OREANDA-NEWS. Fitch Ratings has published Philippine National Bank's (PNB) Long-Term Issuer Default Rating (IDR) of 'BB'. The Outlook is Stable. The agency has also published PNB's Viability Rating (VR) of 'bb' and its National Rating of 'A+(phl)'. A full list of rating actions is at the end of this commentary.


The IDRs and National Rating of PNB are driven by its VR. The ratings reflect the bank's weaker asset quality and profitability compared with its local peers, which are partly mitigated by the bank's higher capital ratios and a stable to improving operating environment. The ratings also take into account its franchise as the fifth-largest bank in the Philippines by assets, after its merger with Allied Banking Corporation (ABC) in February 2013.

PNB's asset-quality metrics - despite having improved under generally stable domestic economic conditions - remain weaker compared with Fitch-rated peers. These include the bank's NPL ratio of 2.75% at end-June 2015 and its NPL reserve coverage of 59% at end-2014, which highlight higher provisioning, earnings and capital impairment risks relative to peers. In addition, the bank's loan concentration to large borrowers is high, which is typical for Philippine banks, but this exposes the bank to lumpy credit losses in the event of a downturn.

PNB's profitability has also been weighed down by historically higher impairment charges and cost-to-income ratio relative to peers (61.8% for 1H15). Weaker profitability is likely to continue to hinder sufficient internal capital generation to support loan expansion. This may improve should the bank successfully extract cost and revenue synergies from its merger with ABC, although progress thus far has been slow.

However, PNB's capital ratios remain higher than those of Fitch-rated peers and provide a satisfactory buffer against potentially higher credit costs. PNB's common equity Tier 1 (CET1) ratio stood at 16.6% at end-June 2015, based on the Basel III regime, which was implemented in the Philippines from 1 January 2014. This compares with an average CET1 ratio of 13.7% across other Fitch-rated Philippine banks. The bank's capital position was aided by a PHP11.6bn equity rights issue in February 2014, which amounted to around 2.8% of its end-2014 risk-weighted assets.

The VR for PNB also takes into account structural issues within the local banking system, including the high conglomerate ownership, the concentrated loan portfolio to large corporate borrowers and developing corporate governance standards.

The Stable Outlook reflects Fitch's view that PNB's financial profile will likely remain steady over the near to medium term in light of resilient domestic economic growth, a fairly conservative regulatory environment, and sufficient funding and liquidity in the system that is supported by structurally high remittances from overseas workers.

PNB's Support Rating (SR) of '3' and Support Rating Floor (SRF) of 'BB-' reflect Fitch's view of a moderate probability of extraordinary state support for the bank, if needed. This takes into account the Philippine sovereign's fiscal position as captured in its rating of 'BBB-' with a Positive Outlook - as well as the bank's moderate systemic importance, stemming from its market share of 6% of system assets at end-2014.

PNB's VR, IDRs and National Rating are primarily sensitive to changes in the bank's risk appetite and asset quality, as well as its loss reserve, earnings and capital buffers to offset risks attached to higher loan growth and potentially higher exposures to more volatile sectors, such as the SME and unsecured retail segments.

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 for the Philippine banking system as a whole. Sustained improvement in asset-quality metrics - including the bank's loan-loss reserves - and improved profitability would help to support the rating.

PNB's ratings could come under pressure if the bank's financial profile were to deteriorate as a result of excessive lending to more risky and volatile sectors and increasing concentration risk. In addition, the bank's ratings may be negatively affected by weak execution on its growth strategy, in particular if the integration of ABC goes poorly.

The SR and SRF would be sensitive to any change in the government's perceived ability or propensity to provide extraordinary support in a timely manner. The Long-Term IDR for the Philippines was recently affirmed at 'BBB-' with a Positive Outlook, and Fitch does not foresee any sign of diminishing implicit state support for the bank in the near term.

The rating actions are as follows:

Long-Term IDR published at 'BB'; Outlook Stable
Short-Term IDR published at 'B'
Viability Rating published at 'bb'
National Rating Long-Term Rating published at 'A+(phl)'; Outlook Stable
Support Rating Floor published at 'BB-'
Support Rating published at '3'.