Fitch Affirms Bank of the Philippine Islands at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency)
Fitch Ratings-Singapore-12 October 2020:
Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) of the
Bank of the Philippine Islands (BPI) at 'BBB-' and its Viability Rating at
'bbb-'. The Outlook is 'Stable' as its IDR is driven by sovereign support.

The Philippines' economy is taking a severe blow from the coronavirus
pandemic, with GDP contracting 9.0% in 1H20 (2019: 6.0% growth) to mark the
worst contraction in south-east Asia. Economic conditions have worsened
considerably since our last review in May 2020, and will remain challenging
despite our expectation of a rebound in headline growth to 9.0% in 2021 from
an 8.0% contraction this year. Banks' financial results in 1H20 were propped
up by a debt moratorium and aggressive monetary easing by the central bank,
but we believe difficulties lie ahead.

Social distancing measures and prolonged job market weakness - for both
domestic and overseas Filipino workers - are likely to continue to dampen
consumer confidence and curb private consumption in the near term. Extended
movement restrictions in the Philippines have also pressured business cash
flows, from micro and small entrepreneurs to corporates in heavily affected
sectors like aviation and tourism. The more difficult operating environment
will continue to pressure banks' asset quality and earnings.
Key Rating Drivers
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

BPI's IDRs are driven by our expectations of a high probability of
extraordinary support from the sovereign, if needed. This is reflected in its
Support Rating of '2' and Support Rating Floor of 'BBB-', which factor in the
bank's very high systemic importance as one of the three largest banks in the
Philippines with a loan market share of 14% at end-1H20.

We believe the authorities have a high propensity to provide ongoing support
to the banking system as it remains a key conduit for pandemic-relief efforts,
and recent regulatory and economic relief attest to its likelihood. The
government's ability to provide support is also reflected in the sovereign
rating of 'BBB/Stable'.

VR

The bank's VR is underpinned by its solid domestic franchise, relatively
diversified revenue sources, consistent financial performance over the past
few years, and a stable funding and liquidity profile. BPI has benefited from
low-cost deposit inflows in 1H20 as a result of its size and market reach,
which gives it and its two largest peers a competitive edge in asset-liability
management, especially in the current low-rate environment.

We see these advantages as structural and relatively durable, which
contributes to why we have rated its VR above the operating environment
midpoint of 'bb+'. Nevertheless, business conditions in the banking sector
will remain challenging over the next year, notwithstanding our expectations
of a rebound in headline GDP growth. Deterioration in asset quality and
profitability beyond our current expectations will exert heavy downward
pressure on the bank's VR, especially if pressures around the operating
environment were to persist.

The bank's non-performing loan (NPL) ratio was slightly higher at 1.8% at
end-1H20 (end-2019: 1.7%) as net loans shrank by 2.8%. The 60-day loan
repayment grace period provided by legislation will continue to postpone the
recognition of NPLs into 1H21, so we foresee BPI's NPL ratio rising only
moderately by end-2020 before more than doubling from end-2019 levels by
end-2021. Much of the credit stress is likely to manifest in the bank's
consumer book and smaller-scale SME segments, though large corporates in some
of the most vulnerable sectors may also come under pressure.

The bank has flagged these impairment risks, and has begun to actively make
provisions for them. We have retained our negative outlook on the
asset-quality midpoint, in view of continuing downside risks to this
assessment. Both asset quality and the bank's attitude towards risk-taking in
the current environment will continue to exert a high influence on its credit
profile.

Revenue growth remained healthy in 1H20, aided by higher net interest income
due to significantly lower cost of funds, and higher trading and investment
gains offsetting lower fee incomes. We expect these drivers of higher revenue
to dissipate from 2H20 as asset repricing catches up with declining deposit
interest rates and as prevailing bond yields slow their descent to curb
portfolio revaluation gains. Net interest margins will narrow in 2021 amid
subdued balance-sheet growth.

Credit provisions in 2021, however, are likely to decline from 2020's high
levels - but remain significantly above pre-pandemic levels - as the bank
draws down on pre-emptive general allowances and smooths out earnings. We
expect BPI's risk-adjusted earnings to post a modest recovery in 2021 but
remain under pressure. Credit deterioration at a scale that is worse than we
currently expect can pressure our assessment on earnings and profitability,
which we have affirmed at 'bb+' with a negative outlook.

BPI's common equity Tier 1 (CET1) ratio remains above the average of peers and
the system, rising by 0.5pp in 1H20 to 15.7% as a result of a smaller loan
book and continued accumulation of earnings. An unchanged dividend payout
policy will slow the build-up of the bank's CET1 ratio, but we expect it to
stabilise at around 15% into 2021 as higher loan impairment is offset by
slower risk-weight asset inflation and continued profitability. Our outlook on
capitalisation and leverage remains stable.

BPI's cost of deposits declined by 42bp in 1H20 as its CASA ratio edged up to
72% (end-2019: 69%) thanks to ample liquidity in the system. Lower credit
demand also contributed in lowering its loan-to-deposit ratio to 84% (2019:
89%). We expect the central bank to maintain a highly accommodative monetary
policy into 2021, which will forestall potential liquidity pressures on the
banking system. Funding and liquidity continue to be a rating strength for
BPI, and we have affirmed the factor midpoint at 'bbb' factor with a stable
outlook.
RATING SENSITIVITIES
IDRS, VR, SUPPORT RATING AND SUPPORT RATING FLOOR

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

BPI's VR is at the same level as its SRF, which implies that its IDR will not
be downgraded as a result of a weaker VR unless the SRF is also downgraded.
The latter can stem from a downgrade in the sovereign rating, or if Fitch
perceives the propensity for the state to provide support to the bank to have
diminished significantly. Conversely, a lower SRF may not result in a
downgrade of BPI's IDR unless its Standalone Credit Profile, as indicated by
the VR, will also have weakened.

We will downgrade the VR to 'bb+' if the operating environment is downgraded,
possibly as a result of a protracted recession extending beyond 2021. We may
also take negative rating action if credit impairment accelerates at a much
faster pace than we currently expect, so as to pressure the asset-quality
score and in turn weigh on earnings and capital. Examples of such
deterioration would include the NPL ratio being sustained at significantly
more than 3% beyond 2021, and/or if its risk-adjusted operating profit does
not recover to pre-pandemic levels even after the economy improves.

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

Positive rating action on the sovereign would result in an upgrade of the
bank's SRF, which could be reflected in corresponding rating action on the
IDR.

The IDR could also be upgraded if the bank's VR is upgraded. This will depend
upon significant improvement in its financial profile metrics, which will be
dependent on a positive reassessment of the operating environment score as a
result of a vigorous and sustained recovery of the economy. The prospects of
an upgrade are low in view of the negative outlook on BPI's asset quality and
earnings and profitability factors, as well as broader challenges over the
operating environment.
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.
ESG Considerations
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
Bank of the Philippine Islands; Long Term Issuer Default Rating; Affirmed;
BBB-; Rating Outlook Stable
; Local Currency Long Term Issuer Default Rating; Affirmed; BBB-; Rating
Outlook Stable
; Short Term Issuer Default Rating; Affirmed; F3
; Viability Rating; Affirmed; bbb-
; Support Rating; Affirmed; 2
; Support Rating Floor; Affirmed; BBB-

Contacts:
Primary Rating Analyst
Willie Tanoto,
Director
+65 6796 7219
Fitch Ratings Singapore Pte Ltd.
One Raffles Quay #22-11, South Tower
Singapore 048583

Secondary Rating Analyst
Tamma Febrian,
Associate Director
+65 6796 7237

Committee Chairperson
Grace Wu,
Senior Director
+852 2263 9919

Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email:
leslie.tan@thefitchgroup.com
Peter Hoflich, Singapore, Tel: +65 6796 7229, Email:
peter.hoflich@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/10139232)
Solicitation Status
(https://www.fitchratings.com/site/pr/10139232#solicitation)
Endorsement Status
(https://www.fitchratings.com/site/pr/10139232#endorsement_status)
Endorsement Policy
(https://www.fitchratings.com/site/pr/10139232#endorsement-policy)

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