Interest in the Philippines as an investment destination is expected to be stoked by a strategic partnership between Security Bank Corp. and Japan’s biggest bank, Fitch Ratings said.
The planned purchase of a 20 percent stake in Security Bank by Bank of Tokyo-Mitsubishi UFJ, the debt watcher said on Friday, would strengthen the credit profile of the Philippine bank and also lead to continued interest in the sector by other foreign financial institutions.
“The new strategic partnership between the two banks and stake sale announced on 14 January 2016 would provide mid-sized Security Bank with access to the client network, product suite and technical know-how of Japan’s largest bank by assets,” Fitch said.
It noted that partnership would bring an additional P36.9 billion in fresh equity, which would make Security Bank the fifth-largest commercial bank in the Philippines in terms of shareholder equity.
The capital injection would boost Security Bank’s common equity Tier 1 ratio to 22.5 percent on a pro-forma basis from 12.7 percent as of end-September 2015, significantly enhancing the Philippine bank’s ability to absorb higher credit losses in times of stress and fund further growth.
“The addition of two BTMU appointees to Security Bank’s board could also improve the governance checks and balances within the bank,” Fitch said.
Security Bank plans to accelerate its growth plans following the transaction, aiming to roughly double its branch network to 500-600 branches and more than quadruple its loan portfolio by 2020 to attain 8 percent to 9 percent of system loans and deposits from its current 4-percent market share, Fitch noted.
The ratings firm said the enhanced franchise could lift Security Bank’s rating profile if it maintained sufficiently prudent underwriting standards and risk controls, and preserved its balance sheet strength throughout the expansion.
“For the present, however, the declared growth targets are ambitious, and we see risks to the bank’s asset quality and earnings performance if its underwriting, risk management and technology infrastructures were to lag behind its rapid expansion plans,” it said.
“This is despite our assessment that the bank’s current lending policies and risk framework appear generally robust and have contributed to its better asset quality and profitability relative to peers over the years.”
Rapid growth is likely to erode Security Bank’s post-deal capitalization over time, but Fitch expects capital ratios to nonetheless remain reasonably high over the next two to three years.
“Brisk asset growth also raises the question of how it will be funded, and the bank’s funding structure – currently healthy with a loan/deposit ratio of 78.7 percent and a majority deposit-funded balance sheet – may be weakened if the bank is unable to boost deposits sufficiently to keep pace with its lending,” the debt watcher said.
The tie-up could open up new business avenues in the form of trade finance, cash management and other lending opportunities to the Japanese business community in the Philippines, it said, noting that Japan is one of the Philippines’ largest trading partners, accounting for over 20 percent of the country’s exports, ahead of the United States and China.
In connection with this, Fitch believes the Philippines’ promising growth prospects, backed by a young, English-speaking population and relatively low credit penetration, make it an attractive investment destination for foreign banks and investors.
“[We] expect continued interest from foreign banks seeking an entry into the market,” it said.
For instance, it noted that a number of regional banks have sought branch licenses over the past 12 to 18 months, and that Taiwan-based Cathay Life Insurance Co. Ltd. in late 2014 acquired a 20-percent stake in mid-sized Rizal Commercial Banking Corp.
The Bangko Sentral ng Pilipinas earlier this week said the local banking sector was poised to become more dynamic and competitive with the entry of six foreign financial institutions last year.