Bank of the Philippine Islands profits doubled from 2009-12F

But profit growth may slow sharply.

According to Nomura, BPI has seen profits double from 2009-12F on the back of strong loan growth, large trading gains, subdued provisions and a falling tax rate. 

Here's more from Nomura:

Net interest margins have been flat/down, while there has been a small improvement in fee income. Our concern is that profit growth may slow sharply given the high base from trading gains and an effective tax rate that rises from an artificially low level.

Trading at 22x 2013F earnings (EPS of PHP4.79) and a P/B of 3.4x (BVPS of PHP30.3), the stock is expensive against its growth profile and profitability, in our view.

Target price based on 16x 2013F earnings
Our Gordon-growth derived TP of PHP77 (PHP87 earlier) puts BPI at 16x 2013F earnings and 2.5x P/B, which is relatively high vs. regional comparisons but justified given limited liquidity in the Philippine market. 

Our TP is based on medium-term sustainable ROE of 18%, long-term annual earnings growth at 6%, and cost of capital of 11.0%, based on a risk-free rate of 6.0% and applying a risk-adjusted beta of 0.9x. Our 2013F earnings estimates are 15% below Street estimates, while our TP is 16% below.

Note that of the 0.60pp rise in ROA since 2009 (from 1.2% to 1.8%), half came from (low quality) non-core non-interest income and 0.3pp from a falling effective tax rate.

Therefore, while an improving macro backdrop ensures that loan growth is likely to remain buoyant (with positive implications for margins and fees), earnings may potentially surprise on the downside given the risks to non-interest income/rising taxes.

The stock is already expensive relative to peers in the region given existing earnings; its 2013F P/E is 22x vs. the regional average of 13x.