Moody’s Investors Service has downgraded the subordinated debt (subdebt) ratings of Rizal Commercial Banking Corp.
(RCBC) and the Philippine National Bank (PNB), following its reassessment on the probability of government support that was assumed for the debt class.
The credit-rating agency concluded its review by removing the support uplift previously incorporated in the banks’ subdebt ratings, resulting in these banks’ subdebt now being rated one notch below their baseline credit assessments adjusted for parental support (adjusted BCAs).
It added that the downgrade reflects the increasing international trend of imposing losses on holders of subdebt securities (creditor “bail-in”), as a pre-condition for distressed banks to receive government support.
“As a consequence, Moody’s no longer assumes that Philippine government support would be forthcoming for the holders of such securities,” it stated.
Meanwhile, Simon Chen, Moody’s assistant vice president and analyst, said that the agency recognized that the Bangko Sentral ng Pilipinas has in the past stepped in to assist ailing banks in a way that supported all creditors.
“However, the global financial crisis has demonstrated that support can be provided selectively, with the costs being shared with subordinated creditors of a bank, without triggering any contagion, as it was previously feared,” Chen said.
Moody’s analysis also observes that the Philippines has a modern and progressive approach to bank regulation.
It explained that there is no explicit legal power allowing Philippine regulators to selectively impose losses on subdebt holders outside of a liquidation process.
The current banking regulations including the General Banking Law of 2000 and the New Central Bank Act provide for an ailing bank to be placed under control by the regulatory authorities, with powers to wind up and/or restructure the ailing bank’s operations, it noted.
“In our view, such recourse could be used to coerce subdebt holders into a distressed ex-change, if not for the outright imposition of losses on them outside of liquidation,” Chen concluded.
At the same time, Moody’s confirmed the subdebt rating of Metropolitan Bank and Trust Co.
“Today’s decision to the remove support uplift from this debt class means that subdebt ratings would now generally move in tandem with a bank’s BCA,” it stated.