example is BDO. Last week, I had lunch with a friend who owns a small and medium enterprise (SME). He maintains an account with BDO for his personal and business requirements. He told me that a couple of weeks ago, a BDO account representative visited him offering all sorts of non-deposit related products of the bank. My friend ended up transferring his insurance requirements to BDO and promised to sign-up for a new BDO–SM Advantage card.
After hearing this, I made some research and found out that BDO has been aggressively scoping out their client base and see what other products the banks can offer. I guess the idea is if you know the account balance, you will likely have an idea on the requirements of your clients. BDO is a universal bank that offers a whole array of financial services products from private banking to credit cards. In a way, BDO is molding itself into a Philippine version of Citibank.
I totally agree with the vision of BDO. Banks can no longer rely on plain vanilla banking services. The days of earning from interest spreads are gone. Banks will have to diversify its products to generate other fee-based income.
This makes me very “bullish” on BDO. The visit made by the BDO account representative to my friend is a microcosm of the big change happening in the bank. BDO is Tessie Coson’s gambit in expanding the empire of her father - Henry Sy. It looks like Tessie is bent on leaving her mark in the banking industry similar to the legacy of Henry Sy in the retail industry.
So, what’s the long term picture for BDO?
First, BDO is poised to become the biggest bank in the next five years. After the merger with Equitable PCI Bank (EPCI – P80.0), BDO will become the second largest bank behind BPI with P615bn in assets. I don’t think BDO will stop at number 2.
Second, BDO is well positioned to expand both its retail and enterprise business. In the retail/consumer side BDO can capitalize on the reach of SM Malls and department stores. On the enterprise side, BDO can easily tap into SM Group’s network of tenants and suppliers.
Third, BDO will realize the full benefit of the merged Equitable-PCI bank. Note that Equitable Bank has a strong niche in the Chinese market while PCI Bank is big in corporate banking.
These three factors should easily catapult BDO to the number 1 position. A bet on BDO, is a bet on Tessie. Having seen how driven she is, I guess, it is a (very) wise bet in the long run.
Against this backdrop, I do not think the market should value BDO at a discount vis-à-vis BPI. Currently, BPI is trading at 2.6x price to book value (P/BV) whilst BDO is priced at 1.7x P/BV. Investors have bid up the valuation of BPI on the back of better assets and earnings quality. However, I do think that growth should be the key consideration in valuing banks. The crisis is over. So moving forward, the market will start paying a premium on growth.
The combined market capitalization of BDO and EPCI Bank is P100bn versus BPI’s P160bn. I think the disparity is way too much. This is clearly a valuation arbitrage opportunity between BDO and BPI. Everything else equal, BDO should be trading at par with BPI. At 2.7x P/BV, BDO is easily worth P70.0/share.
A good example is BDO. Last week, I had lunch with a friend who owns a small and medium enterprise (SME). He maintains an account with BDO for his personal and business requirements. He told me that a couple of weeks ago, a BDO account representative visited him offering all sorts of non-deposit related products of the bank. My friend ended up transferring his insurance requirements to BDO and promised to sign-up for a new BDO–SM Advantage card.
After hearing this, I made some research and found out that BDO has been aggressively scoping out their client base and see what other products the banks can offer. I guess the idea is if you know the account balance, you will likely have an idea on the requirements of your clients. BDO is a universal bank that offers a whole array of financial services products from private banking to credit cards. In a way, BDO is molding itself into a Philippine version of Citibank.
I totally agree with the vision of BDO. Banks can no longer rely on plain vanilla banking services. The days of earning from interest spreads are gone. Banks will have to diversify its products to generate other fee-based income.
This makes me very “bullish” on BDO. The visit made by the BDO account representative to my friend is a microcosm of the big change happening in the bank. BDO is Tessie Coson’s gambit in expanding the empire of her father - Henry Sy. It looks like Tessie is bent on leaving her mark in the banking industry similar to the legacy of Henry Sy in the retail industry.
So, what’s the long term picture for BDO?
First, BDO is poised to become the biggest bank in the next five years. After the merger with Equitable PCI Bank (EPCI – P80.0), BDO will become the second largest bank behind BPI with P615bn in assets. I don’t think BDO will stop at number 2.
Second, BDO is well positioned to expand both its retail and enterprise business. In the retail/consumer side BDO can capitalize on the reach of SM Malls and department stores. On the enterprise side, BDO can easily tap into SM Group’s network of tenants and suppliers.
Third, BDO will realize the full benefit of the merged Equitable-PCI bank. Note that Equitable Bank has a strong niche in the Chinese market while PCI Bank is big in corporate banking.
These three factors should easily catapult BDO to the number 1 position. A bet on BDO, is a bet on Tessie. Having seen how driven she is, I guess, it is a (very) wise bet in the long run.
Against this backdrop, I do not think the market should value BDO at a discount vis-à-vis BPI. Currently, BPI is trading at 2.6x price to book value (P/BV) whilst BDO is priced at 1.7x P/BV. Investors have bid up the valuation of BPI on the back of better assets and earnings quality. However, I do think that growth should be the key consideration in valuing banks. The crisis is over. So moving forward, the market will start paying a premium on growth.
The combined market capitalization of BDO and EPCI Bank is P100bn versus BPI’s P160bn. I think the disparity is way too much. This is clearly a valuation arbitrage opportunity between BDO and BPI. Everything else equal, BDO should be trading at par with BPI. At 2.7x P/BV, BDO is easily worth P70.0/share.
posted by jack galt at
9:06 PM
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