The FINANCIAL — Fitch Ratings has revised Support Rating Floors (SRF) of the following eight Philippine banks: Bank of the Philippine Islands, BDO Unibank, Inc., Development Bank of the Philippines, Land Bank of the Philippines, China Banking Corporation, Rizal Commercial Banking Corp., Security Bank Corporation and Union Bank of the Philippines.
The agency has also upgraded the Support Rating (SR) of the latter four banks.
In addition, Fitch has upgraded BPI's Long-Term Foreign-Currency Issuer Default Rating (LTFC IDR) to 'BBB-' from 'BB+', and BDO's LTFC IDR, LT Local-Currency IDR (LTLC IDR) and Viability Rating (VR) to 'BB+' from 'BB'. The Outlook on the IDRs is Stable.
Fitch would like to highlight that this is not a comprehensive list of all ratings of the Philippine banks. A full assessment on ratings is typically done based on banks' periodic review cycles, according to Fitch Ratings, Inc.
KEY RATING DRIVERS — The actions on the SRs and SRFs follow the upgrade of the Philippines' sovereign ratings on 27 March 2013, including its LTFC IDR to 'BBB-' from 'BB+'. The SRs of '3' reflect Fitch's view of a moderate probability of extraordinary state support available to the aforementioned major local banks, if needed. The varying degree of state support is indicated through the banks' SRFs. The systemically-important Philippine banks such as BPI, BDO, DBP and LBP have SRFs of 'BB+', while those of the medium-sized banks (CBC, RCBC, SBC and Union) are at 'BB-'.
BPI's LTFC IDR is upgraded to be in line with its 'BBB-' LTLC IDR and 'bbb-' VR. Although driven by the VR, BPI's LTFC IDR had been until now constrained by the sovereign's LTFC IDR of 'BB+', due to the bank's exposure to the financial health of the government, wider domestic economy and local financial markets. Of the major Philippine banks rated by Fitch, BPI's ratings have been the highest, due to its established domestic presence, sound financial metrics and prudent management.
Not directly related to the sovereign rating action is the upgrade of BDO's VR and IDRs. One factor is the substantial amount of fresh capital from the rights issue in 2012, which should help the bank better support strong loan growth as well as cope with unexpected setbacks, at least over the medium term. The upgrade also recognises BDO's growing franchise and funding strengths, gradual diversification in its loan book, improving albeit still modest profitability and reasonable asset quality performance. Moreover, Fitch expects the bank to uphold asset quality despite continuing strong loan growth.
RATING SENSITIVIES – SRs AND SRFs — The SRs and SRFs of the Philippine banks would be affected by a change in the government's ability to provide extraordinary support. Further movement in the sovereign ratings is another likely trigger, although this seems less probable in the near term considering the recent upgrade of, and Stable Outlook on, the Philippines' sovereign ratings.
The SRs and SRFs would also be impacted by any change in the government's willingness to extend timely support. One development that could lead to an adverse outcome, for instance, is the global initiatives to reduce the implicit state support available to banks, although Fitch views this to be a long-term prospect for the Philippines.
An increase in banks' relative domestic systemic importance, possibly when smaller banks merge with larger peers, could lift their SRs and SRFs.
RATING SENSITIVIES – VRs AND IDRs of BDO and LTFC IDR of BPI — Concentrated loan books, foreclosed properties with modest reserves and conglomerate ownership structures at the major Philippine banks are some issues that constrain ratings among Philippine banks, including BDO. A further upgrade of BDO's ratings appears unlikely after the recent upgrade, as it is already among the highest rated banks in the Philippines.
On the other hand, BDO's VR could face downward pressure should their loss-absorption capacities weaken in the face of event risks (such as large acquisitions), persistently aggressive growth plans or increasing concentration of exposures.
Of the major local banks, BDO has displayed a higher appetite for rapid expansion, which in part explained its weaker metrics in profitability and capitalisation over the last few years. However, the bank is likely to keep its core capital at more satisfactory levels than in previous years, considering the stricter capital rules under Basel III, which had in part influenced the substantial size of its recent rights issue. This, together with Fitch's expectations of further progress in the bank's profitability and internal capital generation metrics as well as reasonable loan growth targets, could help to minimise downside risks on its VR. That said, any downgrade of its VR would unlikely affect its 'BB+' IDRs, unless considerations behind its 'BB+' SRF were to also weaken.
Any change in BPI's IDR will be driven by changes in its VR, which we see little prospect of in the near term, in light of its sustained strengths in franchise, funding, more modest risk appetite compared to other local banks, and very sound and stable financial profile.
RATING SENSITIVIES – SENIOR NOTES — BDO's upgraded IDR underlines a similar impact on its senior notes. This link reflects the fact that the senior notes constitute direct, unsubordinated and unsecured obligations of the bank, and rank equally with all its other unsecured and unsubordinated obligations.
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