Moody’s Ratings has retained its “Baa2” ratings for Aboitiz-led Union Bank of the Philippines (UnionBank) while its outlook also remained “negative” amid some concerns on profitability and asset quality.
Moody's likewise affirmed the bank’s Baa2 long-term (LT) local currency (LC) and foreign currency (FC) issuer ratings, FC senior unsecured rating and deposit rating. All these ratings have negative outlook which means it could be lowered in the future due to downside risks.
The credit rating company has also affirmed UnionBank’s (P)Baa2 FC senior unsecured medium-term note program rating, Baa2 LT LC and FC Counterparty Risk Ratings, Baa2(cr) LT Counterparty Risk Assessment, and its baa3 Baseline Credit Assessment (BCA) and Adjusted BCA.
Moody’s said they kept the negative outlook because of “uncertainties surrounding the bank's asset quality and profitability metrics, following their deterioration in 2023.”
Moody's noted that the bank’s operating expenses and credit costs will likely remain high due to new businesses and “higher share of riskier retail loans.”
The credit rating firm also said that UnionBank’s “coverage and capital levels are lower than its baa3 BCA domestic and regional peers which would provide lower buffers to loan losses.”
Moody's said it will “need to see a strengthening in the bank's asset quality as well as a longer track record of improvement in both its core and bottom-line profitability, which could support the bank's core capital ratio at a level commensurate with its domestic peers, before reverting the outlook to stable.”
Meanwhile, Moody’s explained that the bank’s BCA standing is based on expectation that its capital levels will improve modestly after it completes its P10 billion planned stock rights offering within the first six months of 2024. This will “mitigate some of the heightened risks to its asset quality,” it added.
As for other metrics, Moody’s expect the bank’s non-performing loan (NPL) ratio will continue to be on the high side or at five percent to six percent in the next 12 to 18 months. It noted “some weaknesses” in its digital banking unit UnionDigital Bank because of unsecured consumer loans.
For this year, the bank’s NPL ratio will continue to be elevated due to the following: the uncertain recovery of select commercial NPL accounts; its larger share of higher-risk retail loans; and the weaknesses in loan collectability among Philippine digital banks.
Moody’s said UnionBank’s capital ratio through its common equity to risk-weighted assets or TCE ratio, is estimated at 13 percent as of end-2023 on “a pro-forma basis, including the benefit of its aforementioned planned capital raise, net of dividends paid in February 2024.”
The bank’s profitability, as measured by return on average assets, declined to 0.8 percent in 2023 from 1.3 percent in 2022, noted Moody’s, and this was “driven by higher provisioning and operating costs, including additional provisions made on its large commercial NPLs and Citi's system integration costs.” UnionBank acquired Citi Philippines’ retail operations in 2022 and integration was concluded last March.
“Nevertheless, its core profitability improved significantly, supported by net interest margin (NIM) expansion,” said Moody’s. It also “expects that the bank's profitability will improve from its current low level, although the extent of the improvement will depend on the bank's ability to control credit risks within its loan portfolio as well as its funding and operating costs.”
In 2023, UnionBank reported a net income of P9.2 billion, down 28 percent from its 2022 level of P12.74 billion. Higher provisioning and the costs of acquiring Citi affected its bottomline last year.