Fitch Ratings raised the likelihood of a change for the better on the credit standing of two government-owned banks over the near term. The decision bared late on Monday came on the heels of an earlier adjustment on the country’s sovereign standing as borrower of global funds.
Fitch Ratings said it has revised the outlook on the long-term issuer default ratings of the Land Bank of the Philippines and Development Bank of the Philippines (DBP).
Their credit outlook was elevated to “positive” from “stable,” indicating that a hike in their base standing was possible in the next 12 to 18 months.
“The outlooks have been revised following a revision in the Philippines sovereign’s outlook to positive from stable on September 24, which takes into account the improvement in Philippine governance standards and global competitiveness,” Fitch said.
Fitch said the revisions reflect its view that the macroeconomic gains posted by the Philippine sovereign were to provide extraordinary support for the government-owned lenders if needed.
“The two banks are 100-percent owned by the government and serve quasi-policy roles. They are also important in the local banking system—we believe LandBank and DBP would be designated as domestic systemically important banks [D-SIBs] due to their meaningful share of assets and deposits in the Philippines,” Fitch said.
Meanwhile, the delay on the proposed merger of the two government banks mean it should become more challenging for the proponents to get the program implemented in the coming years.
“The delay might imply that consolidation in the near to medium term would be challenging considering the upcoming presidential election in 2016. The merger was proposed in February 2015 to improve operating efficiency and economies of scale with a larger balance-sheet capacity while removing their overlapping policy functions,” Fitch said.
As a result, the government banks will likely get an upgrade from improved asset quality along with better franchises and risk appetites over the medium term.
“Changes to the sovereign’s ability to provide support—as indicated by the sovereign rating—as well as the government’s propensity to provide timely extraordinary support would likely lead to corresponding changes to the ratings on [LandBank] and DBP,” Fitch said.