Fitch downgrades 4 Philippine banks

MANILA, Philippines — Fitch Ratings has taken negative ratings action on state-run Land Bank of the Philippines and Development Bank of the Philippines (DBP) as well as privately-owned China Banking Corp. and Philippine National Bank (PNB) as the coronavirus disease 2019 or COVID-19 outbreak is expected to take its toll on the economy and the banking sector’s operating environment.

The debt watcher revised the credit outlook for Landbank and DBP to stable from positive, but affirmed the rating at BBB to mirror the revision in the sovereign rating outlook of the Philippines.

Likewise, the credit outlook of China Bank was revised to negative from stable, but its rating was maintained at BB+ as the deteriorating operating environment due to the pandemic would weigh significantly on the bank’s asset quality and profitability over the next few years.

On the other hand, Fitch downgraded the rating of PNB to BB from BB+ as the economic fallout of the health crisis would weigh significantly on the listed bank’s credit profile in the near and medium term.

“We expect the sharp slowdown to weaken business conditions, stress credit portfolios, and weigh on profitability at least over the next year. This is exerting downward pressure on the banks’ standalone credit profiles, though the rating impact varies according to the existing rating levels relative to perceived vulnerabilities,” Fitch said.

It said the financial impact of the Luzon-wide enhanced community quarantine is acute, and a significant fall in demand and revenues could not be plugged by cheaper financing.

 “The rapid loan growth of recent years, especially in the more vulnerable consumer and small and medium enterprises segments, will be put to the test. For the state-owned banks, intensifying pressure to lend on non-commercial terms also points to potentially higher risk appetites and higher asset-quality risks. As such, we have downgraded our assessment of asset quality for most banks by a notch and with a negative outlook,” Fitch said.

Meanwhile, Fitch affirmed its BBB- rating and stable outlook on the country’s biggest lenders including BDO Unibank, Metropolitan Bank & Trust Co. and Bank of the Philippine Islands (BPI).

Fitch said the ongoing enhanced community quarantine in Luzon that comprises 57 percent of the population and 73 percent of gross domestic product (GDP) has suppressed consumer demand, the primary driver of the economy.

“A weaker operating environment portends higher risks, which necessitates thicker loss-absorption buffers. As we foresee sector conditions deteriorating, we have correspondingly reassessed banks’ capitalization levels and downgraded the factor scores of all seven banks - some by two notches,” it said.