Being big is not always that good
If we are to observe the banking industry of our country, we’ll find BDO Unibank (BDO) as the largest bank in the country with a total resources of close to Php1.1 Trillion, but finds it at third place in terms of the market value with a market value of just Php179 billion trailing Metrobank Trust Group (MBT) with Php191 billion and the market leader Bank of the Philippine Islands (BPI) with Php268 billion.
The reason why BPI leads in the market value table despite ranking third in the total resources table is that it has been able to deliver industry leading performance.
Numbers speaks for itself. Investors doesn’t care how big you are, what do they care about is your ability to deliver profits for the company along with rewarding them with the dividends being paid by the company to them.
In terms of the ability to deliver profits, BPI is the industry leader. In 2011, BPI booked a profit of Php12.8 billion with just total resources of Php752 billion thus delivering a solid performance with a ROA and ROE of 1.6 percent and 15.2 percent respectively. While MBT ranked second with a profit of Php11 billion that translates to a ROA and ROE of 1.2 percent and 11.17 percent respectively. BDO on the other hand had booked only Php10.5 billion in profits despite having more than a trillion pesos on its balance sheet thus translating to a ROA and ROE of 1 percent and 11.4 percent respectively.
In terms of managing its resources prudently, BPI once again is the industry leader. Its 30day and 90day Non Performing Loans (NPL) Ratio is below the industry average. The NPL are the loans that are considered at risk and close to a default. BPI’s NPL for 30 days and 90 days is 1.9 percent and 2.5 percent respectively.
Thus BPI only recognized Php2.150 billion as impairment charge in 2011 compared to the Php3.823 billion and Php6.144 billion impairment charge recognize by MBT and BDO respectively.
Investors are very much attracted to those companies which pays regular dividends and not just regular dividends but huge dividends. BPI among the top three banks in the country is the most generous in giving up dividends yearly. BPI had given up Php21.289 billion as dividends for the past three years while MBT and BDO had paid Php5.859 billion and Php6.263 billion as dividends respectively for the past three years.
Stronger Capital Structure
The reason why BPI manages to pay that big in terms of dividends is because it has a more stable capital structure than the other two MBT and BDO. Retained earnings is vital component of the Tier 1 or Core Capital Ratio along with the share capital of the company. It’s a domino effect as you pay dividends you’re Tier 1 ratio gets depleted and will be replenish through the recognition of profits.
The Tier 1 ratio of BPI is much stronger than BDO with a Tier 1 ratio of 13.1percent compared to the Tier 1 ratio BDO of 10.2percent. Although MBT’s Tier 1 ratio of 13.7 percent is higher than BPI’s Tier 1 ratio, BPI has more retained earnings than MBT with a Php41.643 billion compared to the Php35.986 billion of MBT. That’s the reason why BPI managed to pay more dividends than MBT.
Even in the United States, it shows that being big will not always please the investors as JP Morgan the number 1 bank in terms of assets trails Wells Fargo as the most valuable financial institution in the US.