MOODY’S Investors Service has affirmed its investment grade rating on Union Bank of the Philippines, Inc. (UnionBank), citing the lender’s improved capitalization and expectations of stable asset quality and higher profitability over the next two years.

However, Moody’s outlook for the bank’s rating remains “negative” amid uncertainties over its core capital ratio.

The credit rater said in a statement on Friday that they have affirmed UnionBank’s long-term local and foreign currency issue ratings of “Baa2,” a notch above the minimum investment grade and at par with the country’s credit rating.

It also affirmed the lender’s foreign currency senior unsecured rating of “Baa2,” long-term local and foreign currency counterparty risk ratings of “Baa2,” long-term counterparty risk assessment of “Baa2(cr),” and baseline credit assessment (BCA) and adjusted BCA of “baa3.”

The debt watcher said it based its ratings and BCA affirmation on the bank’s improved solvency position following the P12-billion capital increase in February. This was after a significant capital decrease when UnionBank bought the retail business of Citigroup, Inc. last year.

However, the outlook on the rating remains “negative” as there are uncertainties on how the bank can improve its core capital ratio to a level equal to those of its domestic and regional peers, Moody’s said.

“UBP’s capital ratio, as denoted by tangible common equity to risk weighted assets, is estimated to stand at a moderate 12.6% as of end of 2022 on a pro-forma basis, including the benefit of the P12-billion capital raise in February 2023, net of declared dividends,” it said.

“While the bank targets a higher capital ratio in 2023, the execution of this plan is subject to inherent uncertainty around the level of profitability and asset growth,” it said.

Moody’s said it will also need to see improvements in the bank’s net interest margin and profitability before it can raise the rating outlook to “stable.”

Meanwhile, Moody’s expects the bank’s asset quality to stabilize amid the economy’s continued recovery from the coronavirus pandemic, with its nonperforming loan ratio seen at about 4.5% in the next 12 to 18 months.

“Post-acquisition of Citigroup assets, retail loans accounted for about 50% of UBP’s gross loans, making this bank one of the most retail-focused banks in the Philippines. The inherently higher risk nature of the acquired unsecured credit card and consumer loans compared to corporate loans, is partially balanced by the very high margins of these products,” Moody’s said.

It also expects the lender to post high earnings in the next one to two years amid “cost synergies from the recent acquisition and the bank’s expansion into the higher-yielding retail loans.”

UnionBank’s acquisition of Citi’s Philippine consumer banking business was completed in August 2022.

The transaction, valued at P55 billion, covers Citi’s credit card, unsecured lending, deposit and investment businesses, as well as Citicorp Financial Services and Insurance Brokerage Philippines, Inc., which provides insurance and investment products and services to its retail clients.

The bank’s sustainable return on assets, excluding trading gains, is also expected to increase in 2023 from 1.3% as of end-2022, but “the extent of improvements will depend on the bank’s ability to grow the book, and control the related credit risk, as well as funding and operating costs,” Moody’s said.

Funding and liquidity will also be broadly stable, the credit rater said.

“UBP’s deposit franchise has improved over the past three years, because of the bank’s strong focus on retail business that was further strengthened by the acquisition of Citigroup’s retail deposits,” it added.

UnionBank booked a net profit of P3.4 billion in the first quarter of 2023, a 30% jump from the comparable year-ago level.

The bank’s shares closed at P82.9 apiece on Friday, down by 1.07% or 90 centavos from its previous close. — KBT