Bank stocks are one of the best performers in the Philippine Stock Exchange (PSE) this year. The PSE Finance Index has in fact surged 35% so far, compared with 19% for the benchmark index.

This is probably not surprising considering that bad debts have dropped and accelerating economic growth has boost loan demand. The$225 billion economy grew a faster-than-estimated 5.9% in the second quarter. Furthermore, the Central Bank cut its benchmark interest rate to a record –low 3.75% in July a bullish move for bank stocks not only because it spurs loan demand but it also increases margins.

If one has to invest in bank stocks, however, the question is which one?

When evaluating which one, it is probably appropriate to distinguish between first tier banks from second tier banks. Although arbitrary, one can define large tier banks to be those whose market capital is at least Php200 billion.

The following are then the first tier banks: Metropolitan Bank (MBT: PM), Bank of the Philippine Island (BPI: PM) and Banko de Oro (BDO: PM).

In trying to evaluate the better investment, I compared the stock performance in the last 5 years of the 3 companies. The rationale is this. A stock that is consistently trending up faster over a long period is fundamentally a better company. It is likely to be more profitable, its revenues are growing faster, it is run more efficiently and its future outlook is probably better. It is important to evaluate the performance over a relatively long period such as 5 years to negate the temporary up and down swings.

As the graph below shows, the MBT and BPI are running neck and neck, with a slight edge to MBT. It is without question that BDO is lagging behind.

which-bank-stocks-should-you-invest-in

I would invest in MBT and as a hedge invest only 70% of my allocated funds in it with the remaining 30% in BPI.

In my next posting, I will evaluate the second tier banks: Security Bank (SECB:PM), Union Philippine Bank (UPB:PM), Rizal Commercial Bank (RCB:PM) and China Bank (CHIB:PM). I will not include Philippine National Bank (PNB:PM) because of the uncertainty it faces with its merger with Allied Bank.

*This article was originally published on September 10, 2012