BPI, RBC merger to have limited impact on credit quality, says Moody’s

MANILA, Philippines — The planned merger between Ayala-led Bank of the Philippine Islands (BPI) and Robinsons Bank Corp. (RBC) of the Gokongwei Group will have limited impact on the credit quality of BPI, according to Moody’s Investors Service.

Moody’s analyst Joyce Ong said the proposed consolidation would have a limited impact on BPI’s credit quality because RBC represents just seven percent of the combined banks’ total assets as of end-June.

Ong said RBC’s retail-focused franchise benefits from strong profitability, deposit base and solid capital while its asset quality is weaker than BPI.   BPI is rated Baa2 on stable outlook by Moody’s.

“The planned merger will strengthen BPI’s market share by about 80 basis points,  making it the second largest bank in the country,” Ong said.

She said the transaction would not reduce the merged bank’s capital position significantly because the merger would be completed through a share swap agreement with no cash component.

On a pro forma basis, Ong said the debt watcher expects the Common Equity Tier (CET) 1 ratio of BPI  to decrease by about 10 basis points after the merger, but remain at a still high level of 14 to 15 percent in the next 12 to 18 months.

This, according to Ong, is lower than the 15.9 percent as of end-June,   mainly because credit growth is expected to accelerate at both banks, driven by the post-pandemic economic recovery.

Furthermore, she said the non-performing loan (NPL) ratio of the Ayala-led bank would increase moderately by about 10 basis points but will remain in the range of two to 2.5 percent in 2023.

“The increase is because RBC’s asset quality is relatively weaker than of BPI, driven by the latter’s focus on high risk but high return retail loans. Rising inflation and interest rate hikes will also dampen BPI’s post-pandemic asset quality improvements,” Ong said.

Although RBC’s net interest margin (NIM) is higher than BPI’s, Moody’s said its profitability as denoted by return on assets has traditionally lagged BPI because of high operating expenses.

“We expect profitability of the merged entity will remain broadly stable because the assets and income contribution of RBC will be relatively small. Potential upside to profitability due to RBC’s strong NIM could be realized if BPI manages to rationalize RBC’s operating expenses and achieve cost synergies by using its existing extensive franchise and network post-merger,” she said.