DBP charter changes to support capital position

PROPOSED CHANGES to the charter of the Development Bank of the Philippines (DBP) that would allow for public ownership could help support the state-run lender’s capital restoration following its contribution to the country’s sovereign wealth fund and boost its credit profile, debt watcher Fitch Ratings said.

“The proposed amendments to Development Bank of the Philippines’ charter, which will allow the state to sell part of its stake in the bank, are unlikely to have any impact on the bank’s sovereign support-driven Issuer Default Ratings (IDR),” Fitch said in a commentary on Monday.

“However, a stake sale that significantly improves DBP’s capital position may be positive for the bank’s standalone credit profile, as it can restore underlying capital buffers that were eroded when DBP injected capital into Maharlika Investment Fund in late 2023,” it said.

Fitch in March affirmed DBP’s long-term foreign- and local-currency IDRs at “BBB” with a “stable” outlook, matching its assessment of the Philippines.

However, it downgraded the bank’s Viability Rating (VR) to “bb-” from “bb” following its capital contribution to the Maharlika Investment Corp. (MIC), as this would have “reduced its common equity Tier 1 (CET1) ratio by 4pp (percentage points) and resulted in a breach of the local capital requirement if not for regulatory forbearance.”

The Senate in September approved on final reading a bill that seeks to amend the DBP’s charter.

Under Senate Bill No. 2804 or “The New Development Bank of the Philippines Act,” which will repeal Executive Order No. 81 issued in 1986 or DBP’s current charter, the state-run bank’s capital will be hiked to P300 billion from P35 billion — part of which can be raised via public listing — to help finance its priority sectors.

The bill said that the National Government will own 70% of the DBP’s capital stock at all times, with P32 billion or 10.67% being fully subscribed to and paid for by the state.

Under the measure, the DBP will also be allowed to engage in financial leasing in connection with government projects. The amendments will likewise streamline the bank’s bond issuance process.

Fitch said that while the proposed new DBP charter allows for its public listing, which would dilute the government’s ownership, it ensures that the state will still retain majority control of the lender.

“We believe DBP continues to play a strategic role in advancing the state’s policy agenda that the government is likely to retain, notwithstanding the possibility of lower public ownership. DBP’s policy role underpins its sovereign support-driven IDR of ‘BBB’/Stable, which is equalized with the Philippines’ sovereign rating,” it said.

“However, capital injection via a potential stake sale that enhances DBP’s capital position materially could lead to an upgrade in the bank’s Viability Rating, which reflects its standalone credit strength,” Fitch added.

The debt watcher said the bank’s capitalization has improved, with its parent-level CET1 ratio at 13.8% as of end-September 2024, up from 13% at end-2023, factoring in regulatory relief.

“We expect the bank’s capital buffers to continue to rise steadily as profitability improves, helped by lower credit costs amid a robust economic environment,” Fitch said.

“We have not factored in any potential stake sale in our base-case projections, given the significant uncertainty surrounding the timeline and execution of any sale, but more concrete plans could buoy the VR if and when they are announced. Beyond enhancements in its capitalization, DBP’s VR could also be upgraded should we see improvement in its asset quality and profitability.”

DBP and Land Bank of the Philippines (LANDBANK) earlier sought regulatory relief from the central bank following their contributions to the MIC. DBP and LANDBANK were mandated to contribute P25 billion and P50 billion, respectively, as initial seed capital for the MIC, which were remitted in September 2023.

DBP booked a net profit of P4.68 billion at end-September 2024, down by 8.95% year on year. — Luisa Maria Jacinta C. Jocson