October 17, 2017 / 4:02 AM / 8 months ago

Fitch: Philippine Landbank-Postbank Deal Unlikely to Hurt Rating

(The following statement was released by the rating agency) SINGAPORE, October 17 (Fitch) Land Bank of the Philippines' (Landbank; BB+/Positive) acquisition of Philippine Postal Savings Bank Inc (Postbank) is not expected to have material impact on Landbank's overall credit profile, says Fitch Ratings. If successful, the deal between the two state-owned banks should expand Landbank's role in supporting government policy beyond its existing mandate of promoting the agricultural sector and countryside development. A presidential executive order signed late last month set in motion acquisition plans that have been in discussion for much of the past year. Postbank will become a subsidiary of Landbank under the proposal, with a focus on offering financial services for overseas Filipinos and their family members in the Philippines. The transaction is still subject to the approval of various government bodies, including the Philippine central bank. Fitch expects the purchase to have minimal impact on Landbank's financial profile, given the target bank's limited scale. Postbank's PHP12 billion asset base at end-2016 was less than 1% of Landbank's, the fourth-largest bank in the Philippines by assets. We note that Postbank's asset quality is poor, with significant nonperforming loans (NPL) of around 36% of gross loans at end-2016. Nevertheless, this only translates into an increase of less than 0.5 percentage points in the NPL ratio of the combined entity. We also expect any restructuring, investment and additional operating costs arising from the acquired entity - and its new strategy - to be manageable for Landbank. The transaction will be conducted at zero cost, but the executive order contained a directive for Landbank to infuse additional capital into the acquired entity. There has been no official confirmation in public of the amount of capital needed, but Fitch calculates that a figure of PHP2 billion-3 billion, as mentioned in some press reports, should not diminish Landbank's regulatory capital ratios significantly. This amount is equivalent to 0.3%-0.5% of Landbank's end-2016 risk-weighted assets, and is modest relative to its entity-level regulatory CET1 ratio of around 11.9% at end-June 2017. A key function for the newly transformed bank will be to support the inward remittances of overseas Filipinos, which continue to be a major driver of the Philippine economy. At present, Landbank handles about 5% of the remittance market, compared with market leader BDO Unibank, Inc.'s (BDO; BBB-/Stable) market share of about 40%, according to BDO's annual report. The market for remittance services is a competitive one, but Landbank, through the acquired unit, could capture a greater share of the segment by establishing more convenient locations overseas and in the Philippines, providing better quality services, or offering more competitive pricing. The acquisition could also help diversify Landbank's product and deposit base. Key offerings such as deposit accounts, housing and business loans and investment products to overseas Filipinos and their families could augment the bank's retail loan and deposit franchise, though we expect any diversification effects to be limited in the near term relative to Landbank's overall balance sheet. Contact: Elaine Koh Director +65 6796 7239 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Tamma Febrian Associate Director +65 6796 7237 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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