Banks’ Hanjin exposure credit negative – Moody’s

Credit to Author: MAYVELIN U. CARABALLO, TMT| Date: Mon, 14 Jan 2019 16:23:15 +0000

RCBC most exposed at $140M, ‘will therefore be most affected’

Five of the country’s biggest banks could see their credit ratings fall given their exposure to a bankrupt Korean-owned shipbuilder, Moody’s Investors Service indicated on Monday.

“The exposures are credit negative for the five Philippine banks because they will need to incur additional credit charges related to HHIC-Phil, which will reduce their profit,” Moody’s said in a report.

Subic-based Hanjin Heavy Industries and Construction Philippines (HHIC-Phil) which last Tuesday filed for corporate rehabilitation, reportedly owes Land Bank of the Philippines (Landbank),
BDO Unibank, Inc., Rizal Commercial Banking Corp. (RCBC), Metropolitan Bank & Trust Co. (Metrobank) and Bank of the Philippine Islands (BPI) around $412 million in addition to another $900 million to South Korean creditors.

All five local banks affected by Hanjin’s insolvency currently have investment grade ratings of Baa2, with stable outlooks, from Moody’s.

“Of the five banks, RCBC has the largest exposure to HHIC-Phil at around $140 million and will therefore be most affected,” the debt watcher noted.

It estimated that RCBC’s gross nonperforming loan (NPL) ratio would almost double to 4.3 percent from 2.2 percent, based on 2017 financials, after accounting for its exposure to Hanjin.

Moody’s noted that the other banks’ exposures were smaller at about $60 million for both BDO and BPI, around $80 million for LandBank and about $72 million for Metrobank.

It said the increase in gross NPL ratios for the other four would be smaller at between 15 and 50 basis points.

“Assuming the worst-case scenario in which the banks make provisions for their bad exposures in full because of the unsecured nature of the facilities extended, we expect that credit costs as a percentage of the banks’ pre-provision income will increase to between 20 and 140 basis points, from six to 26 basis points based on their September 2018 financials,” Moody’s said.

The biggest negative effect on profitability will be felt by RCBC, it added.

Still, Moody’s said that “although bank profit will be dampened by the additional credit costs, we expect that the affected banks’ loss-absorbing buffers to remain robust.”

It emphasized that the banks’ tangible common equity ratios were between 11 percent and 16 percent as of the end of Septembe and were above minimum capital requirements in the Philippines.

“For RCBC, our assumed credit losses for the worst-case scenario exceed the bank’s pre-provision income and will reduce its capital ratio by around 50 basis points,” the debt watcher noted.

BSP Deputy Governor Diwa Guinigundo last week pointed out that the five local banks’ exposure to Hanjin, relative to both total loans and total foreign currency deposit unit (FCDU) loans of the banking system, was “very negligible.”

The central bank late on Friday said the Hanjin loans represented only 0.24 percent of total banking system loans and 2.49 percent of FCDU loans

“With its robust capitalization, the Philippine banking system is well-positioned to manage about $400 million in loan exposure to Hanjin…,” the BSP said in a statement.

Finance Secretary Carlos Dominguez 3rd has also said that local banks will be working together to address the potential impact of the looming multimillion-dollar default — potentially the biggest in Philippine corporate history.

“It’s going to hurt but it’s certainly not going to end up hampering them,” he had said.

After plunging on Friday following news of Hanjin’s insolvency, share prices of the affected banks rose on Monday, with RCBC up the most by 2.84 percent or P0.75 to P27.15 apiece.

BPI gained 2.11 percent or P1.90 to P91.90 per share, Metrobank added 2.62 percent or P2.05 to P80 and BDO ended higher by 0.22 percent or P0.30 to P131.60.

State-owned Landbank is not listed.

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