Philippine Markets Newsletter

Through this major move, this bank is on track towards realizing its retail growth strategy…also, AEV tearsheet

April 29, 2022

UnionBank was founded in 1981 as a joint venture between the Aboitiz Group, Insular Life, and the Social Security System. Even recognized as the Best Digital Bank by major institutions such as The Asset, Asiamoney, and the Global Banking & Finance Review for multiple years, how would UnionBank’s acquisition of Citigroup’s consumer banking business affect the country’s banking industry?

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
Powered by Valens Research

Amidst the multiple Filipino banks competing to cement their presence in the country, UnionBank, one of the country’s leading universal banks and the ninth-largest bank in assets, has been making moves to fast-track its growth in the retail banking segment.

Last December 2021, UnionBank announced that it has reached an agreement with American banking giant Citigroup Inc. to acquire the latter’s local business in an effort to increase its higher-yielding consumer loan portfolio, net interest margins, and overall profitability in the long run.

The acquisition will cover Citi’s local credit card, unsecured lending, deposit, investment businesses, and Citicorp Financial Services and Insurance Brokerage Philippines Inc.—an insurance and investment provider for retail customers.

As a result, UnionBank will pay a total of PHP 55 billion for the buyout, which is the cash consideration for the net assets and a premium amounting to PHP 45.3 billion.

In order to raise capital for the acquisition, UnionBank recently announced a Stock Rights Offering (SRO) of 617.18 million shares with a 30% discounted price of PHP 64.81 per share.

Further solidifying the acquisition, the Philippine Competition Commission (PCC) approved the move by UnionBank on an April 5, 2022 ruling that states that the takeover does not significantly lessen competition.

According to economist John Paolo R. Rivera of the Asian Institute of Management, more mergers and acquisitions are to be anticipated in the local banking industry due to uncertainties and changing client preferences.

However, following the announcement, concerns regarding the company’s weakened solvency after the acquisition have been brought up by Moody’s, resulting in a revised rating outlook from stable to negative.

In contrast, despite the negative effects brought about by the pandemic, UnionBank’s performance has been steadily increasing with a record high of PHP 45.1 billion, signifying a 7% increase.

With the acquisition expected to be completed by late 2022, UnionBank will have to facilitate a smooth transition in order to reap the benefits the deal has to offer.

As we continue to monitor Unionbank’s performance, let’s revisit one of the UITFs UnionBank offers—Unionbank PSE Index Tracker Fund. Additionally, we’ve also analyzed the UnionBank PHP Equity Fund in the past.

The Unionbank PSE Index Tracker Fund, established on May 22, 2014, is a peso-denominated UITF that invests and mirrors the Philippine Stocks Exchange Index (PSEi), the benchmark for funds that invest in equities. Investment outlets for this fund include the 30 different equities from the PSEi, which represent major industries in the Philippine economy.

The fund is ideal for investors seeking returns that mimic the index, with a medium- to long-term investment horizon. The fund is currently invested in 96% of exchange-listed stocks.

  • At its inception in May 2014, the Unionbank PSE Index Tracker Fund’s initial net asset value per unit (NAVPU) was PHP 100.00. The fund’s NAVPU initially rose to PHP 117.42 in April 2015, an 18% gain, but was below the benchmark’s gain of 20%.
  • Following the oil price fall in 2016, the Unionbank PSE Index Tracker Fund fell to PHP 88.43 in January 2016. The fund’s loss of 25% matched that of its benchmark.
  • In January 2018, the Unionbank PSE Index Tracker Fund recovered to hit an all-time high of PHP 130.71. The fund’s 48% return was, however, slightly less than its benchmark’s 49% return.
  • The fund declined to PHP 99.91 in November 2018 as a result of uncertainties during the Brexit and US-China trade conflict. The fund’s 24% loss was identical to the benchmark performance in the same period.
  • By July 2019, Unionbank PSE Index Tracker Fund reached a high of PHP 122.18, which matched the benchmark’s 23% gain.
  • The fund dropped to an all-time low of PHP 69.23 in March 2020 as the market crashed due to the COVID-19 pandemic, a 43% drop that slightly outperformed the 44% drop of the benchmark.
  • As of April 19, 2022, the fund recovered to a NAVPU of PHP 105.30, a 52% gain from its 2020 low, matching the PSEi’s gain.
  • Since its inception, UnionBank PSE Index Tracker Fund has had a cumulative 5% gain versus its benchmark’s cumulative 4% gain.

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 eight core non-financial holdings of the Unionbank PSE Index Tracker 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 UnionBank PSE Index Tracker 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 3%, half 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 9%, 3x the average as-reported ROA. These companies have strong returns, with some companies having a Uniform ROA above global average returns.

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 Unionbank PSE Index Tracker 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 8% to 269%, with International Container Terminal Services, Inc. (ICT:PHL), Aboitiz Equity Ventures, Inc. (AEV:PHL), and  Ayala Corporation (AC:PHL) having the highest distortions.

As-reported metrics understate the profitability of International Container Terminal Services, Inc., suggesting an above-average firm with an as-reported ROA of 9%. In reality, this firm more closely resembles one that is high-quality, with a Uniform ROA of 33%, more than 5x the average cost of capital. Furthermore, it has generated returns of at least 11% in the last 5 years.

Similarly, as-reported metrics understate the profitability of Aboitiz Equity Ventures, Inc., suggesting a below-average firm with an as-reported ROA of 3%. In fact, its Uniform ROA boasts a high-quality firm at 10%. Furthermore, it has consistently generated returns of at least 8% in the last decade.

Likewise, as-reported metrics understate the profitability of Ayala Corporation, suggesting another unprofitable firm with an as-reported ROA of only 2%, when this firm more closely resembles one that is breaking even with a 5% Uniform ROA. Prior to the pandemic, it consistently generated returns of at least 9% from 2005 to 2019.

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 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 6% annual Uniform earnings growth over the next two years. Meanwhile, the UnionBank PSE Index Tracker Fund’s top holdings are forecasted to significantly outperform with a 32% projected Uniform earnings growth in the next two years, while the market is forecasting an underperformance with a 9% projected Uniform earnings growth.

Most of the companies in the UnionBank PSE Index Tracker Fund have a positive Uniform earnings growth. Among these companies, Ayala Corporation , Ayala Land, Inc. (ALI:PHL), and SM Investments Corporation (SM:PHL) have the highest Uniform earnings growth spread.

The market is pricing Ayala Corporation’s Uniform Earnings to rise by 3% in the next two years. However, sell-side analysts are seeing sustained earnings growth for the firm, forecasting it to accelerate by 150%.

Similarly, the market is seeing Ayala Land Inc.’s Uniform earnings to rise by 13%, but analysts are projecting a robust 93% earnings growth for the firm in the next two years.

On the other hand, the market is pricing SM Investments Corporation’s Uniform earnings to grow by only 1% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 33%.

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

Uniform Accounting metrics show that these mature, high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and Aboitiz Equity Ventures, Inc. Tearsheet 

Today, we’re highlighting one of the largest individual stock holdings in the Unionbank Equity Fund, Aboitiz Equity Ventures, Inc. (AEV:PHL).

As the Uniform Accounting tearsheet for Aboitiz Equity Ventures, Inc. highlights, the company trades at a Uniform P/E of 16.9x, below the global corporate average of 24.0x, but around its historical average of 17.1x.

Low P/Es require low, or even negative, EPS growth to sustain them. In the case of Aboitiz Equity Ventures, Inc., the company has shown a 542% Uniform EPS decline 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, Aboitiz Equity Venture’s sell-side analyst-driven forecast shows that Uniform earnings are expected to decline by 35% in 2022, and grow by 40% in 2023.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Aboitiz Equity Ventures, Inc.’s PHP 56.85 stock price. These are often referred to as market-embedded expectations.

Aboitiz Equity Ventures is currently being valued as if Uniform earnings were to shrink by 5% per year over the next three years. What sell-side analysts expect for Aboitiz Equity Ventures’s earnings growth is below what the current stock market valuation requires in 2022, but above that requirement in 2023.

The company has an earning power 2x long-run corporate averages, and its cash flows and cash on hand consistently exceed obligations. Based on its operating risk and refinancing capability, it has an intrinsic credit risk of 440bps, indicating low dividend risk and moderate credit risk.

Lastly, Aboitiz Equity Ventures, Inc.’s Uniform earnings growth is well below peer averages, but is trading in line with 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 its 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 UnionBank PSE Index Tracker Fund interesting and insightful.

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


Angelica Lim
Research Director
Philippine Markets Newsletter
Powered by Valens Research

View All

You don’t have access to the Valens Research Premium Application.

To get access to our best content including the highly regarded Conviction Long List and Market Phase Cycle macro newsletter, please contact our Client Relations Team at 630-841-0683 or email

Please fill out the fields below so that our client relations team can contact you

Or contact our Client Relationship Team at 630-841-0683