Moody’s lauds capital buildup of Phl banks

MANILA, Philippines - Philippine banks are now well-positioned to lend more this year as they continue to strengthen their capital base, according to international credit rating firm Moody’s.

In its latest credit outlook, Moody’s noted that the country’s big banks have been aggressively beefing their capital to be able to support their expansion programs.

“These capital-raising initiatives reflect a broader industry trend toward capital optimization in response to the implementation of Basel III in the Philippines on Jan. 1,” it said.

“The country introduced the new rules in a single step rather than the gradual phase-in approach that other countries are using. This prompted a number of banks, including BDO Unibank Inc., Metropolitan Bank & Trust Co. and Rizal Commercial Banking Corp., to dispose of non-core assets and replace non-compliant Basel III securities with core equity or Basel III-compliant securities. These actions are credit positive because they improve the quality of capital and come as Philippine banks’ lending grows at a rate of 15 percent or more,” it added.

Last week, Philippine National Bank raised P11.6 billion ($256 million) in new equity capital through a stock rights issue, two days after Bank of the Philippine Islands announced it had raised P25 billion ($550 million) in a similar issuance.

The additional equity capital, Moody’s said, is credit positive for the two banks because it will increase their loss-absorption capacity and boost their common equity Tier 1 capital well beyond the Basel III minimum.

Moody’s said the additional capital would better position both banks to pursue business expansion.

Pro forma for the capital raise, BPI’s common equity Tier 1 (CET1) capital ratio will rise to 18.6 percent from 14.7 percent as of the end of September 2013, while PNB’s CET1 capital ratio will rise to 19.7 percent from 17 percent.

These increases will make both banks among the best-capitalized banks in the Asia-Pacific region. Both banks’ higher capital levels are also well above the Basel III minimum of 8.5 percent, including a capital conservation buffer of 2.5 percent for the Philippine banks.

BPI, the Philippines’ third-largest bank, had been in talks in 2012 to acquire PNB, but the talks ended last year. PNB is the fifth-largest bank by assets following its merger with Allied Banking Corp. (ABC) in February 2013.

“If BPI had acquired a combined PNB and ABC, we estimated that BPI’s capital ratio would have declined by 3.5 percentage points if the acquisition had been paid for using a 50-50 mix of cash and newly issued equity,” the rating company said.

According to Moody’s, BPI and PNB would benefit from these capital raising activities as the industry anticipates higher interest rates in the coming months.

“Both BPI and PNB intend to utilize a portion of the proceeds from their rights issues to support their expansions plans. Like other Philippine banks, BPI and PNB have been experiencing margin pressure in a low-interest-rate environment,” it said.