OREANDA-NEWS. Fitch Ratings has today affirmed the Long-Term Issuer Default Ratings (IDRs) on two Philippine government-owned banks - Development Bank of the Philippines (DBP) and Land Bank of the Philippines (LBP). The Outlooks on both banks remain Positive, mirroring the Positive Outlook on the Philippine sovereign's ratings. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

IDRS, NATIONAL RATINGS, SUPPORT RATINGS AND SUPPORT RATING FLOORS
The IDRs and National Ratings of DBP and LBP are driven by Fitch's expectation of state support for the banks, as indicated by their Support Ratings (SRs) of '3' and Support Rating Floors (SRFs) of 'BB+'. Their SRFs are at the same level as for the large systemically important commercial banks.

Fitch believes the sovereign would have a high propensity to provide extraordinary support to the two banks in times of need, in light of their full government ownership and quasi-policy roles as set out in their respective forming charters. The probability of state support is considered moderate overall, after taking into account the sovereign's fiscal flexibility, as indicated by the sovereign IDR of 'BBB-'.

VIABILITY RATINGS
The Viability Ratings (VRs) on DBP and LBP take into account the banks' satisfactory asset quality and profitability, reasonable risk management frameworks and healthy funding and liquidity profiles. These ratings also take into account the steady improvement in the Philippine operating environment, including a stronger prudential framework (see Fitch Affirms BPI and Metrobank; Upgrades BDO to 'BBB-', dated 21 April 2016). That said, DBP's and LBP's development mandates continue to have significant influence on their intrinsic profiles, resulting in materially higher loan and deposit concentrations compared with commercial bank peers.

Both banks' capitalisations remain adequate as indicated by their estimated Fitch core capital (FCC) ratios, which are above their regulatory common equity Tier 1 (CET1) ratios. Capital injections from the government over 2016 - of PHP5bn or about 1.9% of risk-weighted assets (RWAs) for DBP and PHP9bn or 1.8% of RWAs for LBP - will help to improve the ratios. The CET1 ratios significantly declined for both banks in 2015 largely due to the full deduction of certain legacy equity investments from CET1 capital. The CET1 ratio fell to 10.4% at end-2015 for DBP from 13.8% a year earlier, and to 10.0% for LBP from 11.7%.

Funding and liquidity are relative rating strengths. Deposits are highly concentrated, but mainly derived from government sources or large corporate funds, and fairly stable. The banks' balance sheets are also liquid, and a significant portion of assets are held in cash, balances with the central bank and government securities.

SENIOR DEBT
DBP's senior notes are rated at the same level as the bank's Long-Term IDR. This is because the notes constitute direct, unsubordinated and unsecured obligations of the bank, and rank equally with all its other unsecured and unsubordinated obligations.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS, SRS AND SRFS
The ratings are sensitive to perceived changes in the sovereign's ability or propensity to extend timely support.

A Presidential Executive Order was signed in February 2016 mandating a merger between DBP and LBP. More tangible progress on the merger could lead Fitch to reassess the sovereign's propensity to provide support, although we see significant uncertainty around merger completion in light of presidential elections next month.

An upgrade of the sovereign ratings - currently on Positive Outlook - would likely have a corresponding effect on the SRFs, and in turn the IDRs. However, a downgrade of the SRs or SRFs would not necessarily lead to negative action on the IDRs, which are also supported by the banks' 'bb+' VRs.

A revision of the sovereign Outlook back to Stable from Positive would lead to equivalent action on the Outlooks of the two banks.

VRS
Further upside to the banks' VRs is less likely, unless their policy roles were to diminish. This is due to the risk of government influence arising from the banks' state ownership.

Sharply higher credit losses leading to a more vulnerable capital or funding position would place pressure on the bank's VRs. This may result from significant economic stress or state influence on the bank's lending and investment decisions.

SENIOR DEBT
Any change in DBP's IDR would affect the issue ratings.

The rating actions are as follows:

DBP
Long-Term Foreign-Currency IDR affirmed at 'BB+'; Outlook Positive
Short-Term Foreign-Currency IDR affirmed at 'B'
Long-Term Local-Currency IDR affirmed at 'BB+'; Outlook Positive
National Long-Term Rating affirmed at 'AA+(phl)'; Outlook Stable
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '3'
Support Rating Floor affirmed at 'BB+'
Ratings on senior notes affirmed at 'BB+'

LBP
Long-Term Foreign-Currency IDR affirmed at 'BB+'; Outlook Positive
Short-Term Foreign-Currency IDR affirmed at 'B'
Long-Term Local-Currency IDR affirmed at 'BB+'; Outlook Positive
National Long-Term Rating affirmed at 'AA+(phl)'; Outlook Stable
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '3'
Support Rating Floor affirmed at 'BB+'