Fitch affirms four Philippine banks

Ratings reflect, among others, satisfactory core capitalization.

Fitch has today affirmed the ratings of three Philippine banks - China Banking Corporation (China Bank), Security Bank Corporation (Security Bank) and Rizal Commercial Banking Corp. (RCBC) - including their Long-Term Issuer Default Ratings (IDRs) at 'BB' and Viability Rating (VR) at 'bb', stating that their Outlooks are Stable.

According to a release from Fitch Ratings, at the same time, the agency has affirmed Union Bank of the Philippines' (UnionBank) Long-Term IDR at 'BB-' and its VR at 'bb-' and simultaneously withdrawn them.

Fitch has chosen to withdraw the ratings of UnionBank for commercial reasons. The Outlook for the bank remains Positive.

The release noted that VRs and IDRs of the four Philippine banks, as well as the National Ratings of China Bank, Security Bank and UnionBank reflect their satisfactory core capitalisation and loan loss reserves relative to their ratings, as well as their sound funding, liquidity and domestic franchises as medium-sized players.

Here’s more from Fitch Ratings:

The ratings take into account the banks' above-average risk appetite and incorporate the different degrees of structural issues faced by these four banks (as well as many major domestic banks), including large corporate loan concentrations, modestly reserved foreclosed assets, developing corporate governance standards, and the presence of families as controlling shareholders.

The Positive Outlook on UnionBank's rating is driven by Fitch's expectation that its credit profile would improve over time. Its loan mix has diversified following the acquisition of City Savings Bank, a thrift bank focusing on teacher loans, in 2013.

However, Fitch believes that it would take time for the benefits of the acquisition to materialise. This acquisition has also contributed to UnionBank growing its loan book well above industry averages, which could give rise to asset quality concerns in time if not managed appropriately.

The Stable Outlooks on the ratings on China Bank, Security Bank and RCBC reflect Fitch's expectation that their credit profiles will likely stay steady over the near to medium term. This is supported by a robust domestic economy, manageable corporate leverage and supportive domestic interest rates.

Healthy domestic consumption and growth in the manufacturing and services sectors should continue to drive domestic demand. This, together with strong foreign inflows, including rising overseas remittances are contributing to the brisk expansion of credit activities, especially in property lending, and could result in disproportionate asset price inflation if left unchecked.

The agency notes that some of these banks have been more acquisitive over the last two to three years. They have bought smaller banks to increase their branch networks and improve their franchises.

While such acquisitions are part of the banks' strategy to strengthen their franchise and market share, they are not without risk, not least because the targets are generally weaker. Loan growth has also been more rapid and above the industry average for some of these banks.

All of the four banks aim to increase their lending into the consumer and SME sectors although any meaningful progress in this area through organic growth is likely only over the medium term.

In Fitch's view, these banks are in a good position to weather reasonable deterioration in the operating environment due to their sound funding profiles and high loss-absorption capacity.

The central bank has been monitoring the real estate sector and currently limits real estate exposure to 20% of the banks' loan book.

However, it may change this limit or the types of loans covered to facilitate further economic growth and better manage various property-related risks. The central bank has already taken some measures to avoid excessive risks building up within the system, and Fitch expects further measures to be taken should risks continue to rise.