MOODY’S Investors Service maintained the “Baa2” rating of the Land Bank of the Philippines (LANDBANK), saying its capital is expected to remain stable even after its impending merger with the United Coconut Planters Bank (UCPB).
LANDBANK’s outlook was also retained at “stable”, which means its credit rating will likely be steady in the next 12 to 18 months.
“The outlook on LANDBANK’s ratings, where applicable, is stable because LANDBANK’s healthy capital and a very high level of government support offset downside risks from asset quality,” Moody’s said in a note on Friday.
Moody’s expects LANDBANK’s common equity Tier 1 ratio to stay higher than 12%, which is within its comparable historical levels, even after the merger with UCPB.
It said the government’s P27.5-billion capital infusion as provided by the Bayanihan II will offset the expected capital erosion resulting from its acquisition of UCPB, which Moody’s estimates “will have negative net worth at the time of the merger”.
Meanwhile, LANDBANK’s asset quality is expected to remain weak due to the coronavirus crisis, although Moody’s noted that its large volume of corporate loans will help offset the impact of the pandemic. It noted that the bank’s bad loan ratio of 2.9% at end-2020, which climbed from 2.1% the prior year, was similar to those recorded by its other rated Philippine banks.
Moody’s added that LANDBANK’s profit could be similar to the 2020 level as credit costs are expected to remain high.
Despite the continued risks from the pandemic, Moody’s believes LANDBANK will continue to have strong funding and liquidity, supported by its role as the payments bank of the government.
A rating downgrade is possible if there is a further weakening in the lender’s asset quality due to the crisis or a downgrade in the Philippines’ sovereign rating.
On the other hand, an improvement in the timeliness and transparency of the bank’s financial reporting, or significantly lower credit risk concentration in its exposure to individual borrowers and industry groups could become grounds for a rating upgrade, Moody’s said.
UCPB RATING UNDER REVIEW
Meanwhile, the debt watcher is reviewing whether to upgrade UCPB’s “Ba3” rating depending on the impact of its merger with LANDBANK. This means a downgrade is unlikely in the meantime, Moody’s said.
“UCPB’s long-term ratings could be upgraded to align with that of LANDBANK upon completion of the merger with LBP, a larger and more-systemically important state-owned bank in the Philippines,” it said.
President Rodrigo R. Duterte in June signed Executive Order 142, which approved the merger between the lenders, with LANDBANK as the surviving entity.
Based on central bank data, as of end-March, LANDBANK was the country’s second biggest bank in terms of assets with P2.405 trillion, while UCPB placed 13th with P322.906 billion. — LWTN