PH's top 5 banks get stable credit rating

Posted at 05/02/14 8:04 AM

MANILA - Five of the country’s largest banks have received stable credit rating outlook, from London-based Fitch Ratings report said.

In a report, Fitch affirmed the ratings on Bank of the Philippine Islands (BPI), Development Bank of the Philippines (DBP) and Land Bank of the Philippines (Landbank).

The agency has also upgraded Metropolitan Bank & Trust Co.’s long-term Issuer Default Rating (IDR) to ‘BBB-’ from ‘BB+’ and its Viability Rating (VR) to ‘bbb-’ from ‘bb+’.

At the same time, the agency has revised BDO Unibank Inc.’s outlook to positive from stable and affirmed its IDR at ‘BB+’ and VR at ‘bb+’.

Fitch said the banks’ long-term IDRs and national long-term ratings are driven by their VRs.

The credit strengths of these five banks are their stable deposit bases, liquid balance sheets, high core capitalization, reasonable loan loss reserves and satisfactory earnings, Fitch noted.

These ratings, Fitch said, also reflect the structural issues that all five banks and the Philippine banking sector face to varying degrees, including their concentrated loan books, foreclosed properties with modest reserves and developing corporate governance standards, and the presence of conglomerates as controlling shareholders.

Fitch said BPI’s ratings are supported by its strong domestic franchise, solid financial performance, strong capitalization and track record of prudent management through economic cycles.

The ratings of DBP and Landbank, on the other hand, reflect their satisfactory financial profiles, albeit with asset-related and state-influence risks, including policy-oriented loans.

Despite their policy roles, both DBP and Landbank still adopt a largely commercial approach, including towards credit risk assessment. BDO’s ratings reflect its market-leading domestic presence, funding strength, sound capitalisation and reserves, and modest but improving profitability and asset quality.

Meanwhile, Metrobank’s ratings reflect its established domestic presence and funding base, satisfactory record in asset quality and profitability as well as improved loan-loss reserves.

The upgrade of Metrobank’s ratings resolves the positive outlook assigned to the bank last year, and reflects Fitch’s view that the continued improvements shown by the bank across a number of quantitative and qualitative indicators, including the disposal of a large portion of its non-core assets, have improved the bank’s credit profile.

Recent robust results of Metrobank, Fitch noted, have been aided by a favorable operating environment and gains on asset sales.

Non-core divestments have reduced Metrobank’s holdings in its associates to five of the bank’s Fitch core capital at end-2013 from 15 percent at end-2012.

The stable outlooks on BPI, Metrobank, DBP and Landbank reflect Fitch’s expectation that they will likely maintain steady risk profiles over the near- to medium-term, underpinned by a robust domestic economy, manageable corporate leverage and supportive domestic interest rates.

Fitch also noted that upgrade prospects are low in the near term for BPI and Metrobank, whose ratings are presently the highest among the Philippine banks rated by Fitch, and also high compared with major banks in similarly rated countries.

Fitch said healthy domestic consumption and growth in the manufacturing and services sectors should continue to drive domestic demand.

“This, together with strong foreign inflows, is likely to fuel brisk expansion of credit activities, including in property lending, which could lead to disproportionate asset price inflation if left unchecked,” it said.

Based on Fitch’s internal stress tests, it showed that the large banks are in a good position to weather reasonable deterioration in the operating environment due to their sound funding and loss-absorption capacities.

In addition, Fitch expects that the central bank will likely take pre-emptive measures to mitigate excessive risks building up within the system.

The positive outlook on BDO reflects Fitch’s view that recent overall improvements in BDO’s asset quality and profitability, underpinned by a supportive operating environment, have brought BDO’s credit profile closer to those of ‘BBB’ range banks globally.

However, BDO’s loan growth has been relatively higher than the industry in real estate-related lending, and around a quarter of its trading portfolio is held in corporate bonds - which could make the bank more vulnerable in a downturn. These factors, taken together with BDO’s core funding, liquidity and capitalization strengths contribute to the revision of BDO’s outlook to positive.

Fitch, however, warned that negative rating actions could occur should the banks’ loss-absorption capacities weaken in the face of event risks (such as large acquisitions), aggressive growth plans or a material increase in risk appetites, including increasing concentration of exposures and excessive lending to the volatile property sector.

“Positive rating actions for the large Philippine banks may stem from sustainable improvements in the broader operating and regulatory environment, including the above-mentioned structural issues,” it said.

It said that a higher SRF, possibly with a sovereign rating upgrade would be likely to lift DBP’s and Landbank’s IDRs although this likelihood is low in the near term hence the stable outlooks.

An upgrade for BDO could occur following continued improvement in the bank’s profitability and asset quality, with prudent loan growth at sustainable levels, and the bank’s capital and funding strengths maintained.

However, the Outlook for BDO may be revised to Stable, should the bank’s financial profile become vulnerable to a material build-up of risks in the macroeconomic environment and domestic banking sector.