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S&P sees Security Bank’s capital deteriorating as credit costs rise

SECURITY BANK Corp. said higher loan loss provisions will help protect its capital amid the ongoing pandemic. — BW FILE PHOTO

SECURITY BANK Corp. might see a deterioration in its capital strength over the next two years amid rising credit costs, S&P Global Ratings said.

“The bank’s performance in third-quarter 2020 was worse than our expectations due to continuously elevated credit costs amid high COVID-19 infection rates in the country,” the debt watcher said in a note on Monday.

“This level of credit costs is significantly higher than industry peers’, with annualized industry credit costs of 180 bps (basis points) for the first nine months,” S&P said.

Security Bank ramped up provisions for credit losses to P1.75 billion in the first nine months of the year, surging by 688% from the amount it set aside in the same period last year.

The bank’s non-performing loan ratio rose to 4.03% in the third quarter from 1.58% in the April to June period. NPL reserve cover stood at 122%.

S&P in June downgraded Security Bank’s stand-alone credit profile to ‘bbb-‘ from ‘bbb’ to reflect asset quality deterioration and heightened credit costs amid the coronavirus pandemic.

In October, the debt watcher revised its outlook on its rating for the bank to “negative” from stable”, which means a downgrade is possible in the next six months to two years.

“Our base case remains that the bank’s risk-adjusted capital (RAC) ratio would stay above 10% over the next two years. However, elevated credit costs will squeeze the capital position, as well as the rating buffer,” S&P said.

On the other hand, an offsetting risk to diminishing capital strength would be Security Bank’s “resilient net interest margin, S&P said. The lender’s net interest margin stood at 4.89% as of end-September, well above the industry average of 3.84%.

Another factor that could provide support to the bank’s capital base and bottomline performance, the debt watcher said, is its improving trading gains, which jumped to P9.2 billion at end-September, surging 557% from the year-ago level.

“Further windfall from the securities book will be difficult, in our view, given the significant shrinkage of the securities portfolio in amortized costs,” S&P said.

Sought for comment, Security Bank said its decision to beef up loan loss provisions is anticipatory and will, in effect, protect its capital. It said the provisions increased its accumulated total allowance for credit losses to 5% of its total loans.

“Fortifying the bank’s capital remains a top priority objective during this period of economic slowdown resulting from the pandemic,” Security Bank said in a statement sent to BusinessWorld.

Despite the crisis, Security Bank said it remains well-capitalized, noting that its common equity Tier 1 (CET1) ratio stood at 19.1% as of September from 17.1% a year ago. This is well beyond the minimum 6% regulatory requirement.

“Security Bank in fact now has the highest CET1 ratio among private domestic universal banks in the Philippines as of Sept. 30,” it said.

The lender’s net profit sank 62% to P1 billion in the third quarter from P2.7 billion a year ago.

This brought the bank’s net earnings in the first nine months to P6.7 billion, down 13% from the P7.7 billion logged in the comparable year-ago period, amid higher loan loss provisions.

Security Bank’s shares ended trading at P106.30 apiece on Tuesday, up by 2.31% or P2.40 from its previous close. — L.W.T. Noble

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