Assessment of the correlation between price-earnings ratio and stock market returns of universal banks in the Philippines

Antonio Jaramillo Dayag,Fernando Trinidad

doi:10.20525/ijrbs.v8i5.481

Abstract

Universal banks are important economic drivers in the Philippines since they provide the financial backbone for businesses and investments. Universal banks comprise 90% of the country’s banking system resources. Eleven [11] of the twenty-one [21] universal banks in the country are listed in the Philippine Stock Exchange, and these banks are the top universal banks based on capitalization. Price to Earnings Ratio [PER] is a commonly utilized investment assessment tool and this ratio indicates how much investors are willing to pay for a stock and is calculated as the ratio of the stock price over earnings per share. Since the stock price is dictated by the stock market, this paper seeks to determine if the P/E ratio of universal banks in the Philippines is correlated to its stock returns, the implication of which is how to form an appropriate balance between stock price volatility and banks’ valuation. The paper uses panel data of the 11 listed universal banks from 2010 to 2018, using Pearson Correlation. The study resulted in a generally weak correlation, however, there were banks that exhibited strong, positive, significant correlation.

Highlights

The Philippines is a fast growing, developing country in Southeast Asia whose economy has several important economic drivers, one of which are universal banks
This study examines the correlation of PER with stock market returns of the top 11 universal banks in the Philippines, and seeks to determine if a correlation exists
There are varied findings on how PER impacts stock return but majority of the findings reveals that PER does not influence stock return

Summary

Introduction

The Philippines is a fast growing, developing country in Southeast Asia whose economy has several important economic drivers, one of which are universal banks. It is estimated that 90% of the country’s banking system resources come from these banks, and to date, there are twenty-one [21] universal banks in the Philippines. As of June 2019, overall total assets of universal and commercial banks is estimated at Php 16 trillion, with liabilities amounting to Php 14 million (BSP Website). It is necessary that these banks undergo valuation to overcome economic and financial crises (Tabara & Vasiliu, 2011). Bank valuation is relevant to policy makers as it examines whether transparency of government bailouts is necessary, as evidenced by the United States’ Troubled Assets Relief Package [TARP] that included the Capital Purchase Program [CPP], in the same way bank managers need to assess the impact of accepting government intervention programs

Objectives

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Discussion

Conclusion