OREANDA-NEWS. The proposed purchase of 20% of Security Bank Corporation (Security Bank; BB/Stable) by Bank of Tokyo-Mitsubishi UFJ (BTMU; A/Stable) would strengthen the credit profile of the Philippines-based bank, says Fitch Ratings.

The new strategic partnership between the two banks and stake sale announced on 14 January 2016 would provide mid-sized Security Bank with access to the client network, product suite and technical know-how of Japan's largest bank by assets. It would also bring an additional PHP36.9bn in fresh equity, which would make Security Bank the fifth-largest commercial bank in the Philippines by shareholders' equity.

BTMU's proposed capital injection would boost Security Bank's common equity Tier 1 (CET1) ratio to 22.5% on a pro-forma basis from 12.7% at end-September 2015, significantly enhancing the Philippine bank's ability to absorb higher credit losses in times of stress and fund further growth. The addition of two BTMU appointees to Security Bank's board could also improve the governance checks and balances within the bank.

Security Bank plans to accelerate its growth ambitions following the transaction, and aims to roughly double its branch network to 500-600 branches and more than quadruple its loan portfolio by 2020, to attain 8%-9% of system loans and deposits from its current 4% market share. If Security Bank can maintain sufficiently prudent underwriting standards and risk controls, and preserve its balance sheet strength throughout such an expansion, its enhanced franchise could lift its rating profile.

For the present, however, the declared growth targets are ambitious, and we see risks to the bank's asset quality and earnings performance if its underwriting, risk management and technology infrastructures were to lag behind its rapid expansion plans. This is despite our assessment that the bank's current lending policies and risk framework appear generally robust and have contributed to its better asset quality and profitability relative to peers over the years.

Rapid growth is likely to erode Security Bank's post-deal capitalisation over time, but we expect its capital ratios to nonetheless remain reasonably high over the next two to three years. Brisk asset growth also raises the question of how it will be funded, and the bank's funding structure - currently healthy with a loan/deposit ratio of 78.7% and a majority deposit-funded balance sheet - may be weakened if the bank is unable to boost deposits sufficiently to keep pace with its lending.

The tie-up could open up new business avenues to Security Bank in the form of trade finance, cash management and other lending opportunities to the Japanese business community in the Philippines. Japan remains one of the Philippines' largest trading partners, accounting for over 20% of the Philippines' exports, ahead of the United States and China.

We believe the Philippines' promising growth prospects, backed by a young, English-speaking population and relatively low credit penetration make it an attractive investment destination for foreign banks and investors, and expect continued interest from foreign banks seeking an entry into the market. A number of regional banks have sought branch licenses over the past 12-18 months, while Taiwan-based Cathay Life Insurance Co. Ltd. in late 2014 acquired a 20% stake in mid-sized Rizal Commercial Banking Corp (BB/Stable).

The transaction is expected to be completed by the first half of 2016, subject to regulatory approval.