Amid the bank’s mildly improved solvency, stable asset quality, and high core profitability, Union Bank of the Philippines (UnionBank) has recently been affirmed with the Baa2 investment grade rating by Moody’s Investors Service, the ninth highest rating in its long-term corporate obligation rating.
However, the Aboitiz-led bank’s credit rating outlook was still rated as negative because of uncertainty related to its plan to improve the bank’s core capital ratio to a level that will be commensurate with that of its domestic and regional peers.
The debt watcher also cited UnionBank’s mildly improved solvency position following the P12 billion capital increase in February following a material capital decrease related to Citigroup’s retail business acquisition.
Stabilizing asset quality for UnionBank
In its report, Moody’s says it sees stabilizing asset quality for the Aboitiz-led bank due to post-pandemic economic recovery.
It noted that the bank is expected to book higher core profitability in the next one to two years from cost synergies from the recent acquisition and the bank’s expansion into higher-yielding retail loans.
UnionBank’s capital ratio stood at 12.6 percent as of the end of 2022, including the benefit of the P12 billion capital raise last February.
“While the bank targets a higher capital ratio this year, the execution of this plan is subject to inherent uncertainty around the level of profitability and asset growth,” stated Moody’s in its report.
The rating agency also expects the bank’s asset quality to remain largely stable due to post-pandemic economic recovery in the Philippines, with the non-performing loan (NPL) ratio at around 4.5 percent in the next 12 to 18 months.
After acquiring Citi’s retail banking business for P72 billion, consumer loans accounted for about 50 percent of UnionBank’s gross loans, making this bank one of the most retail-focused banks in the Philippines.
“The inherently higher risk nature of the acquired unsecured credit card and consumer loans compared to corporate loans is partially balanced by the very high margins of these products,” the report added.
Moody’s also expects UnionBank’s sustainable return on assets, excluding trading gains, to increase mildly in 2023 from 1.3 percent in 2022 amid higher margins and a larger unsecured loan book.
“Funding and liquidity will remain broadly stable. UnionBank’s deposit franchise has improved over the past three years, because of the bank’s strong focus on retail business that was further strengthened by the acquisition of Citigroup’s retail deposits,” Moody’s further stated.
UnionBank booked a 30-percent jump in net income to P3.38 billion in the first quarter from P2.61 billion in the same quarter last year fueled by the acquired Citi consumer business.
The listed bank’s net revenues soared by 57 percent to P16.1 billion from P10.2 billion, driven largely by recurring income.