Philippine Markets Newsletter

Upgraded from its commercial to universal banking license, this bank with a double-A credit rating offers its own UITF…also,

June 24, 2022

Late 2021, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) upgraded Bank of Commerce (BankCom) from a commercial banking license to a universal banking license. This means the bank can offer a variety of additional products and services including investment banking services and bancassurance products.

We take a look at one of the unit investment trust funds (UITFs) 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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The first quarter witnessed the fastest expansion of the loan portfolios of the country’s largest banks since the start of the COVID-19 pandemic in 2020. BusinessWorld’s 1st Quarter Banking Report showed that the combined loans of 45 universal and commercial banks rose by 6% year-on-year to PHP 9.93 trillion in the January-March period, in line with the previous quarter.

The overall loan expansion has translated to income growth for Bank of Commerce (BankCom), the second most aggressive lender in the first quarter. It reported an annual increase of 17% in loans extended, tailing behind Landbank’s 25% and ahead of The Hongkong & Shanghai Banking Corp. Ltd’s 15%.

Bank of Commerce’s net income soared by 146% in the first quarter as its interest earnings improved. BankCom’s net income for the first quarter was PHP 360.59 million, more than double the PHP 146.30 million it posted in the same period last year.

In a press release, the bank said that the earnings growth stemmed from the continued strong core business activities amidst the volatilities perturbing both local and international markets.

As we continue to monitor BankCom’s performance, let’s focus on one of BankCom’s UITFs – Bank of Commerce Diversity Dividend Focused Fund.

Bank of Commerce Diversity Dividend Focused Fund, introduced on April 8, 2015, is a peso-denominated equity fund with the objective of achieving long-term capital growth and dividend income generation through investing substantially in equity securities.

The fund is suitable for investors who exhibit an aggressive risk profile with an investment horizon of more than five years. About 90% of the fund is invested in listed preferred shares and common shares with a track record of dividend payments.

  • At its inception in April 2015, Bank of Commerce Diversity Dividend Focused Fund’s beginning net asset value per unit (NAVPU) was PHP 1.00. It had a relatively neutral position until January 2016 when it dipped by 20% to PHP 0.80 because of the sudden decline in oil prices. During the period, the PSEi underperformed the fund with a loss of 20%.
  • In August 2016, the fund almost returned to its beginning NAVPU after it reached PHP 0.98. Its 23% increase underperformed its benchmark’s gain of 28%.
  • Before the year ended, the fund’s NAVPU dipped again by 15% to PHP 0.83 in December 2016, which outperformed the PSEi’s decrease of 19% during this period. This loss is evident across other Asian stocks as US equities and oil prices continue to fall.
  • The NAVPU slowly recovered by January 2018 to its beginning NAVPU of PHP 1.00, a gain of 20% that underperformed its benchmark’s increase of 38%.
  • The fund saw a decline in the succeeding months, reaching another low of PHP 0.77 in November 2018. This 23% decline is attributed to the worries regarding the BSP’s policy rate changes, the broad selloff of US stocks, and the impending Brexit. The fund outperformed the PSEi’s incurred a loss of 24% in this period.
  • In March 2020, the fund’s NAVPU dropped to its lowest point at PHP 0.53 following the massive market selloff caused by the COVID-19 pandemic. However, this 31% decline versus its 2019 year-end NAVPU outperformed its benchmark’s loss of 41%.
  • The fund has slowly recovered from its decline with a NAVPU of 0.61 in May 2020. This 15% gain underperformed its benchmark’s gain of 22%.
  • Since its inception, Bank of Commerce Diversity Dividend Focused Fund has had a cumulative loss of 37% versus PSEi’s cumulative loss of 21% during the same period.

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 Bank of Commerce Diversity Dividend Focused 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 Bank of Commerce Diversity Dividend Focused 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%, slightly lower than the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have performed similarly with an average Uniform ROA of 4%, equal to 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 Bank of Commerce Diversity Dividend Focused 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 -445% to 119%, with Ayala Corporation (AC:PHL), Ayala Land, Inc. (ALI:PHL), and Universal Robina Corporation (URC:PHL) having the highest positive distortions.

Of these holdings, Globe Telecom, Inc. (GLO:PHL) and Jollibee Foods Corporation (JFC:PHL) were revealed to have lower Uniform ROA, presenting a potential cause for concern. Companies such as these need to be closely monitored for drastic changes that could negatively affect the fund itself, especially when the support behind the stocks’ performance begins to wane.

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 10% from 2005 to 2019.

Similarly, as-reported metrics understate the profitability of Ayala Land with an as-reported ROA of 3%. In fact, its Uniform ROA is at 4%. Furthermore, it has consistently generated returns of at least 7% from 2006 to 2019.

Likewise, as-reported metrics understate the profitability of Universal Robina, suggesting a decent firm with an as-reported ROA of only 5%, when this company actually has a 6% Uniform ROA. It has consistently generated returns of at least 6% over the last decade.

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 5%-6% annual Uniform earnings growth over the next two years. Meanwhile, Bank of Commerce Diversity Dividend Focused Fund’s major holdings is forecasted to significantly outperform with a 44% projected Uniform earnings growth in the next two years, while the market is forecasting an underperformance with a projected 24% Uniform earnings shrinkage.

All the companies in Bank of Commerce Diversity Dividend Focused Fund have positive Uniform earnings growth except for Globe Telecom, Inc. Among these companies, Jollibee Foods Corporation, Ayala Corporation, and Ayala Land, Inc., have the highest positive Uniform earnings growth spread.

The market is pricing Jollibee Foods Corporation’s Uniform earnings to decline by 224% in the next two years, while sell-side analysts are projecting immaterial growth for the company’s earnings.

Moreover, the market is pricing Ayala Corporation’s Uniform earnings to grow by 2% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 151%.

Additionally, the market is pricing Ayala Land’s Uniform earnings to grow by 12% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 91%.

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, but high growth and high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and Ayala Land, Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in Bank of Commerce Diversity Dividend Focused Fund, Ayala Land, Inc. (ALI:PHL).

As the Uniform Accounting tearsheet for Ayala Land, Inc. highlights, the company trades at a Uniform P/E of 25.9x, above the global corporate average of 20.6x but below its historical average of 36.1x.

High P/Es require high EPS growth to sustain them. In the case of Ayala Land, the company has shown a 60% Uniform EPS growth 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, Ayala Land’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 145% and 49% in 2022 and 2023, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Ayala Land, Inc.’s PHP 28.40 stock price. These are often referred to as market embedded expectations.

Ayala Land, Inc. is currently being valued as if Uniform earnings were to grow by 12% per year over the next three years. What sell-side analysts expect for Ayala Land, Inc.’s earnings growth is above what the current stock market valuation requires through 2023.

Furthermore, the company has an earning power below the long-run corporate averages. While its cash flows and cash on hand are below obligations, it also has an intrinsic credit risk of 260bps. Together, these indicate a moderate dividend and credit risks.

Lastly, Ayala Land’s Uniform earnings growth is well above peer averages, and is trading above 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 week’s focus on Bank of Commerce Diversity Dividend Focused Fund interesting and insightful.

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


Angelica Lim
Research Director
Philippine Markets Newsletter
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