MANILA, Philippines — Credit ratings of five Philippine banks are in danger after they were exposed to what could be the biggest corporate default in Philippine history, as this could mean higher credit costs and reduction in profit, Moody’s Investors Service said.
The Philippine unit of South Korean shipbuilder Hanjin last week filed for court rehabilitation proceedings as it struggles to pay $412 million in combined loans from five Philippine banks. Most of the money was reportedly lent without collateral protection.
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Hanjin reportedly owes $140 million to Rizal Commercial Banking Corp., $80 million to state-owned Land Bank of the Philippines, $72 million to Metropolitan Bank & Trust Co. and $60 million each to Bank of the Philippine Islands and BDO Unibank Inc.
This is on top of another $900 million in debts the shipbuilder owes to South Korea lenders, reports say.
“The exposures are credit negative for the five Philippine banks because they will need to incur additional credit charges related to [Hanjin Heavy Industries and Construction Philippines], which will reduce their profit,” Moody’s said in a note dated January 14.
"Assuming the worst-case scenario in which the banks make provisions for their bad exposures in full because of the unsecured nature of the facilities extended, we expect that credit costs as a percentage of the banks’ pre-provision income will increase to between 20 and 140 basis points, from six to 26 basis points based on their September 2018 financials," it added.
The involved banks hold an investment-grade rating of “Baa2” from Moody’s, the same level as the Philippines’ sovereign rating. A lower rating can jack-up the cost of borrowing in foreign currencies for the lenders should they tap investors abroad to raise funding.
Hanjin Philippines was established in 2006 as a subsidiary of South Korean shipbuilder Hanjin Heavy Industries and Construction Co. Ltd. Since 2008, the company has delivered a total of 123 vessels to clients across the globe, putting the Philippines on the map as the world’s fifth largest shipbuilder.
According to media reports, the concerned banks have agreed that no one will unilaterally seize the shipbuilding giant’s assets to protect the country’s banking system and economy. The creditors are also reportedly considering talking to strategic investors.
READ: Chinese companies keen on investing in Hanjin after $412-M default
In the same report, Moody’s said RCBC will be most affected among the five banks since it has the largest exposure to troubled Hanjin.
But the global debt watcher said the affected banks’ loss absorbing buffers “remain robust” despite the expected slump in their profit and additional credit costs.
“The banks’ tangible common equity ratios were between 11 percent and 16 percent as of the end of September 2018, and above the minimum capital requirements in the Philippines,” Moody’s said.
For RCBC, “our assumed credit losses for the worst-case scenario exceed the bank's pre-provision income and will reduce its capital ratio by around 50 basis points,” the credit rater added.
The Bangko Sentral ng Pilipinas earlier said the country’s banking industry remains strong as the bad exposure of big banks to the embattled Korean shipbuilder is “very negligible.”