December 12, 2017, 11:12 am
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Moody’s upgrades PNB, RCBC ratings

Moody’s Investors Service has upgraded the foreign currency deposit ratings of Philippine National Bank (PNB) and Rizal Commercial Banking Corporation (RCBC) to Baa2/P-2 from Baa3/P-3.

Moody’s has also upgraded PNB’s local currency deposit rating to Baa2/P-2 from Baa3/P-3.

In the case of RCBC, Moody’s has upgraded the bank’s senior unsecured debt and senior unsecured MTN program rating to Baa2 and (P)Baa2 from Baa3 and (P)Baa3, as well as the bank’s other short term rating to (P)P-2 from (P)P-3.

Furthermore, for these two banks, Moody’s has upgraded their baseline credit assessments (BCAs) and adjusted BCAs to baa3 from ba1.

Moody’s has also affirmed the Counterparty Risk Assessment (CR Assessment) of PNB and RCBC at Baa2(cr)/P-2(cr).

The ratings outlook for these two banks is maintained at stable.

The upgrade of PNB and RCBC’s deposit ratings to Baa2, Moody’s said, takes into account the one-notch upgrade of their BCAs to baa3, and a one-notch uplift to reflect Moody’s assumption that the banks will receive support from the Government of the Philippines (Baa2 stable) in times of need.

The upgrade of PNB and RCBC’s BCAs also takes into account the stable operating environment for banks in the Philippines, supported by a strong economy, and the private sector’s benign leverage and stable debt servicing metrics. Philippine banks exhibit strong funding profiles
that are dominated by deposits, and demonstrate little reliance on short-term wholesale funding. These factors are incorporated in Moody’s assessment of the macro profile of the Philippines of Moderate(+).

The upgrade of PNB’s BCA to baa3 from ba1 reflects the bank’s improved financial profile since its merger with Allied Banking Corporation (ABC) in 2013. In particular, the bank’s asset quality and capital buffers have become comparable with those of its peers in the Philippines.

The bank’s high levels of capitalization and loan-loss coverage provide sufficient loss-absorption capacity at its current rating level to withstand moderate asset quality deterioration over the next 12-18 months.

PNB’s BCA of baa3 is also supported by its relatively stable funding profile with limited depositor concentration as compared to other peers in the country. PNB was the fifth-largest bank in the system, with 689 branches and 1,176 ATMs as of the end of September 2017. The bank’s franchise was enhanced after the merger with ABC in 2013, particularly in the significant markets of Metro Manila and Luzon. Furthermore, the bank’s liquid assets -- which represented 36 percent of the total tangible assets as of the end of December 2016 -- provide support against downside risks.

Nevertheless, these strengths are balanced by the bank’s low profitability metrics, when compared with other peers in the country, given its low cost efficiency. Although, Moody’s expects PNB’s interest income to improve as the bank expands loans to the higher-yielding small and medium enterprises and the retail segments, nevertheless, the bank’s high cost to income ratio of 67 percent over the last three years will limit improvements to its profitability profile.

The upgrade of RCBC’s BCA to baa3 from ba1 reflects Moody’s assessment that the bank’s standalone profile has become comparable with its peers in the Philippines, as reflected by its solvency and funding metrics. In addition, Moody’s expects the bank to maintain its capital buffers in line with the other similarly rated peers in the Philippines, by periodically accessing the equity markets, as it has done in the past.

RCBC’s BCA of baa3 incorporates the modest deterioration in its asset quality metrics as reflected by its net non-performing loan ratio of 1.41 percent as of September 2017 as compared to 0.97 percent in the year before. 

Over the next 12-18 months, Moody’s said RCBC’s new NPL formation rate is likely to rise gradually as loans begin to season, but will remain manageable, given the robust operating environment in the Philippines.

RCBC’s BCA also reflects the bank’s smaller branch network which limits its ability to garner low-cost deposits compared with that of its larger peers in the country. Nevertheless, liquid assets — which represented 32 percent of the bank’s tangible assets at end-2016 — provide support against downside risks.

The outlook on PNB’s and RCBC’s ratings is stable, in line with the stable outlook on the Government of the Philippines’ long-term rating.

PNB’s deposit rating of Baa2 is at the same level as the Philippines’ sovereign rating. It is unlikely that PNB will be rated above the sovereign, because of the high correlation of risk between the bank and the sovereign. Moreover, the stable outlook on the sovereign’s rating suggests that the upside and downside risks are balanced.

RCBC’s deposit and debt ratings of Baa2 are at the same level as the Philippines’ sovereign rating. It is unlikely that RCBC will be rated above the sovereign, because of the high correlation of risk between the bank and the sovereign. And, the stable outlook on the sovereign’s rating suggests that the upside and downside risks are balanced.

Philippine National Bank, headquartered in Manila, reported total assets of P799 billion as of end-September, 2017.

Rizal Commercial Banking Corporation, headquartered in Manila, meanwhile reported total assets of P504 billion during the same period.
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