Moody’s affirms BDO ratings, outlook

MANILA, Philippines -  Moody's Investors Service  has affirmed its ratings for BDO Unibank Inc.'s local and foreign currency deposits and senior unsecured debt, with its outlook for the ratings remaining stable.

In a statement, Moody's said it has affirmed BDO's local and foreign currency deposits rating of Baa2/Prime-2, as well as the bank's senior unsecured debt rating of Baa2.

At the same time, Moody's also affirmed the bank's baseline credit assessment (BCA) of baa2 and adjusted BCA of baa2.

A Baa2 rating, which corresponds to a medium grade, is subject to some moderate credit risk, while Prime-2 means the bank has a high ability to repay short-term debt.

"The affirmation of BDO's Baa2 deposit and senior unsecured debt rating is based on the bank's BCA of baa2, and Moody's expectation that there is a very high probability of the bank receiving systemic support from the Philippine government (Baa2 stable) in times of need," Moody's said.

According to Moody's, BDO's baa2 BCA took into account BDO's domestically focused, prominent and growing franchise, stable asset quality and loss absorbing buffers, sufficient capital levels that exceed regulatory minimum, stable profitability that is supported by an expansion in net interest margins, and robust funding and liquidity profile.

At the same time, Moody's also positioned the bank's financial profile at baa1, one-notch above the current BCA of baa2.

Moody's mentioned BDO's strengthened capital position, which was brought about by its January 2017 rights issue of P60 billion.

It said the bank's common equity tier 1 (CET1), which settled at 14 percent at end-March 2017, will provide a strong loss absorbing buffer for the bank. Moody's expects BDO's CET 1 ratio to exceed 12.5 percent at end-2018.

It also expects the bank's asset quality profile to remain stable over the next 12 to 18 months.

"Robust economic conditions will support bank borrowers and asset quality in the banking system. Stable asset quality is also supported by the bank's diverse loan portfolio, as well as low leverage in the economy," Moody's added.

However, Moody's said BDO's BCA also incorporated the weaker aspects of the bank's profile, including downside risks to loan quality posed by an unseasoned loan book, and high concentration in the manufacturing sector.

Moody's said the bank's high concentration to conglomerate groups in the manufacturing sector could expose it to single name delinquencies – a latent risk in the system which affects all rated-Philippine banks.

Going forward, Moody's said it also expects BDO's profitability profile to remain broadly stable.

"The bank benefits from a strong funding and liquidity position. As the largest bank in the country, with a market share of 22 percent and 18 percent of total system loans and deposits at end-March 2017, BDO's market position will likely remain defensible," Moody's said.

"Its funding mix has gradually improved, as reflected by its 73 percent of low-cost current account and savings account deposits in its total deposit base at end-March 2017. In addition, like other rated Philippine banks, BDO shows very little reliance on short-term wholesale funding," it added.

Meanwhile, Moody's has also affirmed BDO's senior unsecured medium term notes (MTN) rating of (P)Baa2 and short-term MTN program rating of (P)Prime-2.

The bank's counterparty risk assessment also remains unchanged at Baa1(cr)/P-2(cr).