Fitch Affirms BDO at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency)
Fitch Ratings-Singapore-12 October 2020:
Fitch Ratings has affirmed BDO Unibank Inc.'s (BDO) Long-Term Issuer Default
Ratings (IDR) at 'BBB-' and its Viability Rating at 'bbb-'. The Outlook on the
IDR is 'Stable' as it is driven by sovereign support.

The Philippines' economy is taking a severe blow from the coronavirus
pandemic, with GDP contracting by 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. The 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 exerted pressure on
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 hurt banks' asset quality and earnings.
Key Rating Drivers
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

BDO'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 takes into
account the bank's very high systemic importance as the largest bank in the
Philippines with a deposit market share of more than 18% 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 by the sovereign
rating of 'BBB/Stable'.

VR

The bank's VR is underpinned by its market-leading domestic franchise, sound
business model, consistent delivery of financial performance over the last few
years, and a stable funding and liquidity profile. BDO's strong market
position has accorded it preferential access to lower-cost funding and
stronger pricing power to help weather interest margin pressures amid the
lower-interest-rate environment.

This competitive advantage has proven durable during the early phases of the
pandemic, and the bank's history of steady underwriting and risk controls are
also the main reasons why we have rated its VR above the operating environment
mid-point of 'bb+'. Nevertheless, we expect business conditions to worsen over
the next year and potential weakness in asset quality and earnings to continue
to put heavy downward pressure on the VR, especially if pressures over the
operating environment were to persist.

BDO's non-performing loan (NPL) ratio rose to 2.0% by end-1H20 (2019: 1.1%);
we expect it to rise marginally in 2H20 because of loan moratorium, and expect
more material deterioration in 2021 in reflection of sustained weakness in
mass-market consumer segments, SMEs and middle-market corporates, as well as
businesses in vulnerable sectors. Most of the credit impairment will be
backloaded, as the repayment grace period afforded by legislation implies the
full extent of NPLs may only be recognised in 1Q21 or later. We have affirmed
the asset-quality factor mid-point at 'bb+' with a negative outlook. The
bank's asset quality and appetite for risks in the current environment will
continue to have a higher influence on its credit profile.

A considerable decline in BDO's cost of funds cushioned net interest margins
and pre-provision earnings in 1H20, but we expect moderate revenue pressure in
the year ahead as assets are repriced and the cost of deposits bottoms out.
Risk-adjusted earnings are likely to dip in 2020 as a result of BDO's
aggressive credit provisioning, but recover slightly in 2021 as general
provisions are drawn down. The improvement in profitability nonetheless hinges
on a firm economic recovery, and is subject to much uncertainty and is prone
to revisions to the downside. We have retained our negative outlook on
earnings and profitability, with a mid-point of 'bb+'.

BDO's common equity Tier 1 ratio is likely to remain stable into 2021 as
higher credit impairment is offset by slower balance-sheet growth and earnings
which are still positive, albeit lower. Buffers are thin relative to peers,
and can come under pressure should downside risks materialise. Our assessment
of BDO's capitalisation and leverage remains at 'bb'.

BDO has been a beneficiary of depositors' flight to quality during the
nationwide lockdown, on account of its size and the accessibility of its wide
distribution network. Steady deposit inflows, coupled with the central bank's
aggressive monetary easing, resulted in surplus liquidity that enabled the
bank to pay down higher-cost liabilities and boost its CASA ratio. We see
funding and liquidity as a continued rating strength for the bank, and have an
unchanged outlook on its 'bbb' factor mid-point.
RATING SENSITIVITIES
IDRS, VR, SUPPORT RATING AND SUPPORT RATING FLOOR

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

BDO'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 could 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 BDO's IDR unless its Standalone Credit Profile - as indicated by
the VR - will also have weakened.

A downgrade in the operating environment will result in a downgrade of BDO's
VR, as its VR is already one notch above our assessment of the operating
environment. Downgrades to the operating environment may result from 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 actions 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 upon a positive reassessment of the operating environment score as a
result of a vigorous and sustained economic recovery. The prospects of an
upgrade are low in view of the negative outlook on the asset quality and
earnings and profitability factors, as well as broader challenges around 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
BDO Unibank, Inc.; 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-
----senior unsecured; Long Term Rating; 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/10139228)
Solicitation Status
(https://www.fitchratings.com/site/pr/10139228#solicitation)
Endorsement Status
(https://www.fitchratings.com/site/pr/10139228#endorsement_status)
Endorsement Policy
(https://www.fitchratings.com/site/pr/10139228#endorsement-policy)

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