Fitch Upgrades Four Philippine Mid-Sized Banks; Outlooks Stable
Fitch believes steady growth in the Philippine economy and enhancements to banking regulations over the last few years has strengthened the domestic operating environment, notwithstanding long-standing structural issues, such as concentrated loan portfolios, developing corporate governance standards and family control and conglomerate ownership of the banks. This drives Fitch's upgrade of the Operating Environment factor to 'bbb-' from 'bb+'.
We expect continued economic improvement and pro-active regulatory oversight alongside gradually-improving regulatory frameworks to benefit banks' asset quality and ultimately their credit profiles through the cycle. This is an important factor underlying today's ratings upgrades.
RCBC's medium-term note programme, as well as RCBC's and SBC's senior notes, have been upgraded in tandem.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
VRS, IDRS and NATIONAL RATINGS
The IDRs of the four Philippine banks and the National Long-Term Ratings of CBC, PNB and SBC are driven by their VRs. The upgrade of PNB's National Long-Term Rating reflects an improved credit profile relative to those of other Philippine entities.
The ratings reflect the banks' higher growth appetite amid a broadly-favourable backdrop and their smaller but still meaningful local franchises as mid-sized banks in the Philippines. They also incorporate Fitch's expectation that the banks will maintain broadly-steady asset quality, adequate capital buffers and stable funding and liquidity profiles as they grow and potentially gain market share.
The Stable Outlooks reflect Fitch's expectation that the banks' financial profiles will remain steady over the near - to medium-term. We believe continued economic growth, a relatively conservative regulatory environment and a liquid banking system - backed by a growing middle-class population and strong remittances from overseas workers - will support the banks' rating profiles.
Fitch expects the four banks to continue growing their branch footprints as they allocate more resources to consumer-centric portfolios. The banks continue to target high loan growth in the mid-teens to high-20s and may also undertake acquisitions as they build their franchises and enhance their market positions.
The four banks' asset quality should remain broadly steady, aided by a favourable macroeconomic environment and rising incomes. Asset quality improvements have been most pronounced for PNB and RCBC, whose NPL ratios fell to 2.5% and 1.8% at end-2015 from 8.1% and 7.2% at end-2010, respectively.
Fitch considers SBC's asset quality to be the strongest amongst the four banks, as it has a steady record and low NPL ratio of 0.8% at end-2015, lower large-loan concentration relative to capital, lower exposure to higher-risk consumer loans and larger investment securities portfolio mostly held in Philippine government bonds. This is balanced against Fitch's expectations that SBC's asset mix will change over the medium-term, particularly in light of accelerated growth plans following a partnership deal in 1H16 with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU; 'A'/Negative). Under the arrangement, BTMU invested PHP36.9bn in SBC in return for a 20% stake in SBC and two board seats.
SBC aims for above-industry loan growth of 25%-30%, subject to net interest margins, and has raised its branch growth targets for the next five years following the BTMU partnership. Over-ambitious growth could weaken SBC's asset quality, funding and capitalisation if poorly-managed. Fitch's upgrade of SBC is based on the expectation that the bank will maintain appropriate underwriting standards and sustain a satisfactory financial profile as it expands.
CBC's consolidated asset quality has deteriorated in the last few quarters, with its NPL ratio rising to 2.7% and loan loss provisions declining to 78% of NPLs at end-March 2016 (end-2013: 2.0% and 147%, respectively). This was only partly due to the acquisition of the weaker Planters Development Bank in 2014, as pockets of asset quality weakness emerged in the bank's existing portfolio. The upgrade of CBC's ratings are supported by Fitch's assessment that recent negative trends in the bank's asset quality have been modest on a consolidated group level, and the agency's broader expectation of more stable through-cycle asset quality for the banking sector, including for CBC. We also expect the bank to remediate its loan quality and improve its provision coverage over the next few years.
We believe the four mid-size banks would qualify as mid-tier domestic systemically important banks and incur a minimum common equity Tier 1 (CET1) ratio of 10.0% by January 2019. The CET1 ratios of CBC, PNB, RCBC and SBC (13.1%, 16.9%, 13.1% and 12.1%, respectively) at end-March 2016 comfortably met the higher incoming minimum requirement. The capital injection from BTMU increased SBC's CET1 ratio to about 20.7% at end-March 2016 on a pro-forma basis, further boosting its capital position.
Ambitions for market share gains and high risk-weighted asset growth - exceeding internal capital generation - are likely to erode existing capital ratios, but Fitch expects the banks to maintain adequate capital buffers to support growth targets and offset rapid-growth risks.
A money-laundering case involving RCBC and other Philippine and international entities in 1H16 highlighted existing gaps in domestic anti money-laundering standards. Fitch believes such issues are in line with the Philippine banks' rating levels and expects regulators to take action to deter similar incidents.
SUPPORT RATINGS AND SUPPORT RATING FLOORS
The banks' Support Ratings of 3 and Support Rating Floors of 'BB-' reflect Fitch's expectation of a moderate probability of extraordinary state support for the banks, if needed. This takes into account the Philippine sovereign's fiscal position - captured in its rating of 'BBB-/Positive', and the banks' moderate systemic importance, stemming from their 3%-6% market shares of system assets, loans and deposits. This places them within the top-10 banks in the Philippines.
MEDIUM-TERM NOTE PROGRAMME AND SENIOR DEBT
Fitch has upgraded the ratings on RCBC's medium-term note programme and RCBC's and SBC's senior notes to 'BB+' from 'BB'. The ratings are the same as the banks' IDRs because the senior notes constitute the banks' direct, unsubordinated and unsecured obligations and rank equally with all their other unsecured and unsubordinated obligations.
RATING SENSITIVITIES
VIABILITY RATINGS, IDRS AND NATIONAL RATINGS
A further upgrade of the four banks' IDRs and Viability Ratings is not probable in the near-term in light of the recent upgrade.
Fitch may downgrade the banks' ratings if their higher risk appetites result in significant asset quality deterioration and earnings volatility. The ratings would also come under pressure with increasing concentration risk, excessive growth in riskier, more volatile sectors, such as real estate, unsecured personal loans or unsecured project finance, or if their capitalisation, funding and liquidity strengths diminished, potentially as a result of rapid growth.
Continued improvements in risk frameworks, greater earnings diversity, lower concentration risk and, in some cases, strengthened corporate governance would be positive for the banks' ratings, although Fitch expects such developments to materialise only gradually over the longer-term.
CBC, RCBC and PNB are more vulnerable to negative rating action due to their weaker asset quality. In particular, CBC's rating could be downgraded if its asset quality and provisioning continues to deteriorate or if it executes poorly on its growth strategy, including on the remaining portions of its integration of Planters Development Bank.
SUPPORT RATINGS AND SUPPORT RATING FLOORS
The banks' Support Ratings and Support Rating Floors would be affected by any change in Fitch's perception of the sovereign's ability or propensity to provide extraordinary support to the banks in a timely manner. An upgrade of the sovereign IDRs could lift the banks' Support Ratings and Support Rating Floors.
Fitch does not foresee significant risk of reduced implicit state support for the banks in the near-term.
The rating actions are as follows:
CBC
- Long-Term Foreign - and Local-Currency IDRs upgraded to 'BB+' from 'BB'; Outlook Stable
- National Long-Term Rating affirmed at 'AA-(phl)'; Outlook Stable
- Viability Rating upgraded to 'bb+' from 'bb'
- Support Rating affirmed at '3'
- Support Rating Floor affirmed at 'BB-'
PNB
- Long-Term Foreign-Currency IDR upgraded to 'BB+' from 'BB'; Outlook Stable
- Short-Term Foreign-Currency IDR affirmed at 'B'
- National Long-Term Rating upgraded to 'AA-(phl)' from 'A+(phl)'; Outlook Stable
- Viability Rating upgraded to 'bb+' from 'bb'
- Support Rating affirmed at '3'
- Support Rating Floor affirmed at 'BB-'
RCBC
- Long-Term Foreign - and Local-Currency IDR upgraded to 'BB+' from 'BB'; Outlook Stable
- Viability Rating upgraded to 'bb+' from 'bb'
- Support Rating affirmed at '3'
- Support Rating Floor affirmed at 'BB-'
- Ratings on medium-term note programme and senior notes upgraded to 'BB+' from 'BB'
SBC
- Long-Term Foreign - and Local-Currency IDR upgraded to 'BB+' from 'BB'; Outlook Stable
- Short-Term Foreign-Currency IDR affirmed at 'B'
- National Long-Term Rating affirmed at 'AA-(phl)'; Outlook Stable
- Viability Rating upgraded to 'bb+' from 'bb'
- Support Rating affirmed at '3'
- Support Rating Floor affirmed at 'BB-'
- Rating on senior notes upgraded to 'BB+' from 'BB'
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