Fitch Affirms Land Bank of the Philippines at 'BBB'; Outlook Stable

(The following statement was released by the rating agency)
Fitch Ratings-Singapore-19 October 2020:
Fitch Ratings has affirmed the Long-Term Foreign- and Local-Currency Issuer
Default Ratings (IDRs) of state-owned Land Bank of the Philippines (LBP) at
'BBB'. The Outlook on the IDRs is Stable because they are driven by support
from the Philippine sovereign (BBB/Stable).

The operating environment for Philippine banks continues to be very
challenging despite the relaxation of some quarantine measures in recent
months. Fitch in September 2020 revised our Philippine GDP growth forecast for
2020 from -1% to -8%, one of the sharpest contractions in the Asia-Pacific.

While we expect GDP growth to recover to 9% in 2021, this is partly due to a
low base effect, and the trajectory of the economic recovery remains
uncertain. Moreover, asset quality following rapid loan growth in recent years
is likely to be tested in the current downturn. We expect the banking system's
asset quality and profitability to remain under significant pressure in the
near term.
Key Rating Drivers
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

Our affirmation of the bank's Long-Term IDRs reflects our view of a high
probability of extraordinary state support for the bank in times of need. This
is also indicated in the bank's Support Rating of '2' and Support Rating Floor
of 'BBB'. The ratings consider the bank's strategic policy role, full state
ownership and high systemic importance - as indicated by its market share of
12%-13% of system assets and deposits - and LBP's status as the largest
recipient of government deposits. The ratings also consider the state's
ability to provide such support, as indicated by the sovereign rating of
'BBB'/Stable.

LBP's mandate is to support the Philippine agricultural sector, particularly
farmers' cooperatives, but it also has broader key roles in supporting the
national agenda and in countryside development. Its function is likely to
remain important in the near term as the state steps up efforts to counter the
economic downturn following the coronavirus pandemic. LBP is slated to receive
capital injections from the state as part of the government's recent fiscal
stimulus package, on the expectation that such capital will be lent to
vulnerable borrowers affected by the economic crisis.

VIABILITY RATING

LBP's Viability Rating (VR) reflects the bank's standalone credit profile,
which takes into account its strong state linkages that help to support its
robust funding position, and its adequate capitalisation and profitability
ratios that are broadly comparable with the local private bank peer average.
At the same time, the ratings also consider the risks that state control could
have on its operations and risk control framework, its high large-borrower
concentration and enlarged policy-oriented loan book as well as the
challenging economic conditions.

Fitch has maintained the bank's asset quality score at 'bb' with a negative
outlook due to the steep economic downturn and elevated risks associated with
its higher proportion of concessionary lending. More than 90% of LBP's
portfolio was extended to priority sectors such as agriculture, SMEs,
transportation and utilities, though the bank says that most of these loans
were extended on a commercial basis, which has allowed the bank to maintain
satisfactory profitability over the years.

However, there is a growing risk that lending standards may be loosened given
the state's recent directives for the bank to help ailing borrowers affected
by the crisis, which could raise credit risks for the bank. Excessive credit
growth in higher-risk segments, especially if it is coupled with weakening of
its profitability to levels that are not commensurate with its current rating
levels, could negatively affect our assessment of the credibility of its
management and overall strategic objectives and execution.

LBP's average operating profit/risk weighted assets ratio of 2.2% over
2015-2019 compares well with local peers, helped by its low funding costs and
large holdings of government securities, which carry 0% risk-weighting.
Nevertheless, profitability is under threat from very low interest rates and
increased provisioning. LBP will also face added margin pressure from having
to extend some loans at below-market rates to support the economy. Therefore,
we have retained the negative outlook on the bank's earnings and profitability
mid-point score of 'bb'.

The bank's capitalisation and leverage mid-point score remains at 'bb' with a
stable outlook. LBP's common equity Tier 1 (CET1) ratio of 14.8% as of June
2020 underpins its satisfactory capital buffers against moderate impairment
risks. A planned PHP18.5 billion capital injection from the government will
boost the bank's CET1 ratio by up to 200bp on a pro-forma basis and help to
put the bank's capital levels above most of its local peers. More infusions
are possible under additional bills being deliberated by lawmakers.
Nevertheless, we expect these capital buffers to be depleted quickly as the
bank ramps up lending for pandemic relief in the near term.

LBP's funding and liquidity profile is a relative rating strength and we
expect funding conditions to remain stable in the near term. The bank is
largely deposit funded, with low-cost current and savings accounts (CASA)
making up 95% of its deposits. The majority of its deposits are also sourced
from public entities thanks to its government linkages. The balance sheet is
liquid, as reflected in the low loan/deposit ratio of 41% and liquidity
coverage ratio of 220% at end-June 2020.
RATING SENSITIVITIES
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

Factors that Could, Individually or Collectively, Lead to Positive Rating
Action/Upgrade:

The bank's IDRs, Support Rating and Support Rating Floor are sensitive to
perceived shifts in the state's ability and propensity to support the bank. An
upward revision of the sovereign rating may therefore be positive for the
ratings.

Factors that Could, Individually or Collectively, Lead to Negative Rating
Action/Downgrade:

Conversely, a downgrade of the sovereign rating will lead to a similar
downgrade of the bank's IDRs. Significantly reduced state ownership and/or
influence could indicate a lower propensity to support the bank, which may
negatively affect the bank's IDR, though we believe this is unlikely in the
near term.

VIABILITY RATING

Factors that Could, Individually or Collectively, Lead to Positive Rating
Action/Upgrade:

LBP's VR may be upgraded if the operating environment were to significantly
improve, provided that its financial metrics were to also recover to
pre-pandemic levels.

Factors that Could, Individually or Collectively, Lead to Negative Rating
Action/Downgrade:

We may downgrade the bank's VR if there is a prolonged economic fallout from
the pandemic leading to deterioration in asset quality and profitability
metrics beyond our base case scenario. That is, if LBP's non-performing loan
ratio is above 4% for an extended period and if its secured loan composition
falls significantly, coupled with a weakening in its operating profit/risk
weighted assets ratio to 1.5% or lower on a sustained basis. A significantly
higher proportion of higher-risk policy lending that is not accompanied by
appropriate risk mitigation measures or higher capital buffers may also
pressure its VR.
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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on
historical performance. For more information about the methodology used to
determine sector-specific best- and worst-case scenario credit ratings, visit
[https://www.fitchratings.com/site/re/10111579]
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
The bank's IDRs are driven by our view of a high likelihood of support from
the Philippine sovereign.
ESG Considerations
We have revised LBP's ESG Relevance Score for Governance Structure to '3' from
'4'. We consider the government's influence on LBP's governance structure via
its 100% ownership and full control of the board of directors as structural
features of the bank that do not necessarily cause it to depart from its
policy mandate. This is factored into our consideration of the bank's linkages
with the state and its implications for governance, but is otherwise
credit-neutral.

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
Land Bank of the Philippines; Long Term Issuer Default Rating; Affirmed; BBB;
Rating Outlook Stable
; Short Term Issuer Default Rating; Affirmed; F2
; Local Currency Long Term Issuer Default Rating; Affirmed; BBB; Rating
Outlook Stable
; Viability Rating; Affirmed; bb
; Support Rating; Affirmed; 2
; Support Rating Floor; Affirmed; BBB

Contacts:
Primary Rating Analyst
Tamma Febrian,
Associate Director
+65 6796 7237
Fitch Ratings Singapore Pte Ltd.
One Raffles Quay #22-11, South Tower
Singapore 048583

Secondary Rating Analyst
Willie Tanoto,
Director
+65 6796 7219

Committee Chairperson
Grace Wu,
Senior Director
+852 2263 9919

Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email:
leslie.tan@thefitchgroup.com

Additional information is available on www.fitchratings.com

Applicable Criteria
Bank Rating Criteria (pub. 28 Feb 2020) (including rating assumption
sensitivity) (https://www.fitchratings.com/site/re/10110041)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
(https://www.fitchratings.com/site/dodd-frank-disclosure/10140079)
Solicitation Status
(https://www.fitchratings.com/site/pr/10140079#solicitation)
Endorsement Status
(https://www.fitchratings.com/site/pr/10140079#endorsement_status)
Endorsement Policy
(https://www.fitchratings.com/site/pr/10140079#endorsement-policy)

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