Market Talk (SECB, FLI, MPI, MER)

Banks: Strong growth across all sectors for SECB. Maintain BUY with TP of PHP141, equivalent to 1.7x 2015F PBV and 13.4x PER. Net profit surged more than 4x to PHP2.2b in 2Q14 on strong core lending and treasury income. Loan growth of 30% boosts net interest income 50% while trading income increased fourfold to PHP1.3b. (Details on page x).

Property: FLI’s 1H14 income up 15%. Filinvest Land Inc (FLI-BUY) reported 1H14 net income at PHP2b, 15% higher YoY making up 44% of our full-year estimate. Profits in 2Q14 was at PHP930m, up 16%. Real estate sales surged 30% to PHP6.13b in 1H14, accounting for 56% of our full-year forecast with 2Q14 up 36% to PHP3.07b. Growth in 1H14 real estate sales was driven by project completion and higher sales take-up. Sales take-up grew 9% to PHP7.4b in 1H14. Meanwhile, rental income increased 7% to PHP1.05b, accounting for 46% of our full-year forecast. This was due to higher rental rates and full-year contribution from Plaza E and Filinvest One. Real estate costs surged 33% to PHP3.6b in 1H14 as the company booked sales from lower-margin products. Gross margins from horizontal projects fell 500 bps to 43% in 1H14 while gross margins in medium-rise buildings and horizontal-rise buildings declined slightly to 42% from 43%. General and administrative expenses increased 17% due to higher salaries and professional fees. The high growth in revenues was softened by these costs which resulted in modest growth in net income. Overall performance was slightly below our expectations.

Banks: NPL ratio still minimal at 2.17% in May. Solid asset quality remains as universal and commercial banks recorded NPL ratio of 2.17% in May, little changed from 2.16% in April but better than 2.75% registered in May 2013. In absolute amount, NPLs fell 5.2% YoY but slightly grew 1.7% QoQ to PHP96.07b. Total loan portfolio jumped 20.2% YoY and 1.2% QoQ. Loan loss reserves of PHP132.85b maintained ample NPL cover at 138.29%. Real and other properties acquired fell 6% YoY and virtually unchanged QoQ to PHP96.5b, while non-performing assets (NPA) inched up 0.9% QoQ but declined 5.5% YoY to PHP192.6b. NPA to gross assets ratio slightly increased to 2.09% from 2.08% last month. NPA cover ratio is now at 83.73%.

MPI’s 1H14 net income rose 15%. Metro Pacific Investments Corp (MPI-BUY) reported a 15% YoY increase in net income to PHP4.2b driven by modest performance of operating subsidiaries. Water distribution unit Maynilad grew billed volumes 5%, the same as in 1Q14. Manila Electric Co (MER-HOLD) showed a 3% growth in energy sales and 21% increase in non-electric revenues that was complemented with lower interest expenses at the Beacon level. The toll road subsidiary reported a 7% increase in average daily traffic and 6% increase in average kilometers traveled in North Luzon Expressway; 8% increase in average daily traffic in Manila Cavite Expressway; and contribution from Don Muang Tollways. Lastly, hospitals benefitted from organic growth in the current hospital portfolio and inclusion of earnings from Central Luzon Doctor’s Hospital and Delos Santos Medical Center. Core income also got a boost from lower interest expense as a result of debt refinancing in 2013. There was a slower growth in reported Income of 15% due to business development costs and foreign exchange losses. Net income is 43% of our FY14 estimate, slightly below our expectations.

-ATR Kim Eng