INTERNATIONAL credit watcher Moody’s Investors Service reverted its “stable” outlook for Rizal Commercial Banking Corporation (RCBC) and Philippine National Bank (PNB) to “negative” to reflect coronavirus-induced economic shocks on local enterprises.
Moody’s also noted that both banks’ profitability are lower than peers, and represents a credit weakness. The ratings agency also said the likely deterioration in asset quality due to the coronavirus outbreak will continue to impact these banks’ profitability through elevated credit costs over the next two years.
Both banks are also noted to have relatively high exposure to retail and small and medium-sized enterprises (SMEs) in their loan portfolio. These two segments are among the most affected during the pandemic.
“The change in outlook to negative on RCBC’s ratings reflects risks to asset quality, especially in the retail and SME segments, arising from the coronavirus-induced economic shock. At the same time, the affirmation of its ratings reflect the bank’s capital, which provides a buffer to absorb some level of asset quality deterioration,” Moody’s said.
“PNB faces similar asset quality challenges. However, its capital is much stronger, providing it with a bigger buffer to withstand asset quality pressures and underpinning the ratings affirmation. Nevertheless, the change in outlook to negative considers scenarios under which even its current strong buffer could be eroded,” it further said.
A negative outlook means these banks could be up for a downgrade in the next 12 to 18 months, depending on their conditions upon reassessment.
“RCBC’s Baseline Credit Assessment [BCA] could be downgraded if asset quality deteriorates such that the bank’s CET1 [common equity tier 1] ratio declines by more than 50 basis points from current levels, or if its net NPL [non-performing loan] ratio remains above 3 percent,” Moody’s said.
“PNB’s BCA could be downgraded if there is a substantial deterioration in asset quality, such that either its capital levels or net NPL ratio weakens materially from the current levels,” it added.
On the other hand, Moody’s believes funding and liquidity will be stable and remain a credit strength for the two banks.
“The banks’ funding has remained stable in the last few months, even amid high volatility in the macro environment,” Moody’s said. “Funding is a particular strength of PNB, as reflected in its low cost of funding when compared to peer banks in the Philippines,” it added.