Fitch lowers rating outlook for LANDBANK

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Land Bank of the Philippines (LANDBANK)

Fitch Ratings downgraded its rating outlook for state-run bank Land Bank of the Philippines (LANDBANK) to “stable” from “positive” on Tuesday, less than a week after a similar move was made for the country’s sovereign grade.

In a note on Tuesday, the credit rater said it revised its outlook on LANDBANK’s long-term issuer default ratings (IDR) to “stable” from “positive,” while affirming the ratings at “BBB.”

Fitch also downgraded the bank’s viability rating (VR) to “bb” from “bb+” previously in anticipation of “risks building on the bank’s standalone credit profile as a result of the pandemic.”

This came after the debt watcher lowered its outlook on the Philippines’ rating to “stable” from “positive” on May 7 as it kept the country’s sovereign grade at “BBB.”

“The Philippine economy is experiencing a severe shock relative to the high growth rates of recent years. An ongoing 60-day lockdown of large swathes of Luzon — comprising 57% of the population and 73% of GDP (gross domestic product) — has suppressed consumer demand, the primary driver of the economy, and is resulting in significant financial strains for individual and corporate borrowers,” Fitch said. The debt watcher sees the country’s GDP declining by one percent this year.

In revising its outlook for LANDBANK, the credit rater said it considered the state-run bank’s “distinctive policy function,” full state ownership, significance as the fourth-largest bank in the country and the state’s ability to extend support.

“LANDBANK’s IDRs are equalized with those of the sovereign, reflecting our view of a high probability of extraordinary state support for the bank, if required. This also drives the bank’s Support Rating of ‘2’ and Support Rating Floor (SRF) of ‘BBB’,” Fitch said.

It said due to LANDBANK’s strong links with the government, its long-term IDR is sensitive to changes in state’s ability to support the bank and an “upward revision of the sovereign rating would be positive for the ratings” of the bank.

However, a downgrade in the country’s credit rating would likely lead to a similar downgrade of the bank’s IDRs, it said.

Meanwhile, Fitch said it lowered LANDBANK’s VR as it considered the bank’s strong connections with the government, which helped push its well-established domestic franchise and healthy funding profile.

“This is offset by the risks posed by such state links on its risk appetite and asset quality,” it said.

In case of a prolonged disruption due to the pandemic, the credit rater said it will lower LANDBANK’s VR to “bb-.”

It said it will also consider if the bank’s non-performing loan ratio will increase and remain above four percent for a longer period or if its “operating profit/risk weighted assets ratio trends under 1.5% on a sustained basis.”

“Excessive credit growth, perhaps stemming from a greater non-risk-based policy lending, leading to further pressure on earnings and asset quality, may also pressure its VR,” it added.

Fitch expects the lender’s “acceptable, albeit lower than average” capital buffers, coupled with a weakening operating environment, to weaken its profitability and asset quality over the near or medium-term.

The debt watcher also lowered the bank’s asset quality midpoint score to “bb” from “bb+” with a negative outlook due to weakening operating conditions and uncertainties about the duration of the pandemic and its impact on loan quality.

It noted the bank has high exposures to sectors seen to be among the hardest hit by the virus crisis due to its policy-oriented portfolio, high loan concentration in large borrowers and relatively huge exposure to small and medium enterprises.

“We expect the bank to undertake a greater policy role to support the Philippines’ economic recovery, which may weaken its asset quality,” it said.

As a partner of the government in some of its social protection programs, Fitch said it expects LANDBANK to have a larger role in supporting the country’s economic recovery,” at the expense of “weakening its asset quality.”

“Against this backdrop, we have revised the outlook on the bank’s risk appetite to negative — to reflect the heightened risk of government influence on its underwriting standards and risk controls. This is notwithstanding our view that its overall risk frameworks remain broadly acceptable,” it added.

The credit rater likewise assigned a negative outlook to LANDBANK’s income and profitability score “to reflect significant downside risks stemming from margin compression amid the lower-interest-rate environment and higher provisioning costs.”

It said the bank’s profitability has been “broadly comparable” to other banks despite having less diversified source of income and a “more concentrated loan portfolio.”

However, it said LANDBANK’s capitalization will serve as a “moderate buffer” from domestic headwinds.

“Notwithstanding this, we have lowered the bank’s capitalization and leverage mid-point to ‘bb’ as its current ratio is no longer commensurate with a ‘bbb-‘ score as per Fitch’s criteria — given the revised operating environment mid-point into the ‘bb’ category. Its common equity Tier 1 (CET1) ratio of 13.2% as at March 2020 was broadly comparable with its peers’ average,” it said.

Meanwhile, the bank’s strength in terms of funding and liquidity will likely “remain broadly stable in the near term,” according to Fitch, noting that deposits made up a huge part of LANDBANK’s funding, the majority of which was deposits from state agencies.

With an environmental, social and governance score of four for governance structure, Fitch noted a “moderate risk of government influence” that might affect its own credit profile, despite being a state-owned bank with a government-appointed board. — BML