MOODY’S Investors Service has downgraded its outlook for Union Bank of the Philippines to negative from stable following its recent acquisition of a consumer banking business that is seen to shrink the bank’s capital buffer.
In a statement last Thursday, Moody’s said that UnionBank’s purchase of Citigroup Inc.’s P55-billion business will adversely affect its solvency at a time when asset risks are still fueled by the pandemic.
“The acquisition will reduce Union Bank’s capital, and the bank will take multiple years to rebuild its capital buffer,” it warned.
Moody’s downgrade unfazed the trade in UnionBank shares that saw it going up by 1.78 percent, or P1.80, to close at P102.80 each amid the 0.31-percent decline for the main index last Thursday.
Moody’s sees the listed bank’s tangible common equity (TCE) to adjusted risk-weighted assets ratio declining to around 13 percent from 15.3 percent as of end-2020 upon the completion of the transaction, which is slated by the second half of this year.
“Today’s rating action reflects the negative impact of the bank’s acquisition strategy, which Moody’s regards as a governance risk under its environmental, social and governance (ESG) framework, given the implications for the bank’s capital, financial strategy and risk management,” the debt watcher said. The credit rating agency noted that the acquisition will boost the bank’s core profitability because of more share in higher-yielding retail loans. However, Moody’s posed concerns over the uncertainties in sustaining potential earnings, which are “highly dependent on post-acquisition retention of Citigroup’s clients and synergy realization.”
In addition, Moody’s pointed out that assets risks are expected to be elevated moving forward given the disruptions in pandemic.
It noted that the Aboitiz-led bank’s non-performing loan (NPL) ratio increased to 4.9 percent as of end-September last year from 3.3 percent in 2019.
But the credit watcher sees UnionBank’s funding structure and liquidity to remain stable in the next 12-18 months.
The long-term ratings for the bank are not expected to be upgraded in the next 12-18 months, Moody’s said. But it could be revised should NPL ratio remain below 4.5 percent or core profitability improves “in a sustainable manner post-acquisition.”
Meanwhile, a downgrade may be imposed if TCE ratio stays below 12 percent or NPL ratio surges to beyond 6 percent.
Last month, UnionBank formally announced that it has entered into a share and business transfer agreement with several subsidiaries of the American multinational investment bank to buy the latter’s consumer banking business.
The acquisition covers Citi’s credit card, personal loans, wealth management and retail deposit businesses. In addition, the transaction includes its real estate interests in relation to Citibank Square in Eastwood, three full service bank branches, five wealth centers and two bank branch lites.
As of end-June, Citi’s consumer banking business has gross loans amounting to P59.7 billion; total liabilities of P71.7 billion, including deposits of P67.8 billion; investment AUM (asset under management) of P95 billion; and nearly 1 million customer base.