Fitch upgrades BDO’s credit rating; other banks ‘stable’

Debt watcher Fitch Ratings has upgraded its credit rating on Henry Sy-led BDO Unibank Inc. while maintaining those for four other banks amid a stable domestic banking industry.

Fitch, however, sees the merger of state-run Development Bank of the Philippines (DBP) and Land Bank of the Philippines (Landbank) to be unlikely in the near term given a change in administration by midyear.

In a statement, Fitch said it raised to “BBB-” with a stable outlook from “BB+” previously its long-term issuer default rating for BDO, the country’s biggest bank in terms of assets.

“BDO’s nonperforming loan ratio continued to improve, to 1.2 percent of gross loans at end-2015 [from] end-2014’s 1.5 percent, which we believe is close to its cyclical low. Against this backdrop, Fitch assesses that BDO’s capitalization still provides a satisfactory buffer,” the debt watcher said.

However, Fitch noted that the ratios concerning BDO’s capital buffer, such as the common equity Tier 1 (CET1), fell last year. The CET1 ratio dropped to 11.4 percent from 12.2 percent in 2014.

“The ratios are the lowest in the peer group and Fitch expects management action to lift the bank’s capital buffers in the near to medium term,” it said.

As for George Ty-led Metropolitan Bank and Trust Co. and Ayala-led Bank of the Philippine Islands (BPI)—the second and third largest banks in the country, respectively— Fitch affirmed their ratings at

“BBB-,” both with stable outlooks.

The ratings of DBP and Landbank, meanwhile, were affirmed with a positive outlook, reflecting the Philippines’ sovereign rating of “BBB-“ or minimum investment grade.

“Fitch believes the sovereign would have a high propensity to provide extraordinary support to the two banks in times of need, in light of their full government ownership and quasi-policy roles as set out in their respective forming charters,” it said.

Last February, President Aquino issued Executive Order (EO) No. 198, which will facilitate the merger of DBP and Landbank, with the latter as surviving entity.

The merger will result in a bank with combined assets of about P1.6 trillion, based on end-September 2015 Bangko Sentral ng Pilipinas (BSP) data, which will make it the country’s second biggest bank in terms of assets and seen challenging local tycoons’ dominance in the banking sector.

The Governance Commission on Government-Owned and -Controlled Corporations (GCG), however, has yet to file a formal application with regulators, including the BSP, for the merger.

“The documentary requirements are still being prepared so we can’t say yet when [the application will be filed] but we’re still working within the one-year timeline mandated in EO 198,” the GCG said last week.

For Fitch, “more tangible progress on the merger could lead [the debt watcher] to reassess the sovereign’s propensity to provide support, although we see significant uncertainty around merger completion in light of presidential elections next month.”

In general, Fitch’s outlook on the five banks “take into account the steady improvement in the Philippine operating environment over the last several years.”

“Philippine gross domestic product growth has been one of the strongest in the Asia-Pacific region over the past five years, and the economy has proven relatively resilient amid greater global uncertainty recently. We expect the market to be more insulated from weaker China growth compared to many of its neighbors in the region,” Fitch noted.

“We believe that developments in domestic banking regulation over the years have also strengthened the overall prudential framework. This should help to protect the system against vulnerabilities, which, in the near term, could stem from a potential slowdown in property market activity,” it added.

But the debt watcher pointed out there remained “long-standing” structural weaknesses in the Philippine banking system, such as family control and conglomerate ownership of the major banks that give rise to related party lending, relatively underdeveloped financial markets, and unavailability of real estate market statistics.