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

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.