Here's why RCBC's non-core asset sales is credit positive

It frees up capital for business growth.

Rizal Commercial Banking Corporation announced that it had concluded share purchase agreements to sell its 25% equity stake in RCBC Realty Corporation and its 49% equity stake in RCBC Land, Inc. for a total of PHP4.55 billion ($103.9 million).

Here's more from Moody's:

These proactive non-core asset sales are credit positive for RCBC because they free up capital for business growth and higher capital requirements under the new Basel III regime.

Based on RCBC’s June 2013 financials, we expect its consolidated Tier 1 capital ratio to increase to 16.8% pro forma for the share sale, from 16.2%, well above the average 15% ratio among our rated Philippine banks at the end of June.

Although the increase in capitalization is not material, it removes the possibility that the bank’s Tier 1 capital may decline because of the punitive deduction that banks must apply to their Tier 1 capital for their equity investments in non-financial entities beginning 1 January 2014.

If the bank does not dispose of its stakes in RRC and RLI by 1 January 2014, its Tier 1 capital ratio will decline to 15.2% under the new capital regime, based on June 2013 financials.

Under the agreements, Pan Malayan Management and Investment Corporation will purchase a 7.66% stake in RRC and the entire 49% stake in RLI; House of Investments, Inc. will purchase a 10% stake in RRC; and RLI will purchase the remaining 7.34% stake in RRC.

These divestments continue the bank’s strategy of monetizing its non-core assets and deploying capital to fund its core lending business.

In February, the bank sold PHP4.8 billion of nonperforming assets to Philippine Asset Growth One, Inc., a special-purpose company. Between March and April, the bank raised $200 million from share placements, which increased its capital buffer.

The disposal of stakes in its associates mirrors recent transactions by Metropolitan Bank & Trust Company.

Ahead of the imminent implementation of Basel III requirements on 1 January 2014, we expect other Philippine banks, particularly those that belong to local conglomerates and those with minority stakes in various entities, to be more active in divesting and monetizing value from their non-core assets.

RCBC is the fifth-largest bank in the Philippines in terms of assets, with market share of 5.2% as measured by loans and 4.3% by deposits.