Moody’s downgrades PNB’s credit rating

MANILA, Philippines — Moody’s Investors Service has downgraded the credit rating of Philippine National Bank (PNB) to minimum investment grade as the pandemic led to a deterioration in the bank’s asset quality and capital.

The debt watcher has downgraded PNB’s deposit and senior unsecured ratings to Baa3 - equivalent to minimum investment grade – from Baa2 or a notch above minimum investment grade.

Moody’s also downgraded the bank’s Baseline Credit Assessment (BCA) to Ba1 from Baa3.

“The bank’s deterioration in asset quality has driven the downgrade,” it said.

“The negative outlook reflects risks to asset quality, and in turn, to the bank’s capital,” it said.

Given the negative outlook, an upgrade over the next 12 to 18 months is unlikely, but Moody’s said it could change the outlook to stable if the bank’s asset quality does not materially deteriorate further.

Moody’s noted the gross non-performing loan (NPL) ratio increased to a double-digit level of 11.5 percent as of end-June versus 4.77 percent in end-June last year due to higher corporate NPLs in COVID-affected sectors.

Furthermore, the debt watcher noted that PNB’s provision coverage ratio is lower than its peers at 67 percent as of end-June.

“Risks to asset quality remain because the operating environment remains weak,” Moody’s said.

According to Moody’s, PNB’s weak risk management has resulted in higher NPLs and is a governance risk factor under the debt watcher’s environmental, social and governance (ESG) framework.

It explained the downgrade reflects the impact on the bank from the governance weakness, and the deterioration in credit quality it has triggered.

Likewise, PNB’s common equity tier 1 (CET1) ratio declined to 13.2 percent in end-June from 15 percent last year and there are risks to capital, albeit marginal, as retained earnings will remain muted amid moderate asset growth.

Moody’s said the profitability of the Lucio Tan-led bank is also lower than its peers and is a key credit weakness.

“The level will remain low over the next 12 to 18 months due to elevated credit costs,” it added.

On the other hand, Moody’s pointed out PNB’s funding costs are comparable to those of the big three Philippine banks as it has a high current and savings account deposit to total deposit ratio.