Like most Philippine banks, Banco De Oro has enjoyed a re-rating as the fortunes of the local market have improved. With the shares now at a price to book ratio of about 2.8 and on a prospective P/E ratio of 18, even CEO Nestor Tan thinks the bank, like the stock market, is fully valued for now.
"One risk [the Philippines] faces is that we overheat again because of speculative behaviour," says Tan, "and a contributor to the new wealth effect is the stock market. I wouldn’t want it to go much further from here."
He is in good company. UBS notes in a recent research report that the Philippines is now one of the most expensive markets in Asia, with a prospective P/E ratio of about 18.
Despite the caution, BDO could yet prove to be something of a gold mine for canny investors. Notwithstanding the apparent high valuation, the bank stands to benefit from several unique factors, most of which emanate from BDO’s merger, formally approved in March 2007, with fellow local lender Equitable-PCI Bank.
According to Tan, the merger is proceeding on schedule and without hitches. Branch rationalization means that management has identified 50 to 60 branch locations with overlap between the two banks.
"We’ll combine these branches, free up the licences and redeploy them," says Tan.
While the bank licences remain valuable, the merged branch network will release bank properties, permitting sale and leasebacks to free up capital, eradicating lease costs from redundant locations as well as freeing up for outright sale surplus freehold properties, some of which are in choice locations.
"The combined entity will free up a lot of real estate," says Tan. "We’ll have five owned buildings in Makati alone."
Makati, Manila’s prime business district, is suffering a serious shortage of office and commercial space, with vacancy rates negligible. Sale prices realized by BDO are likely to be attractive.
BDO also stands to benefit from future provision reversals as the economy continues to improve, particularly the real estate sector, a key area of problem loans for Philippine banks in the past. Provisions taken by BDO management both before and as part of the merger were always prudent, admits Tan. Some of these might find their way back onto the balance sheet.
"In the long run you might see a lot of write-backs to the balance sheet," says Tan. "We’ve been very conservative on provisioning."
All this suggests that while BDO’s price to book ratio looks stretched for now, there might be scope for that to shrink materially as book value increases from profits on realization of surplus real estate assets as well as write-backs on surplus provisions, quite apart from continued operational profitability.
Another benefit of the merger might prove a further fillip. Before the deal, BDO’s shares had reached their 40% foreign ownership limit. The merger has diluted foreign interests in the combined entity to 23%, says Tan. Long a favourite of international institutions as a result of sound management and good governance, BDO shares have become far more accessible since the deal. If management begins to deliver on the promise of the merger, expect to see foreign ownership rise again.