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Rating Action:

Moody's upgrades two Philippine banks to investment grade; and assigns Counterparty Risk Assessment to seven banks

22 May 2015

Singapore, May 22, 2015 -- Moody's Investors Service has today upgraded the long-term and short-term deposit ratings of Philippine National Bank (PNB) and Rizal Commercial Banking Corporation (RCBC) to Baa3/P-3 from Ba2/NP. Moody's also affirmed the Baa2/P-2 long-term and short-term deposit ratings of Land Bank of the Philippines (LBP).

In addition, Moody's has upgraded the baseline credit assessment (BCA) and Adjusted BCA of PNB and RCBC to ba1 from ba3 respectively. LBP's BCA was upgraded to ba2 from ba3.

Moody's upgraded RCBC's senior unsecured debt, senior unsecured euro medium term notes (MTN) program, non-cumulative preferred stock and other short-term ratings to Baa3, (P)Baa3, B1(hyb) and (P)P-3 from Ba2, (P)Ba2, B3(hyb) and (P)NP respectively.

At the same time, Moody's also affirmed the following ratings of Metropolitan Bank & Trust Company (MBT): baa2 Baseline Credit Assessment (BCA) and Adjusted BCA, Baa2/P-2 long-term and short-term deposit ratings, Baa3 long-term local currency subordinated debt rating, and Ba2 (hyb) foreign currency preferred stock rating.

Furthermore, Moody's has assigned a Counterparty Risk Assessment (CR Assessment) to all rated Philippine banks as follows: (1) Bank of the Philippine Islands (BPI) -- Baa1(cr)/P-2(cr), (2) BDO UNIBANK, INC (BDO) -- Baa1(cr)/P-2(cr), (3) LBP -- Baa2(cr)/P-2(cr), (4) MBT -- Baa1(cr)/P-2(cr), (5) PNB -- Baa2(cr)/P-2(cr), (6) RCBC -- Baa2(cr)/P-2(cr), (7) United Coconut Planters Bank (UCPB) -- B1(cr)/NP(cr).

These actions follows the conclusion of the rating agency's reviews initiated on 17 March, 2015 that was prompted by changes arising from the implementation of Moody's new methodology for rating banks globally (see "Banks", published on 16 March 2015). In the case of RCBC, the action also concludes the review initiated on 18 December 2014 that was prompted by the company's announcement on 17 December that it had entered into a definitive agreement with Cathay Life Insurance Co., Ltd (Cathay Life, Baa2 positive), whereby Cathay Life will acquire an approximate 20% stake in RCBC.

Moody's has withdrawn the outlooks on all junior instrument ratings for its own business reasons. Please refer to Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com. Outlooks, which provide an opinion on the likely rating direction over the medium term, are now assigned only to long-term deposit and senior unsecured debt ratings. The outlook on all the long-term deposit and senior unsecured debt ratings of these banks is stable.

A full ratings list for these Philippine banks can be found at the end of this press release.

RATINGS RATIONALE

UPGRADE OF LONG-TERM RATINGS AND BCA/ADJUSTED BCA OF PNB AND RCBC

The upgrade of the long-term and short-term ratings of PNB and RCBC reflects the consistent improvement in the credit profiles of these banks, backed by favorable operating conditions in the Philippines.

The upgrade of the bank's BCAs and adjusted BCA to ba1 from ba3 reflects improvements in their asset quality profiles during a period in which new non-performing loans (NPL) formation has remained low in the Philippines. In addition, the bank's capital buffers have improved, following PNB's PHP 11.6 billion in new equity raising in early 2014 and Cathay Life's PHP 7.95 billion investment in new equity of RCBC, which was completed in April 2015.

Although PNB's asset quality remains weaker than the rated Philippine banks average, its high levels of capitalization and loan-loss coverage provide sufficient loss absorption capacity at its current rating levels to withstand systemic stresses over the next 12-18 months.

UPGRADE OF BCA AND ADJUSTED BCA of LBP

LBP's BCA, its stand-alone credit assessment, was upgraded to ba2 from ba3 reflecting the bank's improved credit fundamentals. Over the past three years, the bank's asset quality, profitability, and cost efficiency improved on the back of robust domestic operating conditions. The bank continues to maintain a strong funding profile that is supported by its sizable distribution network and status as the primary depository institution for the government and its agencies.

At the same time, the bank's ba2 BCA also takes into account its high credit concentrations, weakening capital position from credit growth and poorer financial transparency relative to other rated banks in the Philippines.

The bank's adjusted BCA was upgraded to ba2 from ba3, following the upgrade of its BCA.

AFFIRMATION OF RATINGS OF MBT

The affirmation of MBT's BCA and Adjusted BCA of baa2 reflects its strong domestic franchise, robust capital and liquidity profiles and improving asset quality, which reflect discipline and prudence in business growth.

MBT's Baa2 deposit rating is positioned at the same level as the sovereign rating of Baa2 to reflect the high correlation between banking and sovereign credit risk in the Philippines.

ASSIGNING OF COUNTERPARTY RISK ASSESSMENTS

The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

CR assessments reflect Moody's opinion of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they (1) consider only the probability of default, rather than the expected loss; and (2) apply to counterparty obligations and contractual commitments rather than to debt or deposit instruments.

In most cases, the starting point for the CR Assessment -- which is an assessment of the bank's ability to avoid defaulting on its operating obligations -- is one notch above the bank's adjusted BCA, to which Moody's then adds the same notches of support uplift as applied to deposit and senior unsecured debt ratings. As a result, the CR Assessment for most rated banks in the Philippines is 1 notch higher than their deposit ratings, reflecting Moody's view that authorities are likely to honor the operating obligations the CR Assessment refers to in order to preserve a bank's critical functions and reduce potential for contagion.

However, in the case of LBP, given its very high deposit rating, which is aligned with the Philippine government bond rating at Baa2, Moody's has also assigned a CR Assessment of Baa2(cr).

WHAT COULD CHANGE THE RATINGS UP

PNB

An upward revision of PNB's BCA would likely lead to an upgrade of its ratings, assuming that its credit metrics remain robust.

The following factors could result in an upward revision of the BCA: (1) proven ability to maintain its nonperforming assets -- NPLs and foreclosed assets; and/or; (2) evidence that it can reduce its operating expenses and improve its risk-adjusted profitability and/or; (3) a high level of loss-absorption capacity.

RCBC

An upward revision of RCBC's BCA would likely lead to an upgrade of its ratings, assuming that its credit metrics remain robust.

The following factors could result in an upward revision of the BCA: (1) proven ability to contain or reduce nonperforming assets -- NPLs and foreclosed assets; (2) an ability to maintain its capitalization level in line with the peers; and/or (3) evidence that it can continue to reduce credit costs and improve its risk-adjusted profitability to support capital generation.

RCBC's preferred stock rating is linked to its BCA, and could be upgraded if its BCA is raised.

LBP

LBP's deposit rating of Baa2 is at the same level as the Philippines' sovereign rating. It is unlikely that LBP will be rated above the sovereign as we view the correlation of risk between the bank and the sovereign to be high. The stable outlook on the sovereign's rating suggests that the upside and downside risks are balanced. Nonetheless, an upgrade of the sovereign rating would likely lead to an upgrade of the bank's deposit ratings, assuming its credit metrics remain robust.

The following factors could result in an upward revision of the BCA: (1) improvements in the timeliness and transparency of financial reporting; and/or (2) significant reductions in credit risk concentrations in individual borrowers and industry groups; and/or (3) a significant diversification of its funding sources, reducing its reliance on government-related funding and exposure to policy risks.

MBT

MBT's deposit rating of Baa2 is at the same level as the Philippines' sovereign rating. It is unlikely for MBT to be rated above the sovereign as we view the correlation of risk between the banks and the sovereign to be high. The stable outlook on the sovereign's rating suggests that the upside and downside risks are balanced. Nonetheless, an upgrade of the sovereign rating would likely lead to an upgrade of the banks' deposit ratings, assuming its credit metrics remain robust.

If the sovereign is upgraded, the following factors could result in an upward revision of the bank's BCA: (1) a consistent reduction in non-performing assets (non-performing loans and foreclosed assets); (2) steady improvement in profitability levels, as reflected by improvements in core earnings and reductions in credit costs; and/or (3) higher levels of loss-absorption capacity, as reflected by steady improvements in its capitalization.

MBT's subordinated debt and hybrid ratings are linked to its BCA, and could be upgraded when its BCA is upgraded.

WHAT COULD CHANGE THE RATINGS DOWN

PNB

The bank's BCA and consequently its ratings could be lowered if: (1) aggressive organic expansion or acquisitions result in a significant increase in its risk profile; and/or (2) its operating environment weakens significantly or underwriting practices become lax, resulting in a significant increase in nonperforming assets (NPLs and foreclosed assets); and/or (3) there is a material decline in its capital buffers.

RCBC

The bank's BCA and consequently its ratings could be lowered if: (1) aggressive organic expansion or acquisitions result in a significant increase in its risk profile; and/or (2) its operating environment weakens significantly or underwriting practices become lax, resulting in a significant increase in nonperforming assets (NPLs and foreclosed assets); and/or (3) there is a material decline in its capital buffers, such that its Tangible Common Equity/ Risk Weighted Assets (TCE/RWA) ratio falls below 10%.

LBP

The bank's BCA and consequently its ratings could be lowered if: (1) the operating environment weakens significantly or underwriting practices become loose, resulting in a significant deterioration in its asset quality; and/or (2) if non-performing loans rise without a corresponding increase in loan-loss provisions; and/or (3) its capital buffer declines materially, as a result of balance sheet or credit losses.

MBT

The bank's BCA could be lowered if: (1) aggressive organic expansion or acquisitions result in a significant increase in their risk profiles; and/or (2) the operating environment weakens significantly, or underwriting practices loosen, resulting in a steady increase in non-performing assets which erodes loss-absorbing buffers; and/or (3) there is a material decline in the banks' capital buffers, as a result of strong balance sheet growth or credit losses.

Taking into account today's announcement, the bank's ratings are as follows:

BPI

• BCA and Adjusted BCA remains unchanged at baa2;

• Local and foreign currency deposits rating remains unchanged at Baa2/P-2; stable outlook on long-term rating;

• CR Assessment of Baa1(cr)/P-2(cr).

BDO

• BCA and Adjusted BCA remains unchanged at baa2;

• Local and foreign currency deposit rating remains unchanged at Baa2/P-2; stable outlook on long-term rating;

• Foreign currency senior unsecured rating remains unchanged at Baa2; stable outlook on long-term rating;

• CR Assessment of Baa1(cr)/P-2(cr).

LBP

• BCA and Adjusted BCA upgraded to ba2 from ba3;

• Local and foreign currency deposit ratings affirmed at Baa2/P-2; stable outlook on long-term rating;

• CR Assessment of Baa2(cr)/P-2(cr).

MBT

• BCA and Adjusted BCA affirmed at baa2

• Local and foreign currency deposit rating affirmed at Baa2/P-2; stable outlook on long-term rating;

• Local currency subordinated debt affirmed at Baa3;

• Foreign currency pref. stock non-cumulative rating affirmed at Ba2 (hyb);

• CR Assessment of Baa1(cr)/P-2(cr).

PNB

• BCA and Adjusted BCA upgraded to ba1 from ba3

• Local and foreign currency deposit ratings upgraded to Baa3/P-3 from Ba2/NP; outlook on long-term rating changed to stable from ratings under review;

• CR Assessment of Baa2(cr)/P-2(cr).

RCBC

• BCA and Adjusted BCA upgraded to ba1 from ba3;

• Foreign currency deposits rating upgraded to Baa3/P-3 from Ba2/NP; outlook on long-term rating changed to stable from ratings under review;

• Foreign currency MTN program rating upgraded to (P)Baa3 from (P)Ba2;

• Foreign currency senior unsecured debt rating upgraded to Baa3 from Ba2; outlook on long-term rating changed to stable from ratings under review;

• Foreign currency preferred stock rating upgraded to B1(hyb) from B3(hyb);

• Foreign currency other short term rating upgraded to (P)P-3 from (P)NP;

• CR Assessment of Baa2(cr)/P-2(cr).

UCPB

• BCA and Adjusted BCA remains unchanged at caa1;

• Foreign currency bank deposits remains unchanged at B2/NP; stable outlook on long-term rating;

• Foreign currency deposit note/CD program remains unchanged at (P)B2/(P)NP;

• CR Assessment of B1(cr)/NP(cr).

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Manila, BPI reported total assets of PHP1,450 billion as of 31 December 2014.

Headquartered in Manila, BDO reported total assets of PHP1,864 billion as of 31 December 2014.

Headquartered in Manila, LBP reported total assets of PHP849 billion as of 31 December 2013.

Headquartered in Manila, MBT reported total assets of PHP1,616 billion as of 30 March 2015.

Headquartered in Manila, PNB reported total assets of PHP625 billion as of 31 December 2014.

Headquartered in Manila, RCBC reported total assets of PHP458 billion as of 31 December 2014.

Headquartered in Manila, UCPB reported total assets of PHP277 billion as of 31 December 2013.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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.

Alka Anbarasu
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
SUBSCRIBERS: (852) 3551-3077

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's upgrades two Philippine banks to investment grade; and assigns Counterparty Risk Assessment to seven banks
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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