Philippine Markets Newsletter

How has the #1 bank in the country found ways to stay on top throughout the pandemic on top of the recent hacking incident?…also, SM tearsheet

March 4, 2022

Was the recent large-scale account hacking of 700+ BDO clients big enough to prompt current clients to switch banks? Or has BDO performed well enough to still enjoy customers’ trust?

We also take a look at one of the unit investment trust funds (UITF) offered by the bank. In addition to examining the fund’s portfolio, we are including a fundamental analysis of one of the fund’s largest holdings, providing you with the current Uniform Accounting Performance and Valuation Tearsheet for that company.

Philippine Markets Newsletter:
Friday Uniform Portfolio Analytics
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In December 2021, hundreds of BDO account holders were affected by a large-scale hacking scheme, enabling unauthorized fund transfers via InstaPay to a placeholder “Mark Nagoyo” account in UnionBank.

This raised concerns about banks’ security as well as who should be held liable when incidents like this happen.

As of February 16, 2022, BDO has reported that it has so far reimbursed 94% of all 700+ affected customers.

While the BSP and Congress work on passing measures to deter these cybercrime cases in the future, how has this incident affected BDO’s reputation as the largest bank in the country?

Looking back, despite the onset of the COVID-19 pandemic in 2020, BDO had actually surpassed PHP 1 trillion in assets under management.

Rafael Ayuste, Jr. who is BDO’s Senior Vice President and Head of Trust and Investments Group, reported that this achievement could be traced to the 35% leap in its unit investment trust fund (UITF) business at the end of September 2020.

Ayuste mentioned that clients are alert in noticing the opportunities that the current market presents and that they are aware this could potentially result in significant growth in their investment returns as the market recovers.

Since then, clients continued to invest actively in 2021, bolstering BDO Trust’s lead in the trust and investments space in the country with a 24% market share with trust assets under management of PHP 1.18 trillion ($23.66 billion) as of August 31, 2021.

Ayuste explained that increased transparency through BDO Invest Online reassured clients that their money was still safe during the pandemic. With this safety in mind, clients were more willing to take advantage of opportunities during this period of economic recovery.

With trust in the bank’s operations remaining stable, Ayuste further cites the vast investment opportunities offered by BDO such as through global feeder funds, ESG Equity Funds, and the BDO PERA Equity Index Fund.

In fact, we’ve analyzed some of BDO’s other UITFs before:

Today, we revisit one of these UITFs BDO offers—BDO Sustainable Dividend Fund.

The BDO Sustainable Dividend Fund, established on October 18, 2013, is an equity fund that aims to achieve long-term capital appreciation by investing in a diversified portfolio of attractively priced exchange-listed stocks with sustainable dividend yields.

The fund is suitable for investors who have an aggressive risk appetite, willing to stay invested for at least three years, and who are willing to seek potentially higher returns through stock market investments but are also aware of the possibility of capital losses that such investments may entail.

The fund is currently invested in 100% of exchange-listed stocks.

  • At its inception in October 2013, the BDO Sustainable Dividend Fund’s initial net asset value per unit (NAVPU) was at PHP 100.00. After rising to PHP 130.13 in April 2015, the fund fell to a low of PHP 89.84 in January 2016 due to the oil price crash. The fund recorded a loss of 31%, underperforming its benchmark, the PSEi, which incurred a loss of 25% over the same period.

  • The fund then recovered to its highest peak of PHP 136.18 in September 2017—an increase of 52%, at the same time outperforming its benchmark’s gain of 32% over the same period.

  • After reaching this peak, the fund dropped 31% to PHP 93.78 in November 2018 due to uncertainties regarding Brexit and the US-China trade war. The fund underperformed the PSEi, which had a loss of 15% in the same time span.

  • By the end of 2019, the fund had rebounded by 11% to a NAVPU of PHP 104.07, before it fell to a record low of PHP 63.97 in March 2020 due to the coronavirus-induced market selloff. The fund’s 39% loss trailed its benchmark’s 41% loss during this period.

  • As of February 28, 2022, the fund recovered to a NAVPU of PHP 100.92, a 58% gain from its 2020 low, matching the PSEi’s gain.

  • Since its inception, BDO Sustainable Dividend Fund has had a cumulative 2% gain versus its benchmark’s cumulative 12% gain.

Even though the fund’s performance hasn’t been better than the market’s, it does not mean the companies in its holdings are of lower quality. As-reported metrics would have investors believe that the fund’s portfolio consists of companies that do not generate economic profit. Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the top seven core non-financial holdings of the BDO Sustainable Dividend Fund along with its Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Most of the companies in the BDO Sustainable Dividend Fund show as-reported ROAs below cost-of-capital levels, suggesting that they are not generating economic profit. Moreover, the fund is generating an average as-reported ROA of 4%, lower than the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered better profitability with an average Uniform ROA of 7%, nearly 2x the average as-reported ROA.

The Uniform Accounting framework addresses financial statement inconsistencies attributable to the flaws present in the Philippine Financial Reporting Standards (PFRS). This enables investors to determine the true underlying performance of companies and avoid distorted financial analysis and valuation.

As such, it should not be surprising that when analyzing the non-financial holdings of the BDO Sustainable Dividend Fund, the figures that easily stand out are the large discrepancies between Uniform ROA and as-reported ROA for these companies.

While at a glance, the difference between as-reported ROA and Uniform ROA may not seem that great, the distortion in percentage ranges from 26% to 150%, with Ayala Corporation (AC:PHL), SM Investments Corporation (SM:PHL), and International Container Terminal Services, Inc. (ICT:PHL) having the highest positive distortions.

As-reported metrics understate the profitability of Ayala Corporation, suggesting an unprofitable firm with an as-reported ROA of 2%. In reality, this firm more closely resembles one that is breaking even, with a Uniform ROA of 5% in line with the average cost of capital. Prior to the pandemic, it consistently generated returns of at least 9% from 2005 to 2019.

Similarly, as-reported metrics understate the profitability of SM Investments Corporation, suggesting a below-average firm with an as-reported ROA of 3%. In fact, its Uniform ROA boasts a decent firm at 7%. Furthermore, it has consistently generated returns of at least 10% from 2005 to 2019.

Likewise, as-reported metrics understate the profitability of International Container Terminal Services, Inc., suggesting a decent firm with an as-reported ROA of only 7%, when this is actually a high-quality firm with a 13% Uniform ROA. It has consistently generated returns of at least 10% over the last five years.

By focusing on as-reported metrics alone, these companies look like anything but profitable businesses.

That said, looking at profitability alone is insufficient to deliver superior investment returns. Investors should also identify if the market is significantly undervaluing a company’s earnings growth potential.

This table shows the earnings growth expectations for the major non-financial holdings of the fund. It features three key data points:

  1. The two-year Uniform earnings per share (EPS) growth represents the Uniform earnings growth the company is likely to have for the next two years. The earnings number used is the value of when we convert consensus sell-side analyst estimates according to the Uniform Accounting framework.

  2. The market expected Uniform EPS growth represents what the market thinks Uniform earnings growth is going to be for the next two years. Here, we show by how much the company needs to grow Uniform earnings in the next two years to justify the current stock price of the company. This is the market’s embedded expectations for Uniform earnings growth.

  3. The Uniform EPS growth spread is the difference between the two-year Uniform EPS growth and market expected Uniform EPS growth.

On average, Philippine companies are expected to have 5%-6% annual Uniform earnings growth over the next two years. Meanwhile, BDO Sustainable Dividend Fund’s major holdings are forecasted to significantly outperform with a 68% projected Uniform earnings growth in the next two years, while the market is forecasting an underperformance with a 2% projected Uniform earnings growth.

All the companies in the BDO Sustainable Dividend Fund have positive Uniform earnings growth except for PLDT Inc. (TEL:PHL). Among these companies, Ayala Corporation, SM Prime Holdings, Inc.. (SMPH:PHL), and Ayala Land, Inc,. (ALI:PHL), have the highest positive Uniform earnings growth spread.

The market is pricing Ayala Corporation’s Uniform Earnings to grow by only 6% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 235%.

On the other hand, the market is pricing SM Prime Holdings’ Uniform earnings to shrink by 11% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 86%.

Additionally, the market is pricing Ayala Land’s Uniform earnings to grow by 14% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 73%.

Overall, as-reported numbers would significantly understate the expected earnings of these companies as shown by the Uniform-adjusted sell-side estimates.

While these firms suffer from the adverse effects of the coronavirus pandemic, dragging down their short-term earnings growth expectations, Uniform Accounting metrics show that these mature, low growth, but high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and SM Investments Corporation Tearsheet

Today, we’re highlighting the largest individual stock holding in the BDO Sustainable Dividend Fund, SM Investments Corporation (SM:PHL).

As our Uniform Accounting tearsheet for SM Investments Corporation highlights, the company trades at a Uniform P/E of 22.3x, around the global corporate average of 24.0x but below its historical average of 25.7x.

Moderate P/Es require moderate EPS growth to sustain them. In the case of SM Investments Corporation, the company has shown a 48% Uniform EPS shrinkage in 2021.

Sell-side analysts provide stock and valuation recommendations that poorly track reality. However, sell-side analysts have a strong grasp of near-term financial forecasts like revenue and earnings.

We take sell-side forecasts for Philippine Financial Reporting Standards (PFRS) earnings as a starting point for our Uniform earnings forecasts. When we do this, SM Investments Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 60% in 2021 and by 51% in 2022.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify SM Investments Corporation’s PHP 871.00 stock price. These are often referred to as market embedded expectations.

The company has an earning power in line with long-run corporate averages, but its cash flows and cash on hand fall short of obligations within five years. Based on its operating risk and refinancing capability, it has an intrinsic credit risk of 230bps, indicating high dividend risk and moderate credit risk.

Lastly, SM Investments Corporation’ Uniform earnings growth is in line with peer averages but is trading below peer average valuations.

About the Philippine Markets Newsletter
“Friday Uniform Portfolio Analytics”

Investors who don’t engage in the buying or selling of securities for a living often rely on professionals to manage their own investments within the scope of their investment policies.

With so many funds and managers out there, it can get confusing and difficult to decide which one best suits your needs as an investor.

Every Friday at the end of the month, we focus on one fund in the Philippines and take a deeper look into their current holdings. Using Uniform Accounting, we identify the high-quality stocks in their portfolio which may not be obvious using the as-reported numbers.

We also identify which holdings may be problematic for the fund’s returns that they would need to reconsider from a UAFRS perspective.

To wrap up the fund analysis, we highlight one of their largest holdings and focus on key metrics to watch out for, accessible in our tearsheets.

Hope you’ve found this month’s focus on the BDO Sustainable Dividend Fund interesting and insightful.

Stay tuned for next month’s Friday Uniform Portfolio Analytics!


Angelica Lim
Research Director
Philippine Markets Newsletter
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