Merger with UCPB may hurt LANDBANK's financial health — Fitch

MANILA, Philippines — The upcoming merger of Land Bank of the Philippines with United Coconut Planters Bank could risk tarnishing the former’s credit profile, as the transaction would mean additional expenses for the integration and absorption of soured loans of the smaller lender.

In a statement, global debt watcher Fitch Ratings said the pressure on LANDBANK’s profitability would be “immediate” once the merger, approved by President Rodrigo Duterte on June 25, is completed because of UCPB’s weak financial health. Both lenders are state-owned.

In his Executive Order, Duterte said he believes the plan will “significantly strengthen the capability to deliver financial services to the coconut industry and the entire agricultural sector.” But Fitch said the negative impact of the transaction on LANDBANK’s balance sheet would be felt in different fronts.

First, the amount to be paid to acquire UCPB would have to consider the recovery of investments made by existing stockholders and the government to keep the bank afloat during its 10-year rehabilitation program that started in 2008. This could complicate the economics of the transaction, “likely to LANDBANK’s commercial detriment,” Fitch said.

Second, UCPB reportedly held P22 billion in bad debts as of end-2020, which LANDBANK would have to absorb at a time it is also reeling from a build-up of unpaid loans from pandemic-hit borrowers. When combined, LANDBANK’s non-performing loan ratio would climb by 2 percentage points based on Fitch’s estimate, which would mean higher loan loss buffers that could eat up profitability.

“This would exacerbate asset quality pressures that LANDBANK already faces from the current economic slowdown,” Fitch said.

Lastly, Fitch said risks from the merger could consume considerable managerial bandwidth and incur significant integration expenses. “Any merger benefit will accrue only over the long term, but pressure on LBP's profitability would be immediate,” it added.

But if worse comes to worst, Fitch said the government would likely step up financial support to save LANDBANK considering the important role it plays. Beyond its core mandate of promoting countryside development, LANDBANK was previously tapped to create an overseas Filipino bank and extend loans to pandemic-battered borrowers. There is also an ongoing plan for LANDBANK to purchase a stake in Philippine Dealing Systems Holdings, the country's fixed income bourse.

“These state directives reinforce LANDBANK’s strategic importance in executing the government's policy agenda, especially when transactions are undertaken on terms that might not have occurred if they were based on purely commercial considerations,” Fitch said. “These factors would be strengthened by the proposed merger,” it added.

Post-transaction, Fitch estimates that LANDBANK’s market share would increase by about 1.7 percentage points to make it the second-largest bank in the Philippines by assets next to BDO Unibank.