Fitch Affirms Metrobank 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
Metropolitan Bank & Trust Company (Metrobank) 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 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% growth 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 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

Metrobank'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 deposit market share of 12% at end-1H20. We believe the
authorities have a high propensity to provide ongoing support to the banking
system as it remains a primary policy conduit, especially amid current
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 well-entrenched domestic franchise,
relatively diversified revenue sources, consistent financial results over the
last few years, and a robust funding and liquidity profile. Metrobank has been
a beneficiary of low-cost deposit inflows 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 such advantages as structural and relatively durable, which contributes
to why we have rated its VR above the operating environment mid-point of
'bb+'. Nevertheless, business conditions are likely to remain challenging over
the next year, and potential weakness in asset quality and earnings continue
to exert heavy downward pressure on the bank's VR, especially if pressures
over the operating environment were to persist.

The non-performing loan (NPL) ratio rose to 1.6% by end-1H20 (end-2019: 1.3%)
while net loans shrank by 10.2%. We expect credit impairment to continue to
rise gradually in 2H20 before seeing much faster acceleration in 1H21 when the
loan repayment grace period prescribed by legislation expires. Higher credit
stress in its consumer book and broader weakness in the economy and in the
heavily affected sectors will lead to more bad loans, but a history of
credible underwriting and loan security should mitigate credit losses.

Metrobank's relatively high NPL coverage ratio of 188% also provides some
protection to loss given default, but we continue to have a negative outlook
on asset quality in reflection of ongoing risks of worse deterioration. Asset
quality and the bank's appetite for risks in the current environment will
continue to have higher influence on its credit profile.

Non-interest income rose by 55% yoy in 1H20 on the back of trading and
investment gains, while the net interest margin (NIM) widened as a result of a
much lower cost of funds. This prompted pre-provision earnings to rise by 61%
against 1H19. We believe these revenue tailwinds are front-loaded, and NIM
will come under heavier pressure going into 2021 as assets reprice, including
the new credit card interest-rate cap that is effective from November.
Portfolio gains are also likely to normalise as we see local bond yields
having less room to decline.

Heavy credit provisioning in 1H20 - at 342bp of loans on an annualised basis -
has weighed on earnings, but these pre-emptive allowances could provide
respite to earnings in 2021 when loan impairments manifest. We expect
Metrobank's risk-adjusted earnings to post a modest recovery in 2021 but
remain below 2019 levels, and risks to the forecast remain skewed to the
downside. We have thus retained our negative outlook on earnings and
profitability, with an unchanged 'bb+' mid-point.

Metrobank's common equity Tier 1 (CET1) ratio continues to be the highest
among major peers, after rising by 2.5pp in 1H20 to 18.7% as a result of a
smaller loan book and the outsized revaluation gains. We expect the capital
ratio to stabilise at around 17% into 2021 as higher loan impairment is offset
by slower risk-weight asset inflation and relatively resilient earnings. Our
outlook on capitalisation and leverage remains stable.

Metrobank has reduced its cost of deposits in 1H20 and raised its CASA ratio
to 69% (end-2019: 63%), thanks to the considerable liquidity surplus in the
system. Its debt securities portfolio, which is larger than its peers by
proportion, has also enjoyed significant revaluation gains to counteract
headwinds from lower asset yields as a result of the central bank's aggressive
monetary easing. Funding and liquidity continue to be rating strength for the
bank, and we have affirmed the factor mid-point 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:

Metrobank'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 Metrobank'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
Metrobank'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 - for example, if the NPL ratio is 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
require significant improvements 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 recovery of the economy. The prospects
of an upgrade are low in view of the negative outlook on Metrobank'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
Metropolitan Bank & Trust Company; 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/10139231)
Solicitation Status
(https://www.fitchratings.com/site/pr/10139231#solicitation)
Endorsement Status
(https://www.fitchratings.com/site/pr/10139231#endorsement_status)
Endorsement Policy
(https://www.fitchratings.com/site/pr/10139231#endorsement-policy)

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