INTERNATIONAL credit watcher Fitch Ratings Inc. warned last Thursday that the slated merger between Land Bank of the Philippines and United Coconut Planters Bank (UCPB) may have a negative impact on LandBank’s credit profile.
In an analysis, Fitch Ratings said the weak metrics of UCPB could potentially pull down LandBank’s financial strength.
“UCPB has been under a long-drawn rehabilitation program because of its weak financial health, but its size relative to LandBank could significantly weaken the larger bank’s financial profile, as it would make up about 14 percent of [LandBank’s] assets, based on our preliminary understanding of the pro forma merged entity,” Fitch Ratings said.
UCPB reportedly has more than P22 billion in non-performing loans (NPL) at the parent level at end-2020.
“The addition of these to LandBank could cause its NPL ratio to rise by nearly 2 percentage points when combined. This would exacerbate asset quality pressures that LBP already faces from the current economic slowdown,” the credit watcher said.
Fitch Ratings also said risks from the merger could consume considerable “managerial bandwidth” and incur significant integration expenses.
“Any merger benefit will accrue only over the long term, but pressure on LandBank’s profitability would be immediate,” Fitch Ratings said.
The merger would, however, reinforce the government’s propensity to support the bank if needed and would increase LandBank’s market share by about 1.7 percentage points, according to the credit watcher.
LandBank reported early June that despite the economic recession, its assets grew 16.14 percent to P2.405 trillion in the first quarter of the year, from P2.071 trillion in the same period last year.
The bank attributed the increase in assets to the 16.21 percent growth in deposits to P2.123 trillion from P1.827 trillion in 2020.
Earlier this week, President Rodrigo Duterte approved Executive Order (EO) 142, ordering LandBank and UCPB to enter into a merger. The detailed structure of the merger, however, is yet to be determined.
A joint statement after the president signed EO 142 said the mergers is a ‘win-win’ for coconut farmers and other agricultural workers in the country.
LandBank President and CEO Cecilia C. Borromeo, in particular, said that the merger will promote “unprecedented rural development,” especially those in the countryside who belong to the underserved and unbanked sectors.
“LandBank’s track record of being consistently compliant with the Agri Agra Law [Republic Act 10000] shows our commitment to perform our mandate, to empower not only the farmers but all workers in the agriculture sector,” Borromeo said.