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FITCH Ratings said Banco De Oro Universal Bank’s (BDO) asset
quality remains weak, but expects the possible improvement through
rehabilitation and recovery efforts.
At present, the bank has about P16.4 billion in
nonperforming loans and P24.3 billion of net investment properties,
60 percent of which are foreclosed properties having 13-percent
reserve coverage.
Fitch said it remains to be seen whether these
levels are satisfactory as they are “lower than what some other
banks have required.” The lender’s management said it would
suffice since property prices and values of the prime location of
some of its real estate are going up.
The international ratings firm said another
weakness of the bank is its capitalization, which is on a pro-forma
basis “modest” and is subject to downward pressure. Its core
equity stands at P44 billion—net of goodwill, deferred-tax assets
and unrealized reserves—or 7 percent of assets at end-2006.
However, its capital adequacy ratio would be boosted by 2 to 3
percent through its Tier 2 capital issue, raising about P10 billion.
Fitch said it would accord BDO a positive
outlook leading to an upgrade in the lender’s credit rating if the
merger with Equitable PCI Bank (EPCIB) proves successful and the
surviving entity boosts its capital.
It said the Philippines’ second largest
bank—which has a 13-percent market share—is “systemically
important”. However, its ability is “limited given that it only
has a deposit rating of ‘BB’,” which was “low” by Fitch
standards.
“Elsewhere, its parent, the SM group, is
substantial and financially sound and some limited level of support
can be expected,” Fitch said.
The rating for the merged BDO-EPCIB would depend
on its adequate and steady profitability as well as its average
asset quality, supported by modest capital strength, the ratings
firm said. Through small acquisitions, BDO grew but mostly relied on
debt papers as its customer base was “very corporate-oriented”
while EPCIB had diversity in terms of client base and businesses and
products.
“Significant revenue and cost synergies should
arise from the integration of the two banks, due to complete by
mid-2008, as led by BDO’s very competent and driven management,”
Fitch said.
Moreover, the profitability of a bigger BDO is
“adequate with an upside potential in the long run” despite
limited treasury gains “given the rising interest rate
expectations” and the merger of the two entities, the rating firm
said, adding a quarter of the bank’s pro-forma assets are made up
of debt securities, mostly government papers.
-- Likha C. Cuevas-Miel
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