Moody’s affirms BDO’s deposit ratings

MOODY’S Investors Service affirmed its deposit ratings for BDO Unibank, Inc., keeping its outlook at “stable,” on expectations of steady profitability and improved asset quality as the economy continues to rebound.

“Moody’s Investors Service has affirmed BDO Unibank, Inc.’s Baa2/P-2 long-term (LT) and short-term (ST) local and foreign currency bank deposit ratings, Baa2 foreign currency senior unsecured rating, (P)Baa2/(P)P-2 foreign currency senior unsecured medium-term note (MTN) and other ST program ratings, and baa2 Baseline Credit Assessment (BCA) and Adjusted BCA,” the debt watcher said in a statement on Thursday.

Moody’s also affirmed the bank’s Baa1/P-2 LT and ST local and foreign currency counterparty risk ratings and Baa1(cr)/P-2(cr) LT and ST counterparty risk assessments.

The “stable” outlook means its ratings are likely to remain steady in the next 12-18 months.

“The affirmation of BDO’s Baa2 deposit and senior unsecured debt ratings reflects the bank’s stabilizing asset quality, strong capital and adequate profitability. Funding will remain a key credit strength, underpinned by its extensive deposit franchise as the largest Philippine bank by deposits,” Moody’s said.

The economy’s continued recovery from the coronavirus pandemic is expected to boost BDO’s asset quality, the credit rater said, noting how its gross nonperforming loan (NPL) ratio, along with other indicators, improved in 2022.

“While the recent rapid increase in domestic interest rates to the highest level since the 2008 global financial crisis poses asset risks, the bank’s strong loan loss buffers will cushion the impact… However, the bank’s significant credit concentration to large domestic corporates, a structural feature of the Philippine banking system, remains a key asset risk,” Moody’s added.

The debt watcher expects BDO’s capital to remain stable over the next 12-18 months “as internal capital generation will likely keep pace with balance sheet growth and dividends.”

Profitability is also expected to be steady in the same period as its net interest margin is stable.

“Funding is a key credit strength, as seen in a very high 79% ratio of low-cost current and savings deposits in total deposits as of the end of 2022, and will remain stable over the next 12-18 months. Moody’s expects the bank to benefit from a flight to quality during periods of market stress,” it said.

BDO liquidity position is healthy, Moody’s said, with the bank being a consistent net lender in the interbank market.

“While around 71% of its investment securities are in the hold-to-collect category, Moody’s expects that, during periods of market stress, the bank could obtain liquidity by pledging those securities before having to sell them at a loss,” the debt watcher said.

“Given BDO’s systemic importance, Moody’s continues to assume a very high level of public support in the bank’s ratings. However, given the bank’s BCA is at the same level as the Philippine government rating, the bank’s deposit and issuer ratings do not benefit from any uplift,” it added.

Moody’s said BDO’s deposit rating and BCA are at the same level as the Philippines’ sovereign rating, which means an upgrade to the bank will hinge on a rating action for the country.

“BDO’s BCA could be lowered if (a) its CET1 (common equity Tier 1) ratio declines to less than 11.5% or (b) there is a significant and sustained increase in its NPLs, such that its credit costs increase to more than 100 basis points of gross loans, which, in turn reduces its profitability and capital. Its deposit rating could be lowered if the BCA is lowered by more than one notch.”

BDO saw its attributable net income climb by 33.33% P57.054 billion in 2022 from P42.791 billion the prior year.

Its shares closed at P124 apiece on Thursday, down by P2.20 or 1.74%.