RPT-Fitch Affirms Four Philippine Banks; Withdraws UnionBank Ratings

Fri Jul 25, 2014 5:59am EDT

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July 25 (Reuters) - (The following statement was released by the rating agency)

Fitch has today affirmed the ratings of three Philippine banks - China Banking Corporation (China Bank), Security Bank Corporation (Security Bank) and Rizal Commercial Banking Corp. (RCBC) - including their Long-Term Issuer Default Ratings (IDRs) at 'BB' and Viability Rating (VR) at 'bb'. Their Outlooks are Stable.

At the same time, the agency has affirmed Union Bank of the Philippines' (UnionBank) Long-Term IDR at 'BB-' and its VR at 'bb-' and simultaneously withdrawn them. Fitch has chosen to withdraw the ratings of UnionBank for commercial reasons. The Outlook for the bank remains Positive. A full list of rating actions is provided at the end of this commentary.

KEY RATING DRIVERS - VRs, IDRs and National Ratings

The VRs and IDRs of the four Philippine banks, as well as the National Ratings of China Bank, Security Bank and UnionBank reflect their satisfactory core capitalisation and loan loss reserves relative to their ratings, as well as their sound funding, liquidity and domestic franchises as medium-sized players. The ratings take into account the banks' above-average risk appetite and incorporate the different degrees of structural issues faced by these four banks (as well as many major domestic banks), including large corporate loan concentrations, modestly reserved foreclosed assets, developing corporate governance standards, and the presence of families as controlling shareholders.

The Positive Outlook on UnionBank's rating is driven by Fitch's expectation that its credit profile would improve over time. Its loan mix has diversified following the acquisition of City Savings Bank, a thrift bank focusing on teacher loans, in 2013. However, Fitch believes that it would take time for the benefits of the acquisition to materialise. This acquisition has also contributed to UnionBank growing its loan book well above industry averages, which could give rise to asset quality concerns in time if not managed appropriately.

The Stable Outlooks on the ratings on China Bank, Security Bank and RCBC reflect Fitch's expectation that their credit profiles will likely stay steady over the near to medium term. This is supported by a robust domestic economy, manageable corporate leverage and supportive domestic interest rates. Healthy domestic consumption and growth in the manufacturing and services sectors should continue to drive domestic demand. This, together with strong foreign inflows, including rising overseas remittances are contributing to the brisk expansion of credit activities, especially in property lending, and could result in disproportionate asset price inflation if left unchecked.

The agency notes that some of these banks have been more acquisitive over the last two to three years. They have bought smaller banks to increase their branch networks and improve their franchises. While such acquisitions are part of the banks' strategy to strengthen their franchise and market share, they are not without risk, not least because the targets are generally weaker. Loan growth has also been more rapid and above the industry average for some of these banks.

All of the four banks aim to increase their lending into the consumer and SME sectors although any meaningful progress in this area through organic growth is likely only over the medium term.

In Fitch's view, these banks are in a good position to weather reasonable deterioration in the operating environment due to their sound funding profiles and high loss-absorption capacity. The central bank has been monitoring the real estate sector and currently limits real estate exposure to 20% of the banks' loan book. However, it may change this limit or the types of loans covered to facilitate further economic growth and better manage various property-related risks. The central bank has already taken some measures to avoid excessive risks building up within the system, and Fitch expects further measures to be taken should risks continue to rise.

RATING SENSITIVITIES - VRs, IDRs and National Ratings

The VRs of China Bank, Security Bank and RCBC could come under pressure should the banks' loss-absorption capacities weaken significantly in the face of event risks such as sizeable takeovers, aggressive growth plans or a material increase in risk appetite, including increasing concentration of exposures, unseasoned portfolios and excessive lending to the volatile property sector. Such a scenario would also be negative for the IDRs of the three banks and the National Ratings of China Bank and Security Bank. In particular, RCBC's capital levels are lower than its domestic peers, and could be more vulnerable to negative rating actions.

Further diversity and stability in funding, loans and revenue bases arising from disciplined expansion and a more established franchise, strong core capitalisation, sustained risk-adjusted profitability and improvements in asset quality would be rating-positive for China Bank, Security Bank and RCBC.

But upside rating potential may be undermined by any further build-up of risks, such as from brisk property lending growth, and rapidly rising corporate leverage and household debt in the Philippines.

Rating sensitivities for UnionBank are no longer relevant given the ratings have been withdrawn.

KEY RATING DRIVERS AND RATING SENSITIVITIES - Support Ratings (SRs) and Support Rating Floors (SRFs)

The SRs and SRFs of the four Philippine banks are the same at '3' and 'BB-', respectively, reflecting Fitch's view of a moderate probability of extraordinary state support available to them, if needed. The banks each have a 3%-5% market share of domestic banking assets, and hence are of moderate systemic importance to the country relative to their larger peers.

A change in the government's ability to provide extraordinary support would affect the SRs and SRFs. This could stem from a change in the sovereign ratings. However this likelihood is low in the near term as the Long-Term Foreign-Currency IDR for the Philippines was recently affirmed at 'BBB-' with a Stable Outlook.

The SRs and SRFs will also be impacted by any change in the government's willingness to extend timely support. One development that could lead to this adverse outcome, for instance, is global initiatives to reduce implicit state support available to banks, and Fitch views this to be a long-term risk for the Philippines.

Rating sensitivities for UnionBank are no longer relevant given the ratings have been withdrawn.

KEY RATING DRIVERS AND RATING SENSITIVITIES - Debt Ratings

RCBC's senior notes' ratings of 'BB' are in line with its IDR. This is because the notes constitute direct, unsubordinated and senior unsecured obligations of the bank, and rank equally with all its other unsecured and unsubordinated obligations.

RCBC's Basel II perpetual hybrid notes is rated 'B', which is three notches down from the bank's 'bb' VR, reflecting the presence of both subordination and going-concern loss-absorption mechanisms.

A change in RCBC's IDR and VR will affect the ratings on its senior notes and perpetual hybrid notes, respectively.

FULL LIST OF RATING ACTIONS

China Bank

- Long-Term Foreign- and Local-Currency IDRs affirmed at 'BB'; Outlook Stable

- National Long-Term Rating affirmed at 'AA-(phl)'; Outlook Stable

- Viability Rating affirmed at 'bb'

- Support Rating affirmed at '3'

- Support Rating Floor affirmed at 'BB-'

Security Bank

- Long-Term Foreign- and Local-Currency IDRs affirmed at 'BB'; Outlook Stable

- Short-Term Foreign-Currency IDR affirmed at 'B'

- National Long-Term Rating affirmed at 'AA-(phl)'; Outlook Stable

- Viability Rating affirmed at 'bb'

- Support Rating affirmed at '3'

- Support Rating Floor affirmed at 'BB-'

RCBC

- Long-Term Foreign- and Local-Currency IDRs affirmed at 'BB'; Outlook Stable

- Viability Rating affirmed at 'bb'

- Support Rating affirmed at '3'

- Support Rating Floor affirmed at 'BB-'

- Ratings on senior notes affirmed at 'BB'

- Ratings on Basel II perpetual callable subordinated hybrid notes affirmed at 'B'

UnionBank

- Long-Term Foreign- and Local-Currency IDRs affirmed at 'BB-' and withdrawn; Outlook Positive

- National Long-Term Rating affirmed at 'A+(phl)' and withdrawn; Outlook Positive

- Viability Rating affirmed at 'bb-' and withdrawn

- Support Rating affirmed at '3' and withdrawn

- Support Rating Floor affirmed at 'BB-' and withdrawn

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