Fitch Ratings has raised its outlooks for state-owned Land Bank of the Philippines (LandBank) and Development Bank of the Philippines (DBP) to positive from stable following last month’s country outlook upgrade.
The long-term issuer default rating for both banks were affirmed at “BB+” and the debt watcher said both LandBank and DBP could be designated as “domestic systemically important banks”.
“The outlooks have been revised following a revision in the Philippines sovereign’s outlook to positive from stable on 24 September 2015, which takes into account the improvement in Philippine governance standards and global competitiveness,” Fitch said on Monday.
“Falling public debt and resilient economic growth and external finances should at least help sustain the sovereign’s ability to support the banking sector,” it noted.
Given this view, Fitch said the drivers of LandBank and DBP’s IDRs had switched to sovereign support from viability ratings (VRs).
Both banks’ VRs of “bb+” were said to reflect moderate asset quality, including loan books that are “partly policy-oriented and highly concentrated”, and satisfactory capitalization, funding and earning profiles.
Support ratings of “3” and support rating floors of “BB+”, meanwhile, take into account the moderate probability of “extraordinary government support” being made available if needed.
“The two banks are 100 percent owned by the government and serve quasi-policy roles. They are also important in the local banking system — we believe LBP and DBP would be designated as domestic systemically important banks (D-SIBs) due to their meaningful share of assets and deposits in the Philippines,” it also stressed.
A merger of both banks has been proposed to improve operating efficiency and remove policy overlaps, among others, but a delay – due to inaction by the Senate — “might imply that consolidation in the near to medium term would be challenging considering the upcoming presidential election in 2016, Fitch said.
The House of Representatives already approved its version of the merger bill in May of this year.
LandBank’s mandate is to provide financial support for agrarian reform and credit facilities for the agricultural sector. The DBP, meanwhile, is tasked with extending medium- and long-term credit facilities to priority sectors such as infrastructure and microenterprises.
Meanwhile, a proposal to inject fresh capital of P20 billion and P10 billion into LandBank and DBP, respectively, in 2016 is making its way through Congress. The infusions are equivalent to about 4 percent of each bank’s risk-weighted assets and would help both comply with higher capital requirements.
Fitch said the banks would have to maintain common equity Tier 1 ratios above 10 percent to 11 percent in the medium term, including D-SIB charges of 1.5 percent to 2.5 percent that will be phased in over 2017 to 2019.
Fitch last month affirmed the country’s credit rating at “BBB-”. LandBank and DBP’s SRFs are one notch lower than the sovereign ratings and the same as those of the country’s three largest private commercial banks.
“This is due to the DBP’s and LBP’s hybrid nature, as they are subject to the same regulatory and prudential measures and apply similar underwriting criteria to private commercial banks,” Fitch said.