Moody’s Investors Service assigns investment-grade rating to UnionBank

MOODY’S Investors Service has assigned an investment-grade rating to Aboitiz-led UnionBank of the Philippines (UnionBank) with a “stable” outlook in line with the country’s own score, on the back of the lender’s profitability and strong core businesses.

The credit rater said in a statement yesterday that it gave UnionBank long-term local and foreign currency deposit and issuer ratings of Baa2, the same level as the sovereign’s grade.

It also assigned a long-term foreign currency senior unsecured medium-term note (MTN) program rating of (P)Baa2 to the lender. The Aboitiz-led bank likewise got a baa3 baseline credit assessment (BCA), while the counterparty risk assessment is at Baa2(cr).

Moody’s said its ratings are based “on its assessment that “the bank will receive moderate support from the [g]overnment of the Philippines (Baa2 stable) in times of need.”

The debt watcher said UnionBank’s baa3 BCA also “reflects the bank’s above-industry-average core profitability, which is supported by its growing lending operations, in particular, its higher-yielding retail business, and its superior cost efficiency relative to its domestic peers.”

“In addition, the bank’s BCA incorporates its adequate capital generation and track record of strong support from key shareholders,” it said.

It noted that the “above-industry-average profitability” has boosted UnionBank’s growth, with capital and asset levels remaining strong.

Still, the bank’s “above-industry” loan growth — at a compounded annual growth of 30% between 2014 and 2016 against the system’s 16% — “exposes the bank to unseasoned risk,” Moody’s said. UnionBank’s gross non-performing loan (NPL) ratio of 3.95% at end-September, the credit rater noted, is higher than that of its other Philippine banks.

“Over the next 12-18 months, its 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,” the debt watcher said.

“Given management’s intention to pursue a more moderate pace of loan growth in 2018, Moody’s expects that the bank’s internal capital generation will be largely sufficient to support business growth,” it added.

Also cited as a weakness was UnionBank’s funding profile, which Moody’s noted had “a high concentration of high-cost large corporate deposits.”

“Depositor concentration rose over the first nine months of 2017 in order to fund its somewhat rapid loan growth. However, liquid assets — which represented 48% of the bank’s tangible assets at end-2016 — provide some support against downside risks,” it added.

Moody’s said it is unlikely to raise UnionBank’s credit grade ahead of the Philippines’ rating, “given the high correlation of risks between the bank and the sovereign.”

However, it noted that an upward revision of the bank’s BCA, as well as the sovereign’s credit rating, could result in an upgrade for the lender.

For UnionBank’s BCA to be raised, Moody’s said there must be “a consistent improvement in the bank’s asset quality,” a steady increase in core earnings, higher levels of loss provisions and an improved capital profile, as well as “a proven ability to diversify its funding sources and reduce dependence on high-cost corporate deposits.”

Meanwhile, the bank’s rating could be downgraded should its risk and credit profile worsen amid due to its continued rapid expansion, acquisitions, a weaker operating environment, an increase in non-performing assets, and a rise in its reliance on corporate deposits, among others, Moody’s said.

The debt watcher first issued ratings for UnionBank in 2004, but withdrew its credit assessments�� back in 2007.

In its quarterly report released last month, UnionBank said it saw a plunge in its net income, booking P2.03 billion in the third quarter from the P4.22 billion it recorded in the same period in 2016.

Shares in UnionBank closed flat at P87 apiece on Wednesday. —��K.A.N. Vidal