BANK OF THE PHILIPPINE ISLANDS
Fitch Ratings has affirmed the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of
The Outlook is Negative, in line with the Outlook on
Key Rating Drivers
Sovereign Support-Driven IDRs: BPI's Long-Term IDRs are driven by its Government Support Rating (GSR) of 'bbb-'. The rating takes into account its high systemic importance from its 12% share of system deposits, as well as the state's moderate fiscal flexibility, as reflected in the sovereign rating of 'BBB'/Negative.
BPI's Viability Rating (VR) is underpinned by its adequate capitalisation and entrenched domestic franchise, which has helped the bank to attract higher-quality customers and deliver superior financial performance relative to the industry over the years. These are balanced by the bank's sizeable risk appetite as well as risks associated with its high single-borrower concentration, a trait shared by many Philippine banks.
Robust Economic Growth; Headwinds Rising:
Robinsons Merger to Aid Franchise: We believe BPI's established presence has enabled it to consistently generate business volume and retain better asset quality and profitability than the system average. The acquisition of
Asset Quality to Remain Stable: BPI's stage 3 loan ratio improved to 2.9% by end-2022 from 3.6% at end-2021 on the strong economic rebound. We believe any deterioration in its loan portfolio from higher interest rates should be limited, considering the bank's stable underwriting standards and the healthy economic growth. We have therefore affirmed the bank's asset quality score at 'bb'/stable.
Higher Margins to Aid Profitability: BPI's operating profit/risk-weighted asset ratio of 2.5% in 2022 exceeded its pre-pandemic level, helped by robust loan growth and higher net interest margins. We expect the bank's profitability to continue to improve over the next 12-18 months on sustained loan growth and further improvement in margins, which will more than offset the rise in operating costs. These improvements in the profitability core metrics remain commensurate with the 'bb' score in earnings and profitability, which we have affirmed with a stable outlook.
Adequate Capitalisation: BPI's common equity Tier 1 (CET1) ratio of 15.1% at
Healthy, but Tighter, Liquidity: BPI's funding profile is its rating strength. The proportion of low-cost current and savings deposits (CASA) has declined but remained high at 74% as of 4Q22 due to stronger growth in time deposits, which underscores its favourable funding structure. BPI's loan-to-deposit ratio of 84% and liquidity-coverage ratio of 195% at end-2022 also reflect the bank's liquid balance sheet. The negative outlook on the score mirrors that of the sovereign, as funding conditions may tighten further should the sovereign rating be downgraded.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade in the sovereign rating is likely to lead to a downgrade in the bank's GSR and IDRs.
The bank's VR has headroom to withstand some deterioration in its financial profile. However, any significant relaxation of underwriting standards, possibly indicated by excessive growth in unsecured consumer lending, may pressure the VR if it is also accompanied by a decline in the CET1 ratio to significantly below 13%.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A revision of sovereign Outlook to 'Stable' is likely to lead to a similar revision in the bank's IDRs, provided our assessment of the state's propensity to support BPI remains intact.
An upgrade in the operating environment to the 'bbb' category, which could occur when there is strong and sustained economic performance that improves Philippine banks' risk-adjusted growth potential, could lead to an upgrade of BPI's VR, provided its financial performance remains broadly intact.
VR ADJUSTMENTS
The operating environment score has been assigned above the 'b' category implied score because of the following adjustment: sovereign rating (positive).
The business profile score of 'bbb-' has been assigned above the 'bb' category implied score because of the following adjustment reason: market position (positive).
The funding and liquidity score of 'bbb' has been assigned above the 'bb' category implied score because of the following adjustment reason: deposit structure (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
BPI's GSR and IDRs are driven by sovereign support and are linked to
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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