Fitch affirm ratings for BDO, BPI

MANILA, Philippines - Fitch Ratings has affirmed BDO Unibank Inc.’s (BDO) ratings, including its ‘BB’ Long-Term Foreign-Currency Issuer Default Rating (IDR).

It likewise affirmed the Bank of the Philippine Islands’ (BPI) ratings, as well as its ‘BB+’ Long-Term Foreign-Currency Issuer Default Rating (LTFC IDR) and ‘bbb-’ Viability Rating.

The outlook for BDO was stable. Fitch assigned a ‘BB’ rating to BDO’s $300-million 4.5-percent bonds due 2017.

Fitch’s Financial Institutions team head Alfred Chan said that the ratings reflect BDO’s modest, but gradually improving profitability and rapid loan growth record as well as its dominant domestic presence and satisfactory balance sheet strength. The “stable outlook” reflect its reduced downside rating risk, following its recently announced plan for a rights issue, which would improve its capacity to support rapid loan growth, cope with unexpected losses and meet higher capital standards under Basel III in 2014.

“A track record of preserving core capital and further improvements in profitability to levels comparable with those of higher-rated Philippine banks could be positive for BDO’s ratings,” Chan added.

BDO’s return on assets has been increasing over 2009-2011, narrowing the gap with other major Philippine banks. Cost efficiency has gradually improved with strong asset and revenue growth. Further growth will depend largely on the Philippines economy, which has been supportive of the bank’s lending and fee-based activities.

Loan concentration to large corporations is a source of asset-quality deterioration for many major Philippine banks, including BDO, in a fresh downturn scenario.

However, Fitch expects such an impact to be manageable in light of generally reasonable corporate leverage in the country. BDO has also strengthened its loss absorption capacity. The proposed rights issue of $1 billion could raise BDO’s Tier 1 capital adequacy ratio (CAR) to 14 to 15 percent from 10 percent at end-March 2012. Reserves covered 110 percent of non-performing loans (NPLs) and 20 percent of foreclosed properties.

Meanwhile, Fitch Ratings gave BPI a “stable” outlook.

“The ratings reflect BPI’s strong domestic franchise, broad earnings base, sound balance sheet and prudent management record,” it said.

There is limited upside to BPI’s viability rating, which is already the highest among rated Philippine banks, and is high compared with banks in sub-investment-grade countries. An upgrade in sovereign’s LTFC IDR - which is presently on stable outlook - would bring the bank’s ‘BB+’ LTFC IDR in line with its viability rating.

Fitch said that BPI’s focus on costs and asset quality, together with a fairly broad revenue base, underpins the bank’s higher profitability and better earnings resilience than its major domestic peers.

The bank’s capital position has been its rating strength.

It had a core Tier 1 CAR of 14.6 percent at end-March 2012 and is likely to remain well-capitalized. Moreover, reserves cover 98 percent of BPI’s non-performing loans and 31 percent of investment properties due to pre-emptive provisioning efforts since 2008.

BPI’s loan quality has been reasonably healthy, even during the 2008-2009 global downturn and despite the risk of some concentration in large corporate accounts.

The universal bank of the Ayala Group is the third-largest Philippine bank, with a 12 percent share of system-wide assets, reflecting its leading domestic franchise. This, in turn, underpins its stable funding base and liquid balance sheet.