MOODY’S INVESTORS Service on Thursday revised its rating outlook on UnionBank of the Philippines, Inc. (UBP) to negative from stable due to a significant decline in the bank’s capital buffers followings its acquisition of the local retail unit of Citigroup, Inc.

The debt watcher downgraded the outlook while affirming UnionBank’s Baa2 long-term local and foreign currency bank deposit and senior unsecured ratings.

A negative outlook means the bank’s credit rating could be downgraded in the next 12 to 18 months.

UnionBank last month said it will buy Citi’s local retail unit for P55 billion. This includes Citi’s credit card, personal loans, wealth management and retail deposit businesses in the country.

“The negative outlook reflects Moody’s view that UBP’s solvency will weaken after the acquisition is completed, a result of a significant reduction in UnionBank’s post-acquisition capital buffers amid heightened asset risks due to the ongoing pandemic,” Moody’s said in a note.

Moody’s said the bank will likely take “multiple years” to rebuild the capital buffers eroded after it bought Citi’s Philippine retail unit.

“Although the acquisition will improve UnionBank’s core profitability due to an increase in the share of higher-yielding retail loans, the extent and sustainability of the potential earnings boost from this acquisition are highly dependent on a successful post-acquisition retention of Citigroup’s clients and synergy realization, both of which are uncertain at this point,” the debt watcher said.

Moody’s said it views the acquisition as a governance risk for the bank under its environmental, social and governance framework, noting the implications of the transaction to UnionBank’s capital, financial strategy and risk management.

The debt watcher also said asset quality will continue to be threatened by the pandemic, noting UnionBank’s gross nonperforming loan (NPL) ratio picked up to 4.9% as of September 2021 from 3.3% as of end-2019.

Meanwhile, Moody’s expects UnionBank’s funding structure and liquidity to be stable, in line with similarly rated peers, in the next 12 to 18 months.

It warned a rating downgrade will be possible if UnionBank’s tangible common equity ratio drops below 12%. Moody’s currently expects this to decline to 13% following the acquisition from 15.3% at end-2020.

Another factor that could cause a downgrade for the bank is if its NPL ratio hits 6%, Moody’s said.

UnionBank’s net income rose by 26% from a year earlier to P10.71 billion in the nine months to September 2021.

Its shares closed at P102.80 apiece on Thursday, up by P1.80 or 1.78% from its previous finish. — L.W.T. Noble

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