Fitch: Merger with UCPB to hurt Landbank’s finances in the short term

Logos of Landbank and UCPB

Global credit watchdog Fitch Ratings sees the mandated takeover of United Coconut Planters Bank (UCPB) gnawing on the profitability of Land Bank of the Philippines, the surviving entity after both banks’ merger, but benefits may be unlocked over the long run.

In a research note issued on July 1, the London-based think tank said the Malacañang-directed Landbank-UCPB merger could weigh down Landbank’s standalone credit profile, although it could reinforce the government’s propensity to step forward and financially support the bank.

President Duterte signed on June 25 an executive order to merge the two banks. Landbank will acquire the special preferred shares held by the Philippine Deposit Insurance Corp. (PDIC) equivalent to 88.91 percent of voting shares in UCPB, at the total par value of P12 billion.

Strategic importance

Landbank will issue a negotiable debt instrument to PDIC and take over all the assets and liabilities of UCPB, which is still under a government-backed rehabilitation program.

Fitch said these state directives reinforced Landbank’s strategic importance in executing the government’s policy agenda, “especially when transactions are undertaken on terms that might not have occurred if they were based on purely commercial considerations.”

This was not the first time that Landbank had been called upon to carry out a state-arranged merger or acquisition, Fitch said. Landbank has, in turn, obtained capital support from the state, such as the P27.5-billion capital infusion in February 2021, to ramp up financing to vulnerable borrowers affected by the pandemic.

The merger is seen to increase Landbank’s market share by about 1.7 percentage points to make it the second-largest bank in the Philippines by assets, potentially improving its goal to serve the agricultural community.

“However, risks from the merger could consume considerable managerial bandwidth and incur significant integration expenses. Any merger benefit will accrue only over the long term, but pressure on [Landbank’s] profitability would be immediate,” Fitch said.

“This is especially in light of UCPB’s low loan-loss coverage of around 20 percent, which portends sharp increases in credit costs, on top of the increase we were already expecting from [Landbank’s] own portfolio,” it added. INQ