Moody’s Investors Service is an American credit rating company that provides analysis on the creditworthiness of borrowers and the financial health of banks and other financial institutions.
Moody’s said that UnionBank's [UBP 102.80 1.78%] P55 billion acquisition of Citigroup’s PH-based retail banking business will “reduce Union Bank’s capital”, and that it will take the bank “multiple years” to rebuild its warchest, which Moody’s refers to as UBP’s “capital buffer”.
The ratings agency downgraded its outlook of UBP from “stable” to “negative”. A “stable” rating from Moody’s means that UBP is not likely to experience a credit rating change in the near future, whereas a “negative” rating means that there is a “much higher” chance of a rating change in the medium-term (usually within the year).
Moody’s said that the success of the acquisition depends on UBP’s ability to retain Citigroup’s clients, and for various “synergies” between UBP’s existing business and the acquired Citigroup assets to pan out as planned.
Moody’s said that UBP could be in a position for a ratings downgrade if its non-performing loans creep up above 4.5%.
MB BOTTOM-LINE
All ratings agencies are very conservative, and Moody’s is no exception.
It looks at the company’s financials, its business, and the broader economic context, and tries to figure out how likely it is to go bankrupt.
In this case, spending P55 billion to buy an absolutely gargantuan retail banking business is, almost by definition, something that would make UBP less able to weather potential economic disruptions in the future.
That’s what Moody’s is saying here, that by spending P55 billion to buy something, UBP is less able (by P55 billion) to absorb economic shocks, like an uptick in non-performing loans due to whatever might happen because of COVID.
The outlook downgrade to negative is not an actual ratings downgrade, just a signal to investors that it’s more possible than before that UBP could experience an actual ratings downgrade.
It’s not nothing, and definitely something to consider.
This was no small move by UBP, and it does tie up a large portion of the bank’s resources that it might have used to weather future storms. UBP made a move to grow the topline, while Moody’s is simply noting the potential medium-term implications of that move on the bottomline.
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