OREANDA-NEWS. Fitch Ratings has revised the Outlooks on the Long-Term Issuer Default Ratings (IDRs) of two Philippine government-owned banks - Land Bank of the Philippines (LBP) and Development Bank of the Philippines (DBP) - to Positive from Stable. At the same time, the agency has affirmed the Long-Term IDRs on the banks at 'BB+'. A full list of rating actions is provided at the end of the rating action commentary.

The Outlooks have been revised following a revision in the Philippines sovereign's Outlook to Positive from Stable on 24 September 2015, which takes into account the improvement in Philippine governance standards and global competitiveness.

Falling public debt, and resilient economic growth and external finances should at least help sustain the sovereign's ability to support the banking sector. For more details on the Outlook revision on the sovereign, see the rating action commentary "Fitch Revises Outlook to Positive; Affirms at BBB-", dated 24 September 2015.

KEY RATING DRIVERS

VIABILITY RATINGS (VRs), IDRS, NATIONAL RATINGS, SUPPORT RATINGS (SRs) AND SUPPORT RATING FLOORS (SRFs)
The Outlook revision on both banks' IDRs reflects Fitch's view of improving sovereign ability to provide extraordinary support, if needed. Therefore, the drivers of the banks' IDRs have switched from their VRs to sovereign support. This is according to Fitch's rating methodology, which takes the higher of the two.

The banks' VRs of 'bb+' reflect their moderate asset quality, including loan books that are partly policy-oriented and highly concentrated, and their satisfactory capitalisation, funding and earning profiles.

The banks' SRs of '3' and SRFs at 'BB+' reflect Fitch's expectations of a moderate probability of extraordinary government support available to DBP and LBP, if needed. The two banks are 100% owned by the government and serve quasi-policy roles. They are also important in the local banking system - we believe LBP and DBP would be designated as domestic systemically important banks (D-SIBs) due to their meaningful share of assets and deposits in the Philippines.

However, the SRFs are one notch lower than the sovereign ratings - the same as those of the three largest private commercial banks. This is due to the DBP's and LBP's hybrid nature, as they are subject to the same regulatory and prudential measures and apply similar underwriting criteria to private commercial banks.

The National Ratings reflect the banks' creditworthiness relative to the sovereign, which has not changed.

LBP is mandated to provide timely and adequate financial support for agrarian reform and grant credit facilities to the agricultural sector. DBP is mandated to provide medium- and long-term credit facilities for priority sectors, such as infrastructure, logistics, micro-enterprises and SMEs.

The proposed merger between these two banks has been halted as the Senate has not taken legislative action on this front, while the House of Representatives approved its version of the merger bill in May 2015. The delay might imply that consolidation in the near to medium term would be challenging considering the upcoming presidential election in 2016. The merger was proposed in February 2015 to improve operating efficiency and economies of scale with a larger balance-sheet capacity while removing their overlapping policy functions.

A proposal to inject fresh capital of PHP20bn and PHP10bn into LBP and DBP respectively in 2016 is making its way through the legislative process. The amounts equate to about 4% of each bank's risk-weighted assets, and will help the banks better comply with higher capital requirements. Fitch believes that the banks would have to maintain common equity Tier 1 (CET1) ratios above 10%-11% in the medium term, including D-SIB charges of 1.5%-2.5%, which will be phased in over 2017-2019.

SENIOR DEBT
The senior notes of DBP are rated the same as its Long-Term IDR. This is because the notes constitute direct, unsubordinated and senior unsecured obligations of the bank, and rank equally with all its other unsecured and unsubordinated obligations.

LBP does not have any outstanding debt issues rated by Fitch.

RATING SENSITIVITIES

VIABILITY RATINGS (VRs), IDRS, NATIONAL RATINGS, SUPPORT RATINGS (SRs) AND SUPPORT RATING FLOORS (SRFs)
Positive action on the banks' VRs could arise from better asset quality, along with improvements in their franchises and risk appetites over the medium term, as may occur if the banks were to become more commercially oriented over time.

The banks' VRs could face pressure from sharply higher credit losses leading to capital impairment, potentially due to state-directed lending or a severe economic deterioration.

Changes to the sovereign's ability to provide support - as indicated by the sovereign rating - as well as the government's propensity to provide timely extraordinary support would likely lead to corresponding changes to the ratings on LBP and DBP.

SENIOR DEBT
Any change in DBP's IDR would affect its issue ratings.

The rating actions are as follows:

LBP
Long-Term Foreign-Currency IDR affirmed at 'BB+'; Outlook Revised to Positive from Stable
Short-Term Foreign-Currency IDR affirmed at 'B'
Long-Term Local-Currency IDR affirmed at 'BB+'; Outlook Revised to Positive from Stable
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+'

DBP
Long-Term Foreign-Currency IDR affirmed at 'BB+'; Outlook Revised to Positive from Stable
Short-Term Foreign-Currency IDR affirmed at 'B'
Long-Term Local-Currency IDR affirmed at 'BB+'; Outlook Revised to Positive from Stable
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+'.