4 PH banks-BDO,BPI,Landbank,Metrobank-bag investment grade from Moody’s after sovereign upgrade

Moody’s upgrades four Philippine banks to investment grade; outlook positive

Global Credit Research – 03 Oct 2013
Singapore, October 03, 2013 — Moody’s Investors Service has upgraded the deposit ratings of four Philippine banks to Baa3/Prime-3 from Ba1/Not Prime, which means they are now investment grade, following the rating upgrade of the Government of the Philippines’ debt ratings to Baa3 from Ba1.

The rating action concludes the review for upgrade announced on 25 July 2013.

At the same time, Moody’s also raised the banks’ baseline credit assessment (BCA) of three of these banks to reflect improvements in their standalone credit profiles, including two that reached investment grade on a standalone basis.

The banks whose deposit ratings are affected are BDO Unibank, Inc. (BDO), Bank of the Philippine Islands (BPI), Land Bank of the Philippines (LBP) and Metropolitan Bank & Trust Company (MBT).

The credit strength of the government is an important input in our assessment of the government’s capacity to provide support in times of stress, and we believe that due to their systemic importance these four banks are more likely to fully benefit from the higher rating of the government. Also, the rating outlook on these banks’ deposit ratings is positive, in line with the positive outlook of the sovereign bond rating.

More specifically, for BDO, the bank’s senior unsecured debt rating was upgraded to Baa3 from Ba1 along with its deposit rating; as well as its bank financial strength rating (BFSR) to D+ from D, which maps to a BCA of ba1.

In addition, Moody’s raised BPI’s and MBT’s baseline credit assessment (BCA) to baa3 from ba1.

As a result, the following ratings of MBT which are notched off the bank’s adjusted BCA are also upgraded: local currency subordinated debt rating upgraded to Ba1 from Ba2; foreign currency subordinated debt rating upgraded to Ba2 (hyb) from Ba3 (hyb); foreign currency preferred stock rating upgraded to Ba3 (hyb) from B1 (hyb).

A full list of the affected ratings can be found at the bottom of this press release.

RATINGS RATIONALE

The rating actions are in line with the upgrade of the Philippines sovereign’s bond ratings to Baa3 from Ba1. The sovereign rating action on the Philippines is discussed in greater detail in Moody’s press release of 3 October 2013.

There are two main drivers of the rating actions.

First, some of the positive drivers of the sovereign rating action are reflected in an improved operating environment for the Philippine banking system, particularly its major banks. They include the robust growth performance of the Philippine economy despite slowing global external demand; the strong domestic consumption that has been supported by steady remittance inflows, and in turn, contributed to the banks’ healthy credit growth and profitability; well-anchored inflation and no strong signs of overheating in asset markets, which underpin the banking system’s improved asset quality. All of these positive dynamics of the operating environment have resulted in the upward revisions of the BCAs of BPI, MBT and BDO.

Second, the improved creditworthiness of the Philippine government also results in its stronger capacity to support the banks. This has resulted in the upgrades to Baa3 of BDO’s and LBP’s deposit ratings. Moreover, the outlooks on all four banks’ deposit ratings are positive, reflecting Moody’s expectation that further upward pressure on the Philippine Government’s rating would likely result in upward movements on these four bank ratings given Moody’s support assumptions.

BCA OF BPI & MBT REVISED TO baa3

The revision of BPI’s and MBT’s BCA to baa3 from ba1 considers the banks’ track record of above-industry average risk-adjusted profitability and their dominant presence in the domestic corporate and consumer segments. It also takes into account the banks’ consistently robust capital and liquidity profiles, which in our view, reflects the banks’ discipline and prudence in business growth. Overall, Moody’s view the credit profiles of BPI and MBT to be among the most defensive and best positioned to withstand a cyclical downturn among Moody’s rated banks in the Philippines. Overall, the two banks have credit metrics that compare well with other baa3 banks in the region.

BCA OF BDO REVISED TO ba1

The revision of BDO’s BFSR/BCA to D+/ba1 from D/ba2 reflects the bank’s improving risk-adjusted profitability and asset quality, and importantly, its enhanced loss-absorption buffers driven by the higher levels of capitalization and loan loss provisioning. The BCA also reflects the bank’s leading market shares in the Philippines, and its weaker metrics particularly higher credit concentration in large borrowers and lower cost efficiency relative to peer banks.

DEPOSIT RATINGS OF BPI, MBT, BDO & LBP UPGRADED TO Baa3

The Baa3 deposit ratings of BPI and MBT takes into account Moody’s expectation of a very high probability of systemic support from the Philippine government, but the ratings do not benefit from any support uplift from the banks’ baa3 BCA. The ratings are positioned at the same level as the sovereign rating of the Philippines of Baa3, to reflect the high correlation of banking and sovereign credit risk in the Philippines, attributed to (i) the banks’ domestically-focused businesses that do not benefit from any meaningful cross-border diversification, and (ii) their high level of direct government debt exposure.

BDO’s Baa3 deposit rating and senior unsecured debt rating are underpinned by its ba1 BCA, and one notch of uplift resulting from Moody’s expectation of very high systemic support for the banks in times of need. Moody’s view of systemic support for the bank stem from the bank’s entrenched market position, reflected primarily by its leading market share of system loans and deposits.

LBP’s Baa3 deposit rating benefits from three notches of uplift from the bank’s ba3 BCA. Moody’s assess the probability of systemic support for LBP to be very high, due to its sizable deposit and loan market shares domestically, its 100% ownership by the Philippine government, and importantly, its unique public policy role of financing the country’s priority sectors which include small farmers and fishermen, agri-business, and micro-, small- and medium-sized enterprises.

WHAT COULD CHANGE THE RATING UP/DOWN

BPI and MBT

Given the positive outlook on the banks’ deposit ratings, the upgrade of the sovereign rating would likely lead to an upgrade of the banks’ deposit ratings, assuming the banks’ credit metrics remain robust.

It is unlikely for BPI and MBT to be rated above the sovereign as we view the correlation between the banks and the sovereign to be high.

In the event that the sovereign is upgraded, the following factors could result in an upgrade of the banks’ BCA: [1] reduction of its non-performing assets (non-performing loans (NPL) and foreclosed assets) to below 15% of equity and loan loss reserves; [2] continued maintenance of net income at more than 2.5% of average risk-weighted assets; and/or [3] high level of loss absorption capacity reflected by Tier 1 ratio of above 12%.

MBT’s subordinated debt ratings are linked to its BCA, and could be upgraded when the BCA is upgraded.

The banks’ BCAs could be downgraded or the positive outlook on the banks’ deposit ratings could be revised to stable if: [1] aggressive organic expansion or acquisitions result in a significant increase in the banks’ risk profile; and/or [2] the operating environment weakens significantly or underwriting practices become loose, resulting in resulting in the non-performing assets increasing to more than 20% of equity and loan loss reserves; and/or [3] there is a material decline in the banks’ capital buffer, such that Tier 1 ratio falls below 10%.

BDO

The following factors could result in an upward revision of BDO’s BCA: [1] reduction of its non-performing assets to below 20% of equity and loan loss reserves while continuing to rein in credit costs; [2] evidence that it can continue to rein in credit costs and improve its risk-adjusted profitability, reflected by net income of above 2.5% of average risk-weighted assets; and/or [3] high level of loss absorption capacity reflected by its continuing to maintain its Tier 1 ratio above 12%.

The bank’s ratings could be downgraded or the positive outlook on the bank’s deposit and debt ratings could be revised to stable if: [1] aggressive organic expansion or acquisitions result in a significant increase in its risk profile; and/or [2] the operating environment weakens significantly or underwriting practices become loose, resulting in the non-performing assets increasing to more than 25% of equity and loan loss reserves ; and/or [3] a material decline in its capital buffer, such that Tier 1 ratio falls below 10%.

LBP

Given the positive outlook on the bank’s deposit ratings, the upgrade of the sovereign rating would likely lead to an upgrade of the bank’s deposit ratings, assuming the bank’s credit metrics remain robust.

It is unlikely for LBP to be rated above the sovereign as we view the correlation between the banks and the sovereign to be high.

The following factors could result in upward pressure on LBP’s BCA: [1] significant diversification of its funding sources that reduces its reliance on government-related funding and exposure to policy risks; and/or [2] improvement in the timeliness and transparency of financial reporting; and/or [3] significant reductions in credit risk concentrations in individual borrower and industry groups.

The bank’s BCA could be downgraded or the positive outlook on the bank’s deposit ratings could be revised to stable if [1] the operating environment weakens significantly or underwriting practices become loose, resulting in the non-performing loan (NPL) ratio exceeding 5%; and/or [2] a rise in NPLs without a corresponding increase in loan loss provisions, resulting in the NPL coverage falling below 80%; and/or [3] its capital buffer declines materially, such that Tier 1 capital ratio falls below 10%; and/or [4] its funding profile showing signs of weakening for prolonged periods beyond two quarters, which could be reflected by a loans-to-deposits ratio of above 70%.

The ratings of the four banks are as listed below.

BDO Unibank, Inc

Bank Financial Strength Rating (BFSR) of D+, which maps to ba1 baseline credit assessment (BCA)

Local and foreign currency deposits rated Baa3/Prime-3

Foreign currency senior unsecured debt rated Baa3

The outlook of its long term deposit rating and foreign currency senior unsecured debt rating is revised to positive from stable. All other ratings have a stable outlook.

Bank of the Philippine Islands

BFSR of D+, which maps to a baa3 BCA

Local and foreign currency deposits rated Baa3/Prime-3

The outlook of its long term deposit ratings is revised to positive from stable. All other ratings have a stable outlook.

Metropolitan Bank & Trust Company

BFSR of D+, which maps to a baa3 BCA

Local and foreign currency deposits rated Baa3/Prime-3

Local currency subordinated debt rated Ba1

Foreign currency subordinated debt rated Ba2(hyb)

Foreign currency preferred stock rated Ba3(hyb)

The outlook of its long term deposit ratings is revised to positive from stable. All other ratings have a stable outlook.

Land Bank of the Philippines

BFSR of D-, which maps to a ba3 BCA

Local and foreign currency deposits rated Baa3/Prime-3

The outlook of its long term deposit ratings is revised to positive from stable. All other ratings have a stable outlook.

The principal methodology used in these ratings was Global Banks published in May 2013. Please see the Credit Policy page on http://www.moodys.com for a copy of this methodology.

All four banks are headquartered in Manila and reported total assets as follows.

BDO Unibank, Inc: PHP1.3 trillion ($31 billion) as at 30 June 2013

Bank of the Philippine Islands: PHP1.0 trillion ($24 billion) as at 30 June 2013

Metropolitan Bank & Trust Company: PHP1.2 trillion ($28 billion) as at 30 June 2013

Land Bank of the Philippines: PHP737 billion ($18 billion) as at 31 March 2013

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