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Fitch Affirms Six Privately Owned Philippine Banks
February 8, 2017 / 9:20 AM / 10 months ago

Fitch Affirms Six Privately Owned Philippine Banks

(The following statement was released by the rating agency) SINGAPORE, February 08 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) on six privately owned Philippine banks. The banks are: - Bank of the Philippine Islands (BPI), - BDO Unibank, Inc. (BDO), - Metropolitan Bank & Trust Company (Metrobank), - China Banking Corporation (CBC), - Philippine National Bank (PNB), and - Rizal Commercial Banking Corp. (RCBC). The ratings are all on Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS VIABILITY RATINGS, IDRS AND NATIONAL RATINGS BPI, BDO and Metrobank are the three largest banks in the Philippines by assets. Their Viability Ratings (VRs) and IDRs - and the National Ratings of BPI and BDO - reflect their strong domestic franchises, diverse revenue streams and adequate risk-management frameworks, which help to underpin their steady asset quality, above-average profitability and healthy balance sheet buffers. BPI's ratings also give credit for its historically prudent risk appetite, and superior profitability, and funding and liquidity metrics. CBC, PNB and RCBC are among the 10 largest banks in the Philippines with more moderate market shares of around 3%-6% by loans, assets and deposits. These banks have generally shown a greater appetite for growth in recent years as they seek to gain scale and share, but Fitch expects that they will display broadly stable asset quality and profitability backed by acceptable risk controls as they grow. Fitch expects the Philippines' GDP growth to remain robust in the next one to two years, backed by resilient domestic consumption and investment activity. Headwinds for overseas remittances and business-process outsourcing revenues - two important drivers of domestic consumption - may rise, but we still expect both inflow streams to remain broadly resilient for now in the absence of more pronounced and immediate threats. The current government's plans to accelerate infrastructure spending should provide an added boost to domestic activity, and the authorities retain adequate policy flexibility to offset a weakening in economic conditions or greater financial market volatility. We expect credit growth in the mid- to high-teens against this backdrop. Philippine banks' asset quality has generally improved amid the favourable economic backdrop over the last several years. Fitch-calculated gross NPL ratios for the banks in this peer group have fallen to 1.0%-2.5% at end-2015 from 2.9%-8.1% at end-2010, and the ratios remained broadly stable in 2016. NPA ratios and NPL coverage ratios have similarly improved in tandem. One exception is CBC, which has experienced some asset-quality weakness over the last 2-3 years due to the acquisition of a weaker bank and various operational issues. Its reported NPL ratio rose to a high of 2.6% at end-June 2016 (end-2013: 2.0%), but eased to 2.4% at end-September as it worked through its problem loans. CBC's reported NPL coverage ratio deteriorated to around 87% at end-September 2016 from 147% at end-2013, but the ratio has been improving in recent quarters. We continue to monitor these trends and also take into account CBC's historically sound asset-quality performance and conservative culture in our assessment. The profitability of the three largest banks is generally better than that of the mid-tier banks. We attribute this to their greater scale and more diverse business models - they have broader recurring non-interest income streams. In contrast, trading gains have comprised a larger share of the revenues of PNB and RCBC on average over the past few years. This share has declined more recently relative to the highs in 2012, and we expect both banks to continue to emphasise recurring revenue generation in the medium term. PNB's profitability is also hampered by its larger stock of legacy unproductive assets and higher cost base as it has yet to capture the full synergies from its acquisition of Allied Bank in 2013. The bank plans to roll out its integrated core banking platform in 2017, which could help enhance its cost efficiency - and potentially its profitability - in the medium term. Capitalisation, funding and liquidity remain healthy for the banks in this peer group. Their Fitch Core Capital and regulatory CET1 ratios continue to indicate adequate loss-absorption capacity. In particular, BDO's buffers have been strengthened after its PHP60bn stock rights offer in January - which we estimate would have increased its capitalisation buffers by about 3.5% of risk-weighted assets on a pro-forma basis. Internal capital generation is often insufficient to support the robust growth plans of many of the banks, and they periodically raise fresh capital to maintain adequate buffers above regulatory requirements - which are rising for domestic systemically important banks in the Philippines. We expect CET1 hurdles for banks in this peer group to rise to 10%-11% by January 2019 from 8.5% in 2016. To this end, the banks generally benefit from their ownership by financially strong family/conglomerate shareholders, which have historically provided ordinary capital support when needed - although such links also raise concentration and contagion risks within the financial system, which require close monitoring by the authorities. The banks' healthy funding and liquidity positions stem from the liquid domestic financial system (as indicated by the end-2016 system-wide loan/deposit ratio of around 72%, based on the central bank's measure), and their mostly deposit-funded balance sheets. The banks have raised more low-cost current and savings account deposits in recent years, which helped to lower their overall funding costs. We expect liquidity conditions to tighten gradually, driven by external market factors as well as continued brisk system credit growth. However, system liquidity should remain adequate given the significant pool of funds currently held with the central bank that can be released to meet demand when required. The Stable Outlooks reflect Fitch's view that the banks' credit profiles are likely to remain broadly steady over the next one to two years. SUPPORT RATINGS AND SUPPORT RATING FLOORS The Support Ratings (SRs) and Support Rating Floors (SRFs) are based on Fitch's expectation of a moderate likelihood of extraordinary state support for the banks, if needed. BPI, BDO and Metrobank - as the three largest banks in the Philippines - are likely to be of high significance to the domestic financial system, suggesting a high sovereign propensity to provide extraordinary support to these three banks, if needed. We believe the mid-tier banks - CBC, PNB and RCBC - are also systemically important, albeit somewhat less so than their larger peers. Our assessment of sovereign support for the privately owned banks in this peer group also take into account the sovereign's ability to provide such support in times of stress, based on its financial position as incorporated in its 'BBB-' IDRs, currently on Positive Outlook. MEDIUM-TERM NOTE PROGRAMME AND SENIOR DEBT The ratings on RCBC's medium-term note programme and the senior notes of BDO and RCBC are at the same level as their respective Long-Term IDRs. This is because the notes constitute direct, unsubordinated and unsecured obligations of the bank, and rank equally with all their other unsecured and unsubordinated obligations. RATING SENSITIVITIES VIABILITY RATINGS, IDRS AND NATIONAL RATINGS Positive rating action could result from a continued improvement in the overall operating environment, including sustained economic growth, rising overall incomes and further strengthening in regulatory, governance and risk frameworks. This is assuming that such trends translate to healthier asset quality and earnings performance, and that the banks maintain their current capitalisation, funding and liquidity strengths. Negative action may occur if rapid asset growth leads to material strains on the banks' risk and operational controls, or their financial profiles. A further rise in loan concentration and more prominent signs of a potential credit bubble would also place pressure on the ratings. SUPPORT RATINGS AND SUPPORT RATING FLOORS The Support Ratings (SRs) and Support Rating Floors (SRFs) are sensitive to any perceived changes in the sovereign's propensity or ability to provide extraordinary support in times of need. A sustainable improvement in the sovereigns' finances - which may be indicated by a sovereign rating upgrade - could lead to positive action on the SRs and/or SRFs. MEDIUM-TERM NOTE PROGRAMME AND SENIOR DEBT The programme and senior note ratings would move in tandem with their individual banks' Long-Term IDRs. The rating actions are as follows: BPI - Long-Term Foreign- and Local-Currency IDRs affirmed at 'BBB-'; Outlooks Stable - Short-Term Foreign-Currency IDR affirmed at 'F3' - 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- and Local-Currency IDRs affirmed at 'BBB-'; Outlooks Stable - Short-Term Foreign-Currency IDR affirmed at 'F3' - National Long-Term Rating affirmed at 'AA+(phl)'; Outlook Stable - Viability Rating affirmed at 'bbb-' - Support Rating affirmed at '3' - Support Rating Floor affirmed at 'BB+' - Ratings on senior notes affirmed at 'BBB-' Metrobank - Long-Term Foreign- and Local-Currency IDRs affirmed at 'BBB-'; Outlooks Stable - Short-Term Foreign-Currency IDR affirmed at 'F3' - Viability Rating affirmed at 'bbb-' - Support Rating affirmed at '3' - Support Rating Floor affirmed at 'BB+' CBC - Long-Term Foreign- and Local-Currency IDRs affirmed at 'BB+'; Outlooks 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-' PNB - Long-Term Foreign-Currency IDR 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+'; Outlooks Stable - Viability Rating affirmed at 'bb+' - Support Rating affirmed at '3' - Support Rating Floor affirmed at 'BB-' - Ratings on medium-term note programme and senior notes affirmed at 'BB+' Contact: Primary Analyst Elaine Koh (for BPI, BDO and Metrobank) Director +65 6796 7239 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Tamma Febrian (for CBC, PNB and RCBC) Associate Director +65 6796 7237 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Tamma Febrian (for BPI, BDO and Metrobank) Associate Director +65 6796 7237 Elaine Koh (for CBC, PNB and RCBC) Director +65 6796 7239 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(phl)' for National ratings in the Philippines. Specific letter grades are not therefore internationally comparable. Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here National Scale Ratings Criteria (pub. 30 Oct 2013) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1018702 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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