Capital hike credit positive for BDO - Moodys

MANILA, Philippines - International credit rating agency Moody’s Investor Service has classified as “credit positive” the plan of BDO Unibank Inc. to raise $1 billion in anticipation of the new global banking capital framework.

“We view BDO’s equity-raising plan as a proactive attempt to build up its capital buffer ahead of Basel III,” Moody’s said.

It said the latest capital-raising effort is credit positive for BDO as the additional equity capital will boost its core above Basel III minimums and increase its loss-absorption buffer. Higher capital buffers will enhance the bank’s ability to pursue credit growth and, therefore, maintain its leading market position, Moody’s added.

Moody’s said the additional capital will raise BDO’s Tier 1 capital ratio to 15.4 percent on a pro forma basis, from the 10.2 percent reported as of end-2011.

The current level of 10.2 percent is below the banking system average and barely above the proposed Basel III minimum of 10 percent that goes into effect on Jan. 1, 2014.

But this outcome assumes the likely scenario that the new capital will first be primarily held as assets that attract low risk weights (i.e., 20 percent or less) for regulatory capital computation, such as government paper or short-term, liquid money-market securities, Moody’s added.

“We had identified BDO as most in need of a capital infusion among our rated Philippine banks in order to meet the new Basel III requirements, given its aggressive expansion over the past three years,” it said.

Moody’s said that assuming BDO maintains its credit growth rate of 15 percent for the next two years, it expects the bank’s Tier 1 capital ratio to decline to 11.8 percent by the end of 2013, excluding the effect of capital replenishment from retained profits.

“Provided that the issuance is well received by investors, we expect more banks to follow, as they will clearly benefit from similar capital boosting efforts. From this angle, this development carries credit positive implications for the industry as we expect the banking system average Tier 1 ratio to rise above the 13.2-percent average as of the end of 2011,” it added.

According to the BDO, the rights offer to raise $1 billion is approximately 1:3 which will be offered at an indicative discount of 20 to 25 percent to market, which will allow all shareholders to proportionately participate in the capital-raising program.

Strategic investors SM Investments Corp. (SMIC), the International Finance Corp., and the United Overseas Bank (UOB) have expressed their support for BDO’s expansion plans and the proposed rights offer.