Moody's turns 'negative' on UnionBank after acquiring Citi assets

Ramon Royandoyan - Philstar.com
Moody's turns 'negative' on UnionBank after acquiring Citi assets
The deal between UnionBank and Citi will include the American banking giant’s local credit card, personal loans, wealth management, and retail deposit businesses.
UnionBank / Released

MANILA. Philippines — Moody's Investors Service downwardly revised its outlook on UnionBank of the Philippines, saying the Aboitiz-led lender’s move to acquire Citigroup's consumer banking assets in the Philippines could erode its capital buffers at a time of prolonged pandemic uncertainties.

In a statement on Thursday, Moody’s revised its outlook on UnionBank to “negative” from “stable”, meaning there’s a chance that the international debt watcher would donwgrade the bank’s credit rating over the next 12 to 18 months.

Moody’s nevertheless kept UnionBank’s “Baa2” investment grade.

A lower credit rating could increase the cost of foreign borrowing for the company. Explaining its decision, Moody’s said UnionBank's solvency will weaken once its acquisition of Citi’s retail banking operations in the Philippines is completed. To recall, Citigroup chose to sell its local consumer banking assets to UnionBank for P55 billion after the American banking giant announced it would be shifting its focus onto wealth franchise within developed economies.

"The negative outlook reflects Moody's view that UBP's solvency will weaken after the acquisition is completed, a result of a significant reduction in UBP's post-acquisition capital buffers amid heightened asset risks due to the ongoing pandemic," Moody's said.

As it is, the deal included absorbing Citi employees within the Philippines and acquiring several real estate assets, such as Citibank Square in Eastwood, Quezon City. Moody's said it will take UnionBank "multiple years to rebuild its capital buffer" following the mammoth transaction.

"Today's rating action reflects the negative impact of the bank's acquisition strategy, which Moody's regards as a governance risk under its environmental, social and governance framework, given the implications for the bank's capital, financial strategy and risk management," Moody's added.

Moody's explained that despite the deal boosting UnionBank's core profitability, as it will be able inject higher-yielding retail loans into its portfolio, the extent and sustainability of the earning potential is "highly dependent" on whether the bank could retain Citi's customer base.

There is a silver lining, Moody's noted. If UnionBank could improve its asset quality while its non-performing loan ratio stays below 4.5% or if profitability advances “significantly” post-acquisition, then the outlook would be return to “stable”.

But if UnionBank's NPL ratio worsens above 6% or its tangible common equity ratio slips below 12%, Moody's warned that the company’s hard-won investment grade would be due for a downgrade.




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