LAND BANK of the Philippines’ (LANDBANK) proposed merger with the United Coconut Planters Bank (UCPB) may affect its financial profile and profitability in the near term, but the government’s support will be a safety net for the state-run lender, Fitch Ratings said.
“UCPB has been under a long-drawn rehabilitation program because of its weak financial health, but its size relative to LANDBANK could significantly weaken the larger bank’s financial profile, as it would make up about 14% of LANDBANK’s assets, based on our preliminary understanding of the pro forma merged entity,” Fitch said in a note on Thursday.
The debt watcher said the merger could have a “meaningful impact” on LANDBANK’s standalone financial strength, which is part of the factors considered for its viability rating for the bank, which currently stands at “bb”. This grade is given to banks seen to have a “moderate degree of fundamental financial strength,” which would have to be eroded before it needs support to avoid default.
Fitch said with UCPB’s non-performing loans (NPL) reportedly reaching more than P22 billion at end-2020, LANDBANK’s NPL ratio could rise by two percentage points once UCPB’s soured debt is integrated into its portfolio.
“This would exacerbate asset quality pressures that LANDBANK already faces from the current economic slowdown,” it said.
“This is especially in light of UCPB’s low loan-loss coverage of around 20%, which portends sharp increases in credit costs, on top of the increase we were already expecting from LANDBANK’s own,” Fitch added.
LANDBANK will likely only see the benefits of the merger in the long run as the risks are seen outweighing these in the near term, the debt watcher said, especially in terms of profitability, as it could incur significant integration expenses due to the transaction.
These benefits include a wider market share for LANDBANK as the surviving entity after the merger, which could help the agriculture sector.
“The merger would increase LANDBANK’s market share by about 1.7 percentage points to make it the second-largest bank in the Philippines by assets, potentially improving the bank’s franchise by catalyzing economies of scale in serving the agricultural community,” Fitch said.
“The bank’s unique policy role and its high systemic importance are key rating drivers underpinning our expectation of extraordinary support from the government when determining the bank’s Issuer Default Rating. These factors would be strengthened by the proposed merger,” it added.
LANDBANK’s “BBB” rating was affirmed by Fitch in May 2020, although its outlook was downgraded to “stable” from “positive” following a similar move for the sovereign. A stable outlook means the rating will likely be kept within the next 18 to 24 months.
The state-run lender’s net income rose 1.67% to P5.48 billion in the first quarter while its assets stood at P2.405 trillion as of March, making it the second-biggest bank in the country in terms of assets and deposits. Meanwhile, latest central bank data showed the assets of UCPB amounted to P327.39 billion as of December 2020.
Executive Order (EO) No. 142 signed by President Rodrigo R. Duterte on June 25 approved the LANDBANK-UCPB merger. All assets and liabilities of UCPB will be transferred to LANDBANK.
The merger was considered because of the two banks’ shared objectives and interrelated mandates, the EO said. LANDBANK mainly lends to the agriculture sector, while UCPB was originally acquired by the government for the benefit of coconut farmers.
The order said the move “will significantly strengthen the capability to deliver financial services to the coconut industry and the entire agricultural sector, contribute to economic sufficiency, foster countryside development and financial inclusion, and promote stability in the country’s banking system.”
The provisions in the order are expected to be fully implemented within six months from its effectivity. — LWTN