DBP charter amendments unlikely to impact its ratings – Fitch

MANILA, Philippines — The proposed amendments to the charter of the Development Bank of the Philippines (DBP), allowing partial privatization through a stake sale, will unlikely to affect its credit rating, according to Fitch Ratings.

However, a significant improvement in DBP’s capital position from such a sale can positively influence the bank’s standalone credit profile.

“The proposed amendments to DBP’s 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),” the debt watcher said in a commentary.

“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 (MIF) in late-2023,” it said.

Last year, the state-run bank expressed its intention to amend its nearly three-decade-old charter in a bid to cater to the ever-changing market and economic landscape.

As such, the amendments hope to include the increase in DBP’s authorized capital stock to P300 billion, an over 700-percent jump from the current level of P35 billion.

The changes also permit the government to reduce its ownership below 100 percent, provided that it retains a minimum 70 percent stake, ensuring the state’s continued majority control.

“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,” Fitch Ratings said.

The credit rater said that DBP’s policy role underpins its sovereign support-driven IDR of ‘BBB’/Stable, which is equal with the country’s sovereign rating.

While DBP’s role as a policy bank remains intact, a successful stake sale that materially bolsters its capital could lead to an upgrade in its viability rating (VR), which reflects its standalone financial strength.

Fitch earlier downgraded DBP’s VR to “bb-” from “bb” in March last year due to the bank’s P25 billion capital injection into the MIF in 2023.

Fitch said that the capital injection reduced DBP’s common equity tier 1 (CET1) ratio by four percentage points, which would have resulted in a breach of local capital requirements if the central bank had not granted regulatory relief measures.

DBP has since shown signs of recovery, with its CET1 ratio rising to 13.8 percent as of September 2024 compared to 13 percent at the end of 2023.

“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,” it said.

In addition to strengthened capitalization from a potential stake sale, Fitch added that an upgrade to DBP’s VR would require further improvements in asset quality and profitability.

These enhancements, along with sustained capital recovery, can elevate the bank’s standalone credit profile.