Fitch Affirms Philippine National Bank at 'BB'; 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 Rating (IDR) of
Philippine National Bank at 'BB'. The Outlook on the IDRs is Stable.

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 in 2020. 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 exert pressure banks' asset quality and earnings.
Key Rating Drivers
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR

PNB's IDRs are sovereign-support driven, reflecting our view of a moderate
likelihood of extraordinary sovereign support to the bank, in times of need.
This is also indicated in its Support Rating of '3' and Support Rating Floor
(SRF) of 'BB'. The ratings take into consideration its moderate systemic
importance, with an approximately 6% market share of system assets, and the
Philippine sovereign's fiscal flexibility - as indicated by its 'BBB'/Stable
rating.

VR

Its Viability Rating of 'bb' underscores its satisfactory capital buffers and
longstanding franchise, which helps to underpin its generally stable funding
and liquidity profile. These factors are offset by asset quality and
profitability which are weaker than its peers, which we expect to continue to
soften in the next 12 months amid the pandemic-induced economic crisis. The
ratings also take into consideration the risks associated with the bank's
rapid loan growth in recent years as well as its high single-borrower
concentration, though this is a common trait of many Philippine banks.

Fitch has retained the bank's asset quality mid-point score at 'bb-', with a
negative outlook on the back of the steep economic downturn. PNB's reported
gross non-performing loan (NPL) ratio of 4.7% at June 2020 was higher than the
system average of 2.6%. We expect the bank's underlying asset quality metrics
to continue to deteriorate, though the state-mandated 60-day repayment grace
period is likely to temper reported metrics up into 1Q21.

Like many Philippine banks, PNB had beefed up its provisioning in 1H20, though
we expect credit costs to remain elevated in the near term, with the full
extent of provisioning and asset-quality deterioration hinging largely on the
economic recovery trajectory. We believe that its asset quality and risk
appetite will continue to have a higher influence on its standalone credit
profile.

PNB's profitability has generally lagged that of peers, reflecting in part its
lower operating efficiency and higher credit cost, resulting in an earnings
and profitability mid-point score of 'bb-'/negative. Large asset sales gain in
the past had propped up overall profitability and reduced ongoing costs
associated with maintaining legacy assets, while the bank has worked to boost
its core lending business over the past decade. Nevertheless, the current
crisis will weigh on its ability to continue to improve its profitability, in
light of the record low-interest-rate environment, weaker business volumes and
high credit provisioning.

PNB's Common Equity Tier 1 (CET1) ratio improved to 15.0% in June 2020 from
14.1% in December 2019, amid the decline in loan balances due to corporate
repayments and weak credit demand. The bank announced on 10 September that it
is in the process of selling some prime properties to shed low-yielding assets
and strengthen its capital position, though the timing and potential gains
remain uncertain. Notwithstanding this, we believe that its capitalisation is
likely to remain stable in the near term, as lower earnings and increased
credit migration are offset by slower balance-sheet growth. Fitch believes
that the bank's capital buffers will decline gradually in the medium term, as
the bank is likely to return to its above-average loan growth when the economy
recovers.

We expect the bank's funding and liquidity profile to remain generally stable
in the near term. PNB's net loans-to-deposit ratio of 76% was marginally lower
than 77% at end-2019, as the bank shrank its balance sheet to preserve asset
quality and capital. The bank, like many other Philippine banks, has also
boosted its liquid assets buffers in 1H20, with the liquidity coverage ratio
(LCR) rising to 134% from 124% at end-2019. We believe that the bank's
liquidity position will remain satisfactory in 2021, supported by the central
bank's monetary policy stance and slower balance-sheet growth. PNB's CASA
ratio of 75% is higher than many of its mid-sized peers, reflecting its more
established franchise and broader branch network. This has also benefitted the
bank's funding costs, which remain lower than its mid-sized peers.
RATING SENSITIVITIES
IDRS, VR, SUPPORT AND SUPPORT RATING FLOOR

Factors that could, individually or collectively, lead to negative rating
action/downgrade:

We may downgrade the bank's VR if the deterioration in the Philippines'
economic environment is worse than we currently expect and leads to weakening
asset quality and profitability to levels that exceed our base case - that is,
if the NPL ratio rises and stays above 5% for a prolonged period and/or if its
operating profit/RWA does not recover to pre-pandemic levels.

PNB's Support Rating Floor and VR are currently at the same level. This
implies that a downgrade in the standalone credit profile - potentially amid
continued weakness in the economic environment - may not lead to a downgrade
in its IDRs unless our assessment of the state's ability and/or propensity to
support PNB also weakens.

Factors that could, individually or collectively, lead to positive rating
action/upgrade:

An upgrade in the sovereign rating may lead to similar positive rating action
on the SRF and IDRs.

PNB's IDR could also be upgraded if we see material improvements in its
Standalone Credit Profile. Upgrade prospects, however, are unlikely in the
near term, given the weak economic outlook.
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
Philippine National Bank; Long Term Issuer Default Rating; Affirmed; BB;
Rating Outlook Stable
; Short Term Issuer Default Rating; Affirmed; B
; Viability Rating; Affirmed; bb
; Support Rating; Affirmed; 3
; Support Rating Floor; Affirmed; BB

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
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/10138634)
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(https://www.fitchratings.com/site/pr/10138634#solicitation)
Endorsement Status
(https://www.fitchratings.com/site/pr/10138634#endorsement_status)
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(https://www.fitchratings.com/site/pr/10138634#endorsement-policy)

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