BDO, RCBC get investment grade credit rating

MANILA, Philippines — Moody’s Investors Service has affirmed the investment grade Baa2 credit rating of BDO Unibank Inc. and Rizal Commercial Banking Corp. (RCBC) on the back of their strong capital and robust liquidity buffers.

In its latest credit opinion on BDO, the debt watcher cited the strong capitalization providing sufficient support for business growth, as well as robust funding and liquidity of the Philippines’ largest bank.

BDO’s common equity tier 1 (CET 1) increased to 13.9 percent as of end-June from 13.2 percent in end-2020, higher than the 10.5 percent minimum requirement for systemically important domestic banks by the Bangko Sentral ng Pilipinas (BSP).

“We expect BDO’s capital to remain sufficient for business growth and well above the regulatory minimum over the next 12 to 18 months,” Moody’s said.

Another strength of BDO, Moody’s said, is its strong funding mix with low-cost current account and savings account deposits of about 84 percent in its deposit base as of end-June.

“BDO’s funding strength stems from its extensive branch network, which enhances its deposit-gathering ability. BDO is the largest bank in the Philippines. Although the competition in the bank’s home market is intense, its market position is likely to remain defensible.

The bank, which is owned by the Sy family, also benefits from its affiliation with the family’s SM Group, which is a profitable conglomerate with interests in retailing, shopping malls and real estate. As a result, the bank is able to capitalize on SM Group’s good relationships with tenants and their suppliers.

“BDO is unlikely to experience significant liquidity pressure, given its stable liquidity, supported by one of the largest deposit bases in the Philippines,” it said.

However, the debt watcher expects the asset quality of BDO to further deteriorate over the next 12 to 18 months due to the economic shock caused by the pandemic.

The non-performing loan (NPL) ratio of the listed bank increased to 3.1 percent in end- June from 2.7 percent in end- 2020.

Moody’s said the profitability of BDO would be constrained over the next 12 to 18 months by elevated provisions for soured loans.

On the other hand, Moody’s also affirmed the Baa2 rating and negative outlook of RCBC amid deteriorating asset quality, downside risks to capital as NPL formation rates remain high as well as high credit costs.

“The bank’s rating outlook is negative which factors in the downside risks in asset quality, especially in the retail and small and medium-sized enterprise segments, arising from the coronavirus pandemic-induced economic shock,” it said.

The debt watcher said RCBC has a higher share of retail and SME loans and is more exposed in the current environment as its gross NPL ratio rose to five percent in 2020 from 3.8 percent in 2019, while its provision coverage decline to 62 percent in end June from 75 percent in end 2020.

“Furthermore, the current increase in NPLs seen so far does not fully reflect the underlying stress because some borrowers are benefiting from support measures. We expect asset quality to further deteriorate in 2021 when relief measures will be gradually ended,” Moody’s said.

Despite the P4.48 billion capital infusion from Sumitomo Mitsui Banking Corp. for a five percent stake, the rating agency said capital trends of RCBC over the next 12 to 18 months would largely be driven by credit costs as incremental loan growth would remain muted.

“Profitability over the next 12 to 18 months will be constrained on account of elevated credit costs. Further, the bank’s profitability over the last two years has been supported in part by high trading gains. This is not sustainable, especially because further declines in interest rates may be limited,” Moody’s said.