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Rating Action:

Moody's assigns Baa2 ratings to UnionBank

15 Nov 2017

Singapore, November 15, 2017 -- Moody's Investors Service has assigned the following credit ratings and assessments to Union Bank of the Philippines (UnionBank):

- Baa2 long-term local and foreign currency deposit ratings; stable outlook

- Baa2 long-term local and foreign currency issuer ratings; stable outlook

- (P)Baa2 long-term foreign currency senior unsecured medium term note (MTN) program rating

- baa3 baseline credit assessment (BCA) and Adjusted BCA

The long-term Counterparty Risk Assessment (CR Assessment) assigned to UnionBank is Baa2(cr).

The ratings outlook is stable.

RATINGS RATIONALE

Baa2 DEPOSIT AND ISSUER RATINGS

UnionBank's Baa2 ratings incorporate: (1) its BCA of baa3; and (2) Moody's assessment that the bank will receive moderate support from the Government of the Philippines (Baa2 stable) in times of need. The outlook on the long-term ratings is stable, in line with the stable outlook on the Philippines' sovereign rating.

UnionBank's baa3 BCA reflects the bank's above-industry-average core profitability, which is supported by its growing lending operations, in particular, its higher-yielding retail business, and its superior cost efficiency relative to its domestic peers. In addition, the bank's BCA incorporates its adequate capital generation and track record of strong support from key shareholders.

These strengths are balanced by the bank's above-industry loan growth, a situation which could pose downside risks to its asset quality. Furthermore, the bank's funding profile is modest when compared to other rated Philippine banks, with a high reliance on high-cost corporate deposits.

UnionBank's return on assets is higher than most of its peer Philippine banks, underpinned by the strong growth of its high-yielding retail business and superior cost efficiency. At the end of 2016, the bank's return on assets — excluding volatile one-off trading gains — registered 1.2%, which was higher than the industry average in the Philippines of 0.9%.

The bank's above-industry-average profitability has so far supported its rapid business growth in recent years, without a material decline in its capital levels. At end-September 2017, the bank's reported Total Capital Adequacy ratio was 15.1%, down slightly from 15.7% at end-2016 from loan growth of 13% on an annualized basis. Given management's intention to pursue a more moderate pace of loan growth in 2018, Moody's expects that the bank's internal capital generation will be largely sufficient to support business growth.

UnionBank's gross non-performing loan (NPL) ratio of 3.95% at end-September 2017 is higher than that of its peer Philippine banks, and is driven primarily by legacy NPL accounts that had been substantially provided for. Excluding the specific allowances made on the NPLs, the bank's net NPL ratio of around 1.4% at end-September 2017 is closer to the industry average.

Moreover, its above-industry average loan growth (compound annual growth of 30% between 2014 and 2016 against the system's 16%) exposes the bank to unseasoned risk. Over the next 12-18 months, its new NPL formation rate is likely to rise gradually as loans begin to season, but will remain manageable, given the robust operating environment in the Philippines.

UnionBank's funding profile is somewhat weaker than that of its Philippine peers, with a high concentration of high-cost large corporate deposits. Depositor concentration rose over the first nine months of 2017 in order to fund its somewhat rapid loan growth. However, liquid assets — which represented 48% of the bank's tangible assets at end-2016 — provide some support against downside risks.

The bank's ratings also take into account Moody's basic loss-given failure analysis, where creditors are not presumed to absorb losses outside of bank liquidation, since no operational resolution regime is in place in the Philippines.

(P)Baa2 MTN PROGRAM RATING

The provisional (P)Baa2 rating is in line with UnionBank's Baa2 long-term deposit rating and reflects the structure of the proposed issuance.

The notes issued under the program constitute the issuer's direct, unconditional, unsubordinated, and unsecured obligations. Currencies, interest rate structures, maturities and redemption methods of the notes will be specified in the relevant pricing supplements.

The ratings do not apply to any individual notes issued under the program. Ratings on individual notes issued under the program will be subject to Moody's satisfactory review of the terms and conditions set forth in the final base and supplementary offering circular, and the pricing supplements of the notes to be issued.

Moody's does not intend to assign ratings to individual notes issued under the program, with features linked to the performance of another obligor (credit-linked notes).

In addition, Moody's does not intend to assign ratings to notes for which payment of principal or interest is variable and contractually dependent on the occurrence of a non-credit-linked event or the performance of an index (non-credit-linked notes). The only exception will be for notes whose principal and coupon payments are affected by standard sources of variation. For more information, please see Moody's Cross-Sector Rating Methodology: "Rating Obligations with Variable Promises," published in April 2016.

WHAT COULD CHANGE THE RATING -- UP

UnionBank's deposit rating of Baa2 and senior unsecured MTN program rating of (P)Baa2 are at the same level as the Philippines' sovereign rating. It is unlikely that the bank's ratings will be higher than that of the sovereign, given the high correlation of risks between the bank and the sovereign.

If the sovereign's rating and the bank's BCA are upgraded, UnionBank's ratings could be upgraded.

The following factors could result in an upward revision of the bank's BCA: (1) a consistent improvement in the bank's asset quality, as reflected by stable or slower new NPL formation rate; (2) steady improvement in earnings quality, as reflected by a sustained increase in the share of core recurring earnings; (3) higher levels of loss absorption capacity, as reflected by a steady improvement in its capitalization profile; and/or (4) a proven ability to diversify its funding sources and reduce dependence on high-cost corporate deposits.

WHAT COULD CHANGE THE RATING -- DOWN

UnionBank's BCA, and consequently its ratings, could be lowered, if the following factors occur: (1) continued rapid expansion or acquisitions result in a significant increase in the bank's risk profile; (2) its operating environment weakens significantly or underwriting practices become lax, resulting in a significant increase in nonperforming assets; (3) large-borrower concentration risk rises materially; (4) the bank's reliance on corporate deposits rises further and increases its vulnerability to significant deposit outflows or liquidity issues; and/or (5) the Macro Profile for the Philippines is lowered; the Macro Profile is a rating input used to determine a bank's BCA and is designed to capture systemwide factors that are predictive of the bank's propensity to fail.

The principal methodology used in these ratings was Banks published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 1968, UnionBank is the eighth-largest universal and commercial bank in the Philippines by total assets. UnionBank is headquartered in Manila, and reported assets of PHP549.4 billion (approximately $10.6 billion) at 30 September 2017.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Simon Chen
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Gene Fang
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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