Moody’s Investors Service upgraded the deposit ratings of the four biggest banks in the Philippines after it raised the country’s sovereign debt rating by a notch to Baa2.
The ratings agency said in a statement it has upgraded the deposit ratings of BDO Unibank Inc (BDO), Bank of the Philippine Islands (BPI), Land Bank of the Philippines (LBP), and Metropolitan Bank & Trust Company (MBT) to Baa2/Prime-2, one notch higher than their previous aa3/Prime-3, with a stable outlook.
“Moody’s considers that the credit strength of the Philippine government is an important input in its assessment of the latter’s capacity to provide support in times of stress, and believes that these four banks—due to their systemic importance—are more likely to fully benefit from the higher sovereign rating,” it added.
At the same time, the ratings agency also raised the bank financial strength ratings (BFSR) of BDO, BPI and MBT to C- from D+ to reflect improvements in their standalone credit profiles.
As a result, Moody’ also raised the three banks’ baseline credit assessments (BCAs) to baa2 from baa3.
Banks-sovereign ratings link
“There are two main drivers of the rating actions for the banks: First, some of the positive drivers of the sovereign action are reflected in the improved operating environment for the Philippine banking system, particularly its major banks,” it said.
The ratings agency noted that these positive drivers include robust growth in the Philippine economy despite slowing global demand; strong domestic consumption supported by steady remittance inflows, which in turn has contributed to the banks’ healthy credit growth and profitability; well-anchored inflation; and the absence of any strong overheating in domestic asset markets, thereby underpinning the banking system’s improved level of asset quality.
“Second, the improved creditworthiness of the Philippine government results in its stronger capacity to support the banks,” it said.
Moody’s stressed that the stable outlook on the Philippines’ rating suggests that the upside and downside risks to these four banks are balanced.
An upgrade to the Philippine sovereign is likely to lead to an upgrade of the banks’ deposit ratings, assuming their credit metrics remain robust, Moody’s said, although it added that it is unlikely for banks to be rated above the Philippines as the correlation of risk between the banks and the sovereign is high.
Moody’s warned that the banks’ BCAs could be lowered if aggressive organic expansion or acquisitions result in a significant increase in their risk profiles; if the operating environment weakens significantly or underwriting practices loosen, resulting in a steady increase in non-performing assets which erodes loss-absorbing buffers; or if there is a material decline in the banks’ capital buffers resulting in Tier 1 ratios falling below 10 percent.
Meanwhile, it said the following factors could result in an upward revision of LBP’s BCA: Significant diversification of its funding sources, reducing its reliance on government-related funding and exposure to policy risks; improvements in the timeliness and transparency of financial reporting; or significant reductions in credit risk concentrations in individual borrower and industry groups.