Fitch Affirms Philippines' China Bank, Security Bank and RCBC
KEY RATING DRIVERS
VRS, IDRS, AND NATIONAL RATINGS
The IDRs of the three Philippine banks and the National Ratings of China Bank and Security Bank are driven by their VRs.
The ratings reflect their higher risk appetite, adequate capitalisation, sound funding and liquidity, and their small yet meaningful market shares. The VRs also take into account structural issues within the local banking system, including concentrated loan portfolios, conglomerate/family ownership and developing corporate governance standards.
The Stable Outlooks on all three banks reflect Fitch's view that their financial profiles will likely remain steady over the near to medium term in light of sustained economic growth, a fairly conservative regulatory environment, and sufficient funding and liquidity in the system that is supported by strong inflows from overseas workers.
Fitch expects the three banks to continue expanding their branch networks to support deposit and loan growth, and they may undertake acquisitions to enhance their franchises and market positions. Loans growth will likely stem from infrastructure and power projects and the SME and consumer segments, which are higher-yielding and underpenetrated.
Fitch believes system loan growth may slow from the fast pace in 2011-2014 (17% on average a year) given external headwinds - arising from slower global growth, rising interest rates and the risk of weaker-than-expected growth in China - and regulatory changes announced in 2014 aimed at strengthening the banks' underwriting practices and cooling down the real estate sector.
The ratings also capture Fitch's expectation that the banks will maintain sound capital buffers to balance loan growth and potential loan deterioration. Fitch believes the banks in this peer group would qualify as domestic systemically important banks (D-SIBs) and would have to maintain a minimum CET1 ratio of 10.0% by January 2019, a requirement which they can all comfortably meet already. The CET1 ratios of Security Bank and China Bank were both close to 14% at end-March 2015, and that of RCBC improved to around 14% at end-June 2015 from 12% at end-2014 following a capital injection - equivalent to around 2% of risk-weighted assets - from Cathay Life Insurance in April 2015.
Asset quality at Security Bank and RCBC has remained broadly steady, aided by a favourable macroeconomic environment and low interest rates over the last five years, and Fitch believes that there is likely limited room for further improvement. Fitch does not rely too much on the banks' regulatory NPL ratios, which hover around 1%-2%, as it is a backward-looking measure that only considers past-due loans
Fitch considers Security Bank's asset quality as the strongest in this peer group, given its lower concentration in large loans relative to capital, smaller exposure to consumer loans and larger securities portfolio that is mainly in Philippine government bonds. Nonetheless, its relative strength can quickly diminish if the bank's recent rapid growth, particularly in the consumer segment, leads to higher delinquencies and impairment costs.
China Bank's consolidated asset quality deteriorated after it acquired Planters Development Bank (Plantersbank) in 2014. Its reported NPL ratio rose to 2.5% at end-March 2015 from 2.0% at end-2013, and there may be further deterioration emanating from the assets of the newly acquired bank.
SUPPORT RATINGS AND SUPPORT RATING FLOORS
The banks' Support Ratings of '3' and Support Rating Floors of 'BB-' reflect Fitch's view of a moderate probability of extraordinary state support for the banks, if needed. This takes into account the Philippine sovereign's fiscal position - as captured in its rating of 'BBB-' - as well as the banks' moderate systemic importance, stemming from their market shares of 3%-5% of system assets, placing them among the sixth to tenth in the market by that measure.
SENIOR DEBT AND LEGACY HYBRID SECURITIES
The 'BB' ratings on the senior notes of Security Bank and RCBC are driven by their IDRs, as they are direct, unsubordinated and unsecured obligations of the banks, and rank equally with all their other unsecured and unsubordinated obligations.
RCBC's Basel II perpetual callable subordinated hybrid notes are rated 'B', which is three notches down from the bank's 'bb' VR, reflecting the presence of both subordination and going-concern loss-absorption mechanisms.
RATING SENSITIVITIES
VRS, IDRS AND NATIONAL RATINGS
The three banks' IDRs and VRs, and National Ratings of China Bank and Security Bank are primarily sensitive to changes in their risk appetites and maintaining sound capital buffers to offset risks attached to rapid growth. Reduced concentration risk and stronger corporate governance could support positive ratings action but Fitch would expect such changes to occur only over the longer term.
Their ratings could come under pressure if the banks' credit profiles were to deteriorate as a result of excessive lending to riskier and more volatile sectors and increasing concentration risk.
RCBC and China Bank could be more vulnerable to negative rating action due to their weaker asset quality. In addition, China Bank's ratings may be negatively affected by weak execution on its growth strategy, in particular if the integration of Plantersbank goes poorly.
SUPPORT RATINGS AND SUPPORT RATING FLOORS
The SRs and SRFs would be sensitive to any change in the government's perceived ability or willingness to provide extraordinary support in a timely manner. However, they are not likely to change in the foreseeable future - as the Long-Term IDR for the Philippines was recently affirmed at 'BBB-' with a Stable Outlook, and Fitch does not foresee any sign of diminishing implicit state support for the banks in the near term.
SENIOR DEBTS AND HYBRID SECURITIES
A change in the Long-Term IDR of Security Bank and RCBC would affect the ratings on their senior notes. RCBC's perpetual hybrid notes are notched from the VR, and as such, a change in the VR would impact the issuer's rating. That said, RCBC has announced it will exercise its call option on the perpetual hybrid notes on 24 July 2015, and the rating on RCBC's hybrid notes will be withdrawn if and when the exercise is completed.
The rating actions are as follows:
China Bank
- Long-Term Foreign- and Local-Currency IDRs affirmed at 'BB'; Outlook Stable
- National Long-Term Rating affirmed at 'AA-(phl)'; Outlook Stable
- Viability Rating affirmed at 'bb'
- Support Rating affirmed at '3'
- Support Rating Floor affirmed at 'BB-'
Security Bank
- Long-Term Foreign- and Local-Currency IDRs affirmed at 'BB'; Outlook Stable
- Short-Term Foreign-Currency IDR affirmed at 'B'
- National Long-Term Rating affirmed at 'AA-(phl)'; Outlook Stable
- Viability Rating affirmed at 'bb'
- Support Rating affirmed at '3'
- Support Rating Floor affirmed at 'BB-'
- Rating on senior notes affirmed at 'BB'
RCBC
- Long-Term Foreign- and Local-Currency IDRs affirmed at 'BB'; Outlook Stable
- Viability Rating affirmed at 'bb'
- Support Rating affirmed at '3'
- Support Rating Floor affirmed at 'BB-'
- Ratings on senior notes affirmed at 'BB'
- Ratings on Basel II perpetual callable subordinated hybrid notes affirmed at 'B'
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