Fitch Affirms Four Philippine Banks
16 May 2013 6:28 AM (EDT)
Fitch Ratings-Singapore-16 May 2013: Fitch Ratings has affirmed the ratings of four Philippine banks – Bank of the Philippine Islands (BPI), BDO Unibank, Inc. (BDO), Development Bank of the Philippines (DBP) and Land Bank of the Philippines (LBP). The Rating Outlooks are Stable. A full list of rating actions is provided at the end of this commentary.
Key Rating Drivers
The banks’ Long-Term Issuer Default Ratings (IDRs) and National Long-Term Ratings are driven by their Viability Ratings (VRs). The credit strengths of these four banks are their stable deposit bases, satisfactory liquidity, high core capitalisation and rising loan loss reserves. These are counterbalanced by varying degrees of structural issues faced by all four banks, including their concentrated loan books, foreclosed properties with modest reserves and developing corporate governance standards, alongside the presence of conglomerates as controlling shareholders.
BPI’s ratings are supported by its established domestic franchise, sound and steady financial metrics and prudent management record through economic cycles. The ratings of DBP and LBP reflect their satisfactory financial profiles, albeit with asset-related and state-influence risks, including policy-led loans and government-directed exposures. BDO’s ratings reflect its growing domestic presence and funding strength, high capitalisation and reserves, improving but still modest profitability and reasonable asset quality.
The Stable Outlooks reflect Fitch’s expectation that these banks will largely maintain steady risk profiles over the near- to medium-term, underpinned by a benign domestic economy, manageable corporate leverage and low interest rates. Lending activities and fee-based income growth are backed by domestic demand, with rising overseas remittances and business process outsourcing countering the fragile global economy. This backdrop, alongside strong foreign inflows, is likely to increase brisk expansion of credit activities (especially in property lending) and asset prices in the Philippines. However, based on Fitch’s own stress testing the large banks are in a strong position to weather reasonable deterioration in the operating environment, due to their funding and loss-absorption capacity. Furthermore, Fitch expects the domestic regulator to act promptly to prevent excessive risks building up within the system.
Rating Sensitivities – VRs, IDRs and National Ratings
The VRs could come under pressure should the banks’ loss-absorption capacities weaken in the face of event risks (such as sizeable takeovers), excessive growth or a material increase in risk appetite, including increasing concentration of exposures. However, because the ‘BB+’ IDRs of BDO, DBP and LBP 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.
Rating upside for the large Philippine banks may stem from sustainable improvements in the broader operating and regulatory environment, including the abovementioned structural features. Upgrade prospects are low in the near term for BPI, whose ratings are presently the highest among the Philippine banks rated by Fitch, and also high compared with major banks in similarly rated countries. The same can be said for DBP and LBP, whose ratings are already high – among major domestic banks – and for quasi-policy banks. Upward rating action may arise for BDO from a steadier credit profile, with its profitability and loan growth moving closer to the levels of higher-rated Philippine banks while maintaining its capital and funding strengths, reasonable asset quality record and reserve levels. Further build-up of risks (such as from that of strong property sector growth) may also limit the prospect of upside rating potential, all else being equal.
Rating Sensitivities – Support Ratings (SRs) and 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. Fitch believes that BPI and BDO are systemically important to the country on account of their sizeable domestic deposit bases, while the same is true for DBP and LBP owing to their state ownership, policy mandates and status as government depository banks.
A change in the government’s ability to provide extraordinary support would affect the SRs and SRFs. This could occur with a change in the sovereign ratings, although this seems highly unlikely in the near term considering the recent upgrade of, and Stable Outlook on, the Philippines’ sovereign ratings (see related rating action commentary dated 27 March 2013 at www.fitchratings.com).
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 an adverse outcome, for instance, is global initiatives to reduce the implicit state support available to banks, although Fitch views this to be a long-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.
The subordination status and absence of going-concern loss-absorption features are reasons behind BPI’s local currency subordinated notes being rated one notch below its VR-driven National Long-Term Rating. DBP’s perpetual hybrid notes are rated three notches below its VR, reflecting the presence of both subordination and going-concern loss-absorption mechanisms. The ratings of these securities are ultimately sensitive to a change in the VRs.
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+’
- Ratings on subordinated notes affirmed at ‘AA+(phl)’
BDO
- 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+’
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 perpetual callable subordinated hybrid notes affirmed at ‘B+’
LBP
- 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+’
Contacts:
Primary Analyst
Alfred Chan
Director
+65 6796 7220
Fitch Ratings Singapore PTE Ltd
6 Temasek Boulevard
#35-05 Suntec Tower Four
Singapore 038986
Secondary Analyst
Mikho Irawady
Associate Director
+65 6796 7230
Committee Chairperson
Jonathan Cornish
Managing Director
+852 2263 9901
Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com.
Additional information is available at www.fitchratings.com.
Applicable criteria, “Global Financial Institutions Rating Criteria”, dated 15 August 2012, “Assessing and Rating Bank Subordinated and Hybrid Securities”, dated 5 December 2012, and “National Ratings Criteria”, dated 19 January 2011, are available at www.fitchratings.com.
Applicable Criteria and Related Research
Global Financial Institutions Rating Criteria
Assessing and Rating Bank Subordinated and Hybrid Securities
National Ratings Criteria
Additional Disclosure
Solicitation Status
