Debt watcher Moody’s Ratings has downgraded Union Bank of the Philippines’ (UnionBank) credit ratings, citing deteriorating asset quality following rapid growth in retail lending and rising problem loan ratios.

In its latest rating action issued on Monday night, April 21, Moody’s cut the bank’s long-term foreign and local currency deposit and issuer ratings to Baa3 from Baa2, and also downgraded its baseline credit assessment (BCA) and adjusted BCA to ba1 from baa3. The long-term counterparty risk ratings and assessments were likewise downgraded, alongside the senior unsecured medium-term note program and senior unsecured debt ratings.

“The rating action considers the bank's rapid retail loan growth which led to the deterioration in its asset quality,” Moody’s said. It also pointed to “a relatively more aggressive financial strategy and risk management, which has negatively impacted the bank’s credit profile.”

UnionBank’s problem loan ratio climbed to 7.4 percent by end-2024 from 6.5 percent a year earlier, driven by challenges in its mortgage and commercial loan portfolios, as well as credit quality issues at its digital lending arm, UnionDigital Bank. Despite efforts to scale back risk, Moody’s expects the problem loan ratio to stay elevated in 2025.

Although the bank's return on assets (ROA) improved to 1.1 percent in 2024, supported by strong net interest margins, Moody’s noted that profitability remains heavily dependent on managing credit costs. “Credit costs will also remain the highest due to its larger unsecured retail book,” it said, adding that improved profitability is subject to “material uncertainty.”

UnionBank’s capital position strengthened after a share rights offering in 2024, pushing its tangible common equity to risk-weighted assets (TCE/RWA) ratio to 13.2 percent. Moody’s expects the ratio to remain in the 13- to 14-percent range but noted it lags behind peers with lower-risk loan portfolios, leaving less buffer against unexpected losses.

Liquidity remains a bright spot, with unencumbered liquid assets at 34 percent of tangible banking assets and a 250-percent liquidity coverage ratio. However, market funds now account for 20 percent of tangible banking assets, the highest among peers, and Moody’s anticipates increased reliance on market funding as UnionBank and UnionDigital Bank expand.

Moody’s said an upgrade could occur if UnionBank reduces its problem loan ratio below five percent, improves ROA above 1.5 percent, and boosts provision coverage. A downgrade is possible if problem loans rise above eight percent, ROA falls below 0.9 percent, or capital levels drop below the 13-percent threshold. UnionBank had reported total assets of ₱1.1 trillion as of end-2024.