Debt-watcher Fitch Ratings has affirmed the credit scores of two government-owned banks and retained a “positive” outlook, in line with expectations for the sovereign.
In a statement on Thursday, Fitch said it affirmed the long-term issuer default ratings (IDRs) of Development Bank of the Philippines (DBP) and Land Bank of the Philippines (LBP).
“The outlooks on both banks remain positive, mirroring the positive outlook on the Philippine sovereign’s ratings,” it stated.
The ratings firm said the IDRs and national ratings of DBP and LBP were driven by expectation of state support for the banks, as indicated by their support ratings (SRs) of “3” and support rating floors (SRFs) of “BB+.”
A “BB+” rating by Fitch is non-investment grade, indicating an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time.
“Their SRFs are at the same level as for the large systemically important commercial
banks,” it said.
Fitch also believes the government would have a high propensity to provide extraordinary support to the two banks in times of need, in light of their full ownership and quasi-policy roles as set out in their respective forming charters.
“The probability of state support is considered moderate overall, after taking into account the sovereign’s fiscal flexibility, as indicated by the sovereign IDR of ‘BBB-’,” it said.
A “BBB” rating, which is an investment-grade, indicates that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
Meanwhile, the credit ratings agency noted that the viability ratings (VRs) on DBP and LBP take into account the banks’ satisfactory asset quality and profitability, reasonable risk management frameworks and healthy funding and liquidity profiles.
“These ratings also take into account the steady improvement in the Philippine operating environment, including a stronger prudential framework,” it said.
That said, DBP’s and LBP’s development mandates continue to have significant influence on their intrinsic profiles, resulting in materially higher loan and deposit concentrations compared with commercial bank peers.
Fitch said both banks’ capitalizations remain adequate as indicated by their estimated Fitch core capital (FCC) ratios, which are above their regulatory common equity Tier 1 (CET1) ratios.
Capital injections from the government over 2016–of P5 billion or about 1.9 percent of risk-weighted assets (RWAs) for DBP and P9 billion or 1.8 percent of RWAs for LBP–will help to improve the ratios.
“The CET1 ratios significantly declined for both banks in 2015 largely due to the full deduction of certain legacy equity investments from CET1 capital,” according to Fitch.
The CET1 ratio fell to 10.4 percent at end-2015 for DBP from 13.8 percent a year earlier and to 10.0 percent for LBP from 11.7 percent.
“Funding and liquidity are relative rating strengths. Deposits are highly concentrated, but mainly derived from government sources or large corporate funds, and fairly stable,” it said.
Fitch pointed out that the banks’ balance sheets are also liquid, and a significant portion of assets are held in cash, balances with the central bank, and government securities.