Merger with BPI to have positive effect on PNB, Allied - Moody's

Posted at 11/26/12 2:03 PM

MANILA, Philippines - A merger between Lucio Tan's Philippine National Bank and Allied Banking Corp. and the Ayala-led Bank of the Philippine Islands would be a "credit positive", Moody's Investors Service said on Monday. 

Last Wednesday, BPI, the country's third-largest bank by assets, said it was in talks with a group headed by businessman Lucio Tan, the country's second-richest man, to acquire Tan's 60% stake in PNB. 

"BPI’s acquisition of PNB is credit positive for PNB and ABC because BPI is fundamentally stronger than the other two banks, and as such will be able to improve their credit profiles," Moody's said. 

Moody's noted a merger with BPI will have a positive effect on PNB and Allied, especially since the two banks still rank lowly among Philippine banks in key credit performance measures.

"Both (PNB and Allied) maintain substantial legacy bad loans that continue to weigh on their asset quality. In addition, both exhibit high credit risk concentration to large borrowers relative to their core capital base, which exposes them to significant credit losses. Moreover, the boards of directors at both banks are dominated by a controlling shareholder (Tan) and lack adequate representation by independent directors, both of which threaten their corporate governance," Moody's said. 

Moody's said a merger among BPI (3rd largest in terms of assets), PNB (7th largest) and Allied (13th largest) will form the largest banking group in the country with an estimated market share of 19% of system assets. 

Based on its initial assessment, Moody's said the merger will "not entail a significant burden on BPI’s credit profile.

"Assuming that BPI pays 2x PNB’s and ABC’s book value for Lucio Tan’s stakes in both banks, and funds the acquisition through a share swap based on the last traded share price prior to the announcement of the acquisition, we estimate BPI’s Tier 1 capital ratio would increase to 16.0% from 14.5%, based on September 2012 financials. In another scenario in which BPI pays for the acquisition using a 50-50 mix of cash and newly issued equities, we estimate BPI’s Tier 1 capital ratio would decrease to 11.0%," Moody's said. 

As of Friday, BPI and PNB said there were no further developments that would require disclosure.