Fitch casts doubt on Landbank-DBP merger

MANILA, Philippines – Fitch Ratings said the completion of the merger between Land Bank of the Philippines and Development Bank of the Philippines would likely face delay with the scheduled change in leadership in June.

“More tangible progress on the merger could lead Fitch to reassess the sovereign’s propensity to provide support, although we see significant uncertainty around merger completion in light of presidential elections next month,” the debt watcher said.

President Aquino, who is scheduled to step down on June 30, issued EO 198 approving the merger of Landbank and DBP to create the country’s second largest bank with a combined asset base of P1.6 trillion based on September 2015 data.

Fitch has affirmed the long-term issuer default ratings (IDRs) of Landbank and DBP at “BB+” on the back of positive outlooks.

The IDRs and national ratings of Landbank and DBP were driven by Fitch’s expectation of state support for the banks.

“Fitch believes the sovereign would have a high propensity to provide extraordinary support to the two banks in times of need, in light of their full government ownership and quasi-policy roles as set out in their respective forming charters,” it added.

The rating agency explained the probability of state support is considered moderate overall after taking into account the sovereign’s fiscal flexibility.

It said the viability ratings on Landbank and DBP take into account the banks’ satisfactory asset quality and profitability, reasonable risk management frameworks and healthy funding and liquidity profiles.

The ratings also take into account the steady improvement in the Philippine operating environment, including a stronger prudential framework.

“That said, Landbank’s and DBP’s development mandates continue to have significant influence on their intrinsic profiles, resulting in materially higher loan and deposit concentrations compared with commercial bank peers,” it said.

Fitch added the capitalization of both government-owned banks remain adequate as indicated by their estimated Fitch core capital (FCC) ratios, which are above their regulatory common equity Tier 1 (CET1) ratios.

The CET ratio of Landbank fell to 10 percent last year from 11.7 percent in 2014 while that of DBP slipped to 10.4 percent from 13.8 percent.

However, the ratios are seen to improve as Landbank is expected to receive a P9 billion capital infusion from the government this year or about 1.8 percent of risk-weighted assets (RWAs) while DBP is set to get P5 billion or 1.9 percent of RWAs.

“Funding and liquidity are relative rating strengths. Deposits are highly concentrated, but mainly derived from government sources or large corporate funds, and fairly stable. The banks’ balance sheets are also liquid, and significant portion of assets are held in cash, balances with the central bank and government securities,” Fitch said.

The Governance Commission on GOCCs (GCG) has been advocating for the merger between Landbank and DBP since 2013.

Under the EO, the merger should be completed within a year. Both banks are expected to submit a business plan to the Bangko Sentral ng Pilipinas  for approval before President Aquino steps relinquishes his post in June.

GCG chair Cesar Villanueva is confident the merger between Landbank and DBP would not be hampered by a leadership change.