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RPT-Fitch Affirms 3 Philippine Banks, Upgrades Metrobank; BDO on Positive Outlook
April 30, 2014 / 10:58 AM / in 3 years

RPT-Fitch Affirms 3 Philippine Banks, Upgrades Metrobank; BDO on Positive Outlook

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April 30 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed the ratings on three Philippine banks - 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 Company’s (Metrobank) Long-Term Issuer Default Rating (IDR) to ‘BBB-’ from ‘BB+’ and its Viability Rating (VR) to ‘bbb-’ from ‘bb+'. The Outlooks for all four banks are Stable.

At the same time, the agency has revised BDO Unibank, Inc.’s (BDO) Outlook to Positive from Stable and affirmed its IDR at ‘BB+’ and VR at ‘bb+'. A full list of rating actions is provided at the end of this commentary.

KEY RATING DRIVERS - VRs, IDRs and National Ratings

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 capitalisation, reasonable loan loss reserves and satisfactory earnings. These ratings 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.

BPI’s ratings are supported by its strong domestic franchise, solid financial performance, strong capitalisation and track record of prudent management through economic cycles. The ratings of DBP and Landbank 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. 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 have been aided by a favourable operating environment and gains on asset sales. Non-core divestments have reduced Metrobank’s holdings in its associates to 5% of the bank’s Fitch core capital at end-2013 from 15% 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. 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. Nonetheless, Fitch’s internal stress tests show 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 capitalisation strengths contribute to the revision of BDO’s Outlook to Positive.

RATING SENSITIVITIES - VRs, IDRs and National Ratings

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. However, because the ‘BB+’ IDRs of BDO, DBP and Landbank are at the same level as their Support Rating Floors (SRFs), the IDRs will not be affected by a downgrade of the banks’ VRs, unless considerations underpinning their ‘BB+’ SRFs also weaken.

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. 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. 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, withprudent 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.

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

The SRs and SRFs of the five 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. Fitch believes that BPI, BDO and Metrobank are systemically important in the Philippines on account of their sizeable domestic deposit bases, while the same is true for DBP and Landbank due to their 100% government ownership and quasi-policy mandated roles.

A change in the government’s ability to provide extraordinary support, which could be indicated by a change in the sovereign ratings, would affect the SRs and SRFs. 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 Stable Outlook.

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

RATING SENSITIVITIES - Debt Ratings

The senior notes of BDO and DBP are rated the same as their Long-Term IDRs. This is because the notes constitute direct, unsubordinated and senior unsecured obligations of the banks, and rank equally with all their other unsecured and unsubordinated obligations. Any change in the IDRs would affect these issue ratings.

DBP’s legacy perpetual hybrid notes are rated three notches below its VR, reflecting the presence of both subordination and going-concern loss-absorption mechanisms. The rating of these securities is ultimately sensitive to a change in its VR.

The list of rating actions is as follows:

BPI

Long-Term Foreign-Currency IDR affirmed at ‘BBB-'; Outlook Stable

Long-Term Local-Currency IDR affirmed at ‘BBB-'; Outlook Stable

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

Viability Rating affirmed at ‘bbb-’

Support Rating affirmed at ‘3’

Support Rating Floor affirmed at ‘BB+’

BDO

Long-Term Foreign-Currency IDR affirmed at ‘BB+'; Outlook Revised to Positive from Stable

Long-Term Local-Currency IDR affirmed at ‘BB+'; Outlook Revised to Positive from Stable

National Long-Term Rating upgraded to ‘AA+(phl)’ from ‘AA’; 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+’

Metrobank

Long-Term Foreign-Currency IDR upgraded to ‘BBB-’ from ‘BB+'; Outlook Stable

Long-Term Local-Currency IDR upgraded to ‘BBB-’ from ‘BB+'; Outlook Stable

Viability Rating upgraded to ‘bbb-’ from ‘bb+’

Support Rating affirmed at ‘3’

Support Rating Floor affirmed at ‘BB+’

DBP

Long-Term Foreign-Currency IDR affirmed at ‘BB+'; Outlook Stable

Long-Term Local-Currency IDR 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+’

Ratings on senior notes affirmed at ‘BB+’

Ratings on legacy perpetual callable subordinated hybrid notes affirmed at ‘B+’

Landbank

Long-Term Foreign-Currency IDR affirmed at ‘BB+'; Outlook Stable

Long-Term Local-Currency IDR 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+'

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