OREANDA-NEWS. A proposed PHP60bn rights issue by BDO Unibank, Inc. (BDO; BBB-/Stable) would add to the bank's loss-absorption capacity and provide greater balance-sheet flexibility to fund future growth over the medium term, says Fitch Ratings. A strengthened capital buffer would also place the bank in a better position to meet more demanding capital requirements for domestic systemically important banks (DSIBs), which will be phased in over January 2017 to January 2019.

Fitch views the proposed capital raising as timely, in light of rising capital requirements for larger Philippine banks over the next two to three years. We believe that BDO - as the largest bank in the Philippines - would need to have common equity Tier 1 (CET1) of 11.0% of risk-weighted assets by 1 January 2019. BDO's CET1 ratio had fallen to 11.3% at end-June 2016 on a consolidated basis (end-2014: 12.4%), which was adequate based on current regulations, but would have left limited headroom above the higher incoming requirement.

Fitch believes the timing of the proposed capital issuance also reflects the confidence of BDO's management and board in the medium-term growth prospects for the Philippines. BDO has stated that the capital raised would allow the bank to "take advantage of the country's growth opportunities", citing consumer, provincial middle market and SME and infrastructure-related loans as particular growth areas for the bank.

Bank lending in the Philippines has expanded briskly for a number of years. System-wide loans rose at a compound annual growth rate of 16.4% over 2010-2015, and lending activity has remained robust thus far in 2016. The central bank reported in August 2016 that outstanding loans of universal and commercial banks grew by 17.7% in July 2016 year-on year, driven by both consumer and business financing.

Fitch expects domestic economic activity and loan demand to remain well-supported in the near term, backed by broadly steady overseas remittances and strong consumer and business sentiment. The central bank reported that its consumer confidence index recorded its highest ever reading for 3Q16, and the outlook for infrastructure investment in the Philippines remains intact after the change in government, with another PHP171bn in projects approved by a cabinet-level board in mid-September.

The new capital will provide BDO with a comfortable loss-absorption buffer as it continues to expand its loan portfolio over the next one to two years. Fitch estimates that the proposed PHP60bn deal would add roughly 3-4pp to BDO's consolidated CET1 ratio, equating to about 28.4% of end-June 2016 consolidated total equity.

The proposal is still pending regulatory approvals, but BDO states that controlling shareholder SM Investments Corporation will subscribe to a proportionate share of its rights, and would be willing to underwrite any rights not exercised by minority shareholders.