Fitch Ratings raises outlook on Philippine banks to stable

FITCH RATINGS on Tuesday raised its outlook on local lenders to reflect the revision done for that on the sovereign, which means their ratings will likely be maintained in the next 12 to 18 months.

The debt watcher revised its outlook on five rated Philippine banks to stable from negative while maintaining their ratings, it said in a statement on Tuesday. The move came a week after it did the same for its outlook on the country’s “BBB” assessment.

Fitch covers government-owned Land Bank of the Philippines (LANDBANK) and Development Bank of the Philippines (DBP) and three commercial banks: Bank of the Philippine Islands (BPI), BDO Unibank, Inc. (BDO), and Metropolitan Bank & Trust Co. (Metrobank).

“The Issuer Default Ratings of all banks we rate in the Philippines continue to be driven by our expectation of extraordinary government support, if needed. Today’s rating actions reflect our view of the state’s improving ability to provide such support,” Fitch said.

According to the credit rater, the net interest margins of Philippine banks have benefited from the 425-basis-point increase in interest rates since May last year due to their favorable asset and funding structures.

“We expect the pace of margin expansion to slow for the rest of the year, as we believe that the central bank is at the tail-end of its policy tightening cycle and as most loans already reflect prevailing rates,” Fitch said.��

On May 18, the Bangko Sentral ng Pilipinas (BSP) decided to keep the policy rate at 6.25% and signaled it will remain unchanged at least until third quarter of this year.

“However, revenue growth remains robust and we expect the banks to build on the momentum to record even stronger profitability in 2023. Continued capital accrual will support the banks’ capitalization, which we expect to remain steady in the near term,” it said.

For the government-owned banks, Fitch kept LANDBANK’s and DBP’s Long-Term IDR ratings at “BBB” due to the high probability of state support to the banks in�� times of crises, as indicated by their Government Support Rating (GSR) of “bbb.”

It said the details of the merger between the two banks are still fluid, but the government’s willingness to support both lenders remains intact while the issue is being resolved.

Both banks’ viability ratings (VR) are not affected by the likely merger and will continue to benefit from the resilient economic momentum over the next 12-18 months.

The merger is expected to be finalized in November this year. LANDBANK will be the surviving entity with larger assets, capital stock and even having more branches compared with DBP.

LANDBANK primarily caters to developing the Philippines’ agricultural sector and provides support for the agrarian reform program, while DBP provides banking services for small businesses in the agricultural and industrial sector.

On the other hand, BDO, BPI, and Metrobank, which all hold a “BBB-” rating from Fitch, will continue to benefit from the resilient economic activity over the next 12-18, the debt watcher said.

It said the profitability of all three banks will continue to improve this year due to its higher margins and sustained loan growth.

Meanwhile, a revision or a downgrade in the sovereign rating outlook may lead to a similar revision in the three banks’ ratings.

For Metrobank, there could be negative action on the IDRs and GSR if the government’s capability to support the bank diminished. However, this scenario is unlikely to happen in the near term. — Keisha B. Ta-asan