OREANDA-NEWS. April 27, 2015. Fitch Ratings has affirmed the ratings on three Philippine banks - Bank of the Philippine Islands (BPI), BDO Unibank, Inc. (BDO) and Metropolitan Bank & Trust Company (Metrobank). The Long-Term Issuer Default Ratings (IDR) on both BPI and Metrobank were affirmed at 'BBB-' with Stable Outlooks, and their Viability Ratings (VR) affirmed at 'bbb-'. BDO Unibank, Inc.'s (BDO) IDR was affirmed at 'BB+' on Positive Outlook, and its VR affirmed at 'bb+'.

Concurrently, the agency has assigned Short-Term Foreign-Currency IDRs to BPI and Metrobank of 'F3' and BDO of 'B', which directly correspond to their Long-Term IDRs. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS - VRs, IDRs and National Ratings

The banks' Long-Term IDRs and National Long-Term Ratings are driven by their VRs.

BPI's ratings reflect its greater appetite for growth in recent years, but also the bank's track record over the past decade of prudently managing risk. The ratings also incorporate the bank's generally solid credit profile, with a stable funding base stemming from its established domestic franchise, sound capitalisation, and steady and high profitability.

Metrobank's ratings are supported by its liquid balance sheet, improved asset quality and good loss-absorption buffers. Capitalisation, already sound, was further boosted by a PHP32bn equity raising in April 2015, which will likely help to fund above-trend loan growth in the coming 12-18 months.

The Stable Outlooks on BPI and Metrobank reflect Fitch's expectation that their risk profiles will be maintained over the near to medium term amid robust economic growth in the Philippines.

BDO's ratings reflect the bank's moderate but improving core profitability and asset quality, stemming from its historically higher appetite for growth and acquisition relative to peers. The ratings also take into account its sound funding position and reasonably healthy capitalisation and reserves.

The Positive Outlook on BDO's ratings acknowledges the improvement in its underlying profitability and asset quality over the past few years. However, this has occurred in a strong economy, which has benefited the banking system generally, so any credit issues stemming from high loan growth in recent years may take time to surface. Asset quality risks can be partly mitigated through high loss absorption buffers. In this regard, BDO's capitalisation remains fairly sound overall, but its Fitch core capital (FCC) ratio fell to 12.8% at end-2014 from 14.3% at end-2013 on account of high loan growth and higher dividends.

Favourable operating conditions and abundant liquidity continue to support rapid banking system loan growth, which accelerated to roughly 19% in 2014 from 16% in 2013. This raises the risk of credit misallocation and asset bubbles, although Fitch notes that anecdotal property price inflation - as one indicator - does not appear extreme.

These issues are somewhat mitigated by the banks' reasonably healthy financial profiles, including their considerable loss absorption buffers. Fitch's internal stress tests suggest that the three large banks have adequate loss absorption cushions to weather a fairly significant rise in credit costs. Fitch expects the banks to maintain relatively high core capitalisation in the medium term, in light of new regulation requiring domestic systemically-important banks (D-SIBs) - which are likely to include BPI, BDO and Metrobank - to hold even more capital from 2017 onwards. In addition, on-going initiatives by the regulator to monitor potential asset quality issues and strengthen the banks' prudential practices are appropriate in Fitch's view.

RATING SENSITIVITIES - VRs, IDRs and National Ratings

Continued improvements in the operating and regulatory environment, including progress on the structural issues such as high borrower concentration and conglomerate ownership, and sustainable improvement in the banks' other credit metrics could support positive rating action in the medium term. However, there is limited upside for BPI's and Metrobank's ratings in the near term as they are already the highest of the Philippine banks rated by Fitch, and high relative to banks in other similarly rated countries. Moreover, their ratings are equal to the sovereign (BBB-/Stable) and they have sizeable exposure to Philippine government bonds.

For BDO, Fitch will continue to monitor its appetite for growth and risk, the seasoning of its loan portfolio and developments in its loss-absorption buffers (including capitalisation relative to its immediate peers) before taking any ratings action.

The ratings on BPI and Metrobank and the VR on BDO may face negative rating action in the event of a continued rise in risk appetite, such as aggressive acquisition activity, further rapid loan growth or further increases in risk concentration, including to the real estate sector, which may lead to asset quality deterioration and weakened loss absorption buffers. However, BDO's IDR of 'BB+' is at the same level as its Support Rating Floor (SRF), and any downgrade of its VR will not affect its IDR unless considerations behind its 'BB+' SRF also weaken.

KEY RATING DRIVERS AND RATING SENSITIVITIES - Support Ratings (SR) and Support Rating Floors (SRF)

The SRs and SRFs of the three Philippine banks are the same at '3' and 'BB+', reflecting Fitch's view of a moderate likelihood of extraordinary state support for these banks, if needed. Fitch believes that BPI, BDO and Metrobank are systemically important in the Philippines due to their large individual shares of domestic deposits, but the ratings also incorporate the sovereign's modest ability to provide support in times of need, as reflected in its IDR of 'BBB-'.

The SRs and SRFs may change depending on Fitch's assessment of the sovereign's ability to provide extraordinary support, which may be indicated by a change in the sovereign ratings, and its propensity to extend timely support. Evidence of diminishing implicit state support for banks would be negative for these ratings, although Fitch does not expect this issue to arise in the Philippines in the near term.

RATING SENSITIVITIES - Debt Ratings

BDO's senior notes are rated at the same level as its Long-Term IDR. This is because the notes constitute direct, unsubordinated and unsecured obligations of the bank, and rank equally with all its other unsecured and unsubordinated obligations. Any change in the IDR would affect the issue ratings.

The rating actions are as follows:

BPI
Long-Term Foreign-Currency IDR affirmed at 'BBB-'; Outlook Stable
Short-Term Foreign-Currency IDR assigned at 'F3'
Long-Term Local-Currency IDR affirmed at 'BBB-'; Outlook Stable
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-Currency IDR affirmed at 'BB+'; Outlook Positive
Short-Term Foreign-Currency IDR assigned at 'B'
Long-Term Local-Currency IDR affirmed at 'BB+'; Outlook Positive
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+'
Ratings on senior notes affirmed at 'BB+'

Metrobank
Long-Term Foreign-Currency IDR affirmed at 'BBB-'; Outlook Stable
Short-Term Foreign-Currency IDR assigned at 'F3'
Long-Term Local-Currency IDR affirmed at 'BBB-'; Outlook Stable
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '3'
Support Rating Floor affirmed at 'BB+'