S&P flags risks to Security Bank’s capital strength

MANILA, Philippines — S&P Global Ratings said the record high credit costs of Security Bank Corp. due to the impact of the COVID-19 pandemic could diminish the bank’s capital strength over the next two years.

In its latest bulletin, the debt watcher said the elevated credit costs of the listed bank would squeeze its rating buffer.

“Our base case remains that the bank’s risk-adjusted capital ratio would stay above 10 percent over the next two years. However, elevated credit costs will squeeze the capital position, as well as the rating buffer,” S&P said.

Security Bank reported last week that its net income declined by 13.4 percent to P6.66 billion from January to September compared to P7.69 billion in the same period last year due to the record provision for potential loan losses.

For the third quarter alone, the bank’s earnings fell 63.5 percent to P1 billion from P2.74 billion in the same quarter last year as provisioning amounted to P10.07 billion or nine times last year’s P1.11 billion.

“The bank’s performance in third-quarter 2020 was worse than our expectations due to continuously elevated credit costs amid high COVID-19 infection rates in the country,” S&P said.

In all, the listed bank allocated P21.1 billion for potential credit losses during the nine-month period, 12 times the P1.75 billion earmarked in the same period last year.

“As a result, the bank’s annualized credit costs increased to a hefty 600 basis points for 2020, from 91 basis points in 2019,” it added.

The debt watcher said the level of credit costs is significantly higher than industry peers’, with annualized industry credit costs of 180 basis points for the first nine months.

It also noted the rise in the bank’s gross non-performing loan (NPL) ratio to 4.03 in end September from 1.44 percent year-on-year.

On the other hand, S&P said Security Bank’s net interest margin (NIM) remained resilient, improving to 4.89 percent from 4.71 percent, and substantial trading gains amounting to PP9.2 billion from P1.4 billion could help partially support the bank’s bottomline performance, as well as its capital base.

“Further windfall from the securities book will be difficult in our view given the significant shrinkage of the securities portfolio in amortized costs,” it said.

S&P said it has factored in the current strong capitalization, likely elevated credit costs amid the COVID-induced downturn, as well as its slightly weaker funding profile and midsize market position in the BBB- rating and negative outlook of Security Bank.

“We revised down Security Bank’s stand-alone credit profile to BBB- from BBB in June this year, reflecting the bank’s weakening asset quality and elevated credit costs amid the material economic fallout from the pandemic,” S&P said.

The bank’s outlook was also revised to negative from stable suggesting a potential downgrade over the next 24 months.

S&P pointed out the economic risk trend for banks operating in the Philippines is negative as the country’s gross domestic product (GDP) is seen contracting by 9.5 percent this year before bouncing back with a growth of 9.6 percent next year.

“The banking sector’s recovery to pre-COVID levels will likely stretch beyond 2022. Our base case assumes sector credit costs and non performing asset ratios to be 1.5 to two percent and 5.5 to 5.7 percent, respectively, in 2020 and 2021,” S&P said.