MANILA, Philippines — Land Bank of the Philippines is expected to remain financially healthy despite its upcoming merger with United Coconut Planters Bank, Moody’s Investors Service said Friday.
In a statement, the global debt watcher kept LandBank’s domestic and foreign currency bank deposit ratings at Baa2/P-2, a notch above the minimum investment grade and matching the country’s credit rating.
The decision is based on Moody’s expectation that LandBank’s capital will remain “adequate” while staying profitable even after its acquisition of UCPB. Both lenders are state-owned.
At the same time, Moody’s affirmed its “stable” outlook on LandBank because the lender’s “healthy capital and a very high level of government support offset downside risks from asset quality.” It’s all thanks to a “substantial capital infusion” from the government last February that could offset the capital erosion arising from the merger with UCPB.
“LBP's capital, even after factoring in a reduction post the acquisition of UCPB, will remain adequate. The bank's core equity tier 1 (CET1) ratio will likely remain higher than 12% post acquisition, comparable with its historical capital levels,” Moody’s explained.
“Profitability in 2021 will remain at around 2020 levels as credit costs will remain elevated. The acquisition does not have a material impact on LBP's profitability as UCPB's profitability is comparable with LBP's,” it added.
Last June 25, President Rodrigo Duterte signed Executive Order 142 greenlighting the merger, with LandBank serving as the surviving entity. In his EO, Duterte said he believes the transaction will “significantly strengthen” LandBank and UCPB’s capability to “deliver financial services to the coconut industry and the entire agricultural sector.”
Moody’s assessment was in stark contrast with that of Fitch Ratings, which said the transaction could hurt LandBank’s balance sheet because of UCPB’s weak financial health. If anything, Moody’s believes UCPB stands to benefit from the transaction, saying the smaller bank’s long-term ratings could be upgraded to align with that of LandBank upon completion of the merger.
“Funding and liquidity will remain key strengths for LBP. The bank's funding benefits from its unique role in effectively acting as the payments bank for the government. This is reflected in its high share of low cost funding,” Moody’s said.
“Post the acquisition, Moody's expect the bank's funding quality to remain among the best within rated Philippine banks,” it added.