BDO, Metrobank may engage in a bidding war against BPI for PNB-ABC

Who will win the race for banking supremacy?

Maybank Kim Eng raised its 2013 earnings estimate on Bank of the Philippine Islands (BPI) following higher loan growth assumption of 18% from 13% previously on expectations of stronger domestic demand.

Here's more from Maybank Kim Eng:

As a result, our 2013 earnings forecast went up 6% to PHP17.6b (EPS: PHP4.95), suggesting 7% YoY growth. Likewise, our BPI price target has been upgraded to PHP86.50/sh, equivalent to 2.9x 2013F PBV relative to an average ROE of 17.4%.

Share price surge on merger talk. BPI’s share price has surged 12% after it confirmed negotiations of a potential merger with Philippine National Bank (PNB). Unconfirmed news is that BPI is offering PHP96/sh or equivalent to 1.7x PBV for the stakes of majority owner Lucio Tan in the soon-to-be-merged PNB and Allied Banking Corp (ABC). However, prevailing market talk is that the merger deal is still far from being finalized, with share-swap terms still fluid.

Ayala group seen to hold 33%. Should the deal materialize, BPI has ample authorized capital in a shares-only transaction to issue more than 1,300m new common shares. Control of the merged entity potentially could be divided among the Ayala group with 33%, DBS Holdings with 7.4%, Lucio Tan group with 20% and the remaining balance as public float.

Becoming the country’s top bank. If BPI pulls off the PNB-ABC acquisition, the triple merger of BPI-PNB-ABC would result in the country’s largest bank, overtaking BDO Unibank Inc (BDO – HOLD) and Metropolitan Bank and Trust Co (MBT – BUY). Eventually, the expected contribution of PHP6b in 2012/2013 from PNB-ABC equates to a 6% return on BPI’s probable PHP104b investment. This is higher than the bank’s average cost of funds of only 1.7%.

BPI pricey at 3.2x PBV but merger deal crucial. As in most M&A’s, there are consolidation costs and given the size of target PNB-ABC, these are bound to be significant and could last up to two years. While our view on BPI remains positive over the medium-term, valuations are currently on the high side at 3.2x 2013F PBV against a PER of 19.1x.

PNB benefits on possible tender offer. For PNB, we believe the ongoing talks benefit PNB minority shareholders as it could trigger a possible tender offer based on the negotiated price. Fundamentally, we have a target price of PHP75/sh, equivalent to 1.2x 2013F proforma PBV relative to a 9% ROE. We maintain our HOLD rating on both banks until the merger decision is announced. If the merger is finalized soon, the resulting greater size and profitability likely will bring about a re-rating for the two banks.

More banking consolidation soon?. BDO and MBT may not willingly let go of their industry rankings above BPI without a fight. Thus, we do not discount both banks joining a possible bidding war for PNB-ABC or triggering more M&A activity in the sector as the race for banking supremacy heats up. For one, the consolidation of Sy-affiliated banks BDO and China Banking Corp (CHIB) could be in the offing. Nevertheless, we keenly await further developments on what is shaping to be a major industry shake-up.