Banks’ credit ratings at risk from Hanjin

HUGE LOAN EXPOSURES to troubled Hanjin Heavy Industries and Construction Philippines (HHIC-Phil) could pull down credit ratings for the five Philippine banks concerned as its problems would mean narrower profits for absorbing possible defaults, Moody’s Investors Service said in a Jan. 14 note.

The debt watcher said credit risks from the South Korean shipbuilder’s bankruptcy will drive credit costs higher, with reports pegging the amount at $412 million. Settlement of the unpaid debts was left hanging after Hanjin filed for corporate rehabilitation last week.

Moody’s analysts said this does not bode well for the ratings of Rizal Commercial Banking Corp. (RCBC), stateowned Land Bank of the Philippines (LANDBANK), Metropolitan Bank & Trust Co. (Metrobank), Bank of the Philippine Islands (BPI) and BDO Unibank, Inc. in their view.

“The exposures are credit negative for the five Philippine banks because they will need to incur additional credit charges related to HHIC-Phil, which will reduce their profit,” Moody’s analysts Simon Chen and Shirley Zeng said in a credit outlook.

Moody’s rates these lenders at “Baa2,” which is one notch above minimum investment grade. This matches the rating given to the Philippine government and allows them to raise funding from foreign investors at cheaper cost.

HHIC-Phil has maintained a shipyard at the Subic Bay Freeport Zone in Central Luzon since 2006 and had hired over 22,000 workers. Issues on worker safety have also hounded the shipbuilding firm since it started operations here.

HHIC-Phil owes $140 million to RCBC, $80 million to LANDBANK, $72 million to Metrobank and $60 million each to BDO and BPI.

“Assuming the worst-case scenario in which the banks make provisions for their bad exposures in full because of the unsecured nature of the facilities extended, we expect that credit costs as a percentage of the banks’ pre-provision income will increase to between 20 and 140 basis points (bp), from six to 26 basis points based on their September 2018 financials,” the report read.

“The biggest negative effect on profitability will be at RCBC.”

Moody’s analysts said they expect the bank’s bad loans ratio to nearly double to 4.3% of the total portfolio from 2.2% in 2017 due to its huge Hanjin exposure.

The increase in nonperforming loan ratios of the other four banks “will be smaller” at 15-50 bp, it added.

At the same time, the debt watcher said the banks involved can still weather this challenge, as they have more than enough capital buffers to keep a solid footing.

“Although bank profit will be dampened by the additional credit costs, we expect that the affected banks’ loss-absorbing buffers to remain robust,” Moody’s said, adding that “[f]or RCBC, our assumed credit losses for the worst-case scenario exceed the bank’s pre-provision income and will reduce its capital ratio by around 50 basis points.”

BSP Officer-in-Charge Deputy Governor Diwa C. Guinigundo said on Friday last week that HHIC-Phil’s outstanding debt is “negligible” compared to total industry loans. Latest central bank data showed that this represents 0.24% of total loans and 2.49% of foreign currency loans.