SINGAPORE - Credit watcher Fitch Ratings has affirmed the individual ratings of Philippine National Bank (PNB) at 'D/E' and Allied Banking Corporation (Allied Bank) at 'D.'
A rating of 'D' means a bank has weaknesses of internal and/or external origin, and there are concerns regarding its profitability and balance sheet integrity, franchise, management, operating environment or prospects.
On the other hand, an 'E' rating means a bank has serious problems, which either requires or is likely to require external support.
Fitch said PNB's rating reflects its reasonably strong franchise owing to a longstanding history, but also its low profitability and weak balance sheet.
"While the bank's reported non-performing assets have steadily declined over the years, they still remained substantial at 11.5% of total assets at end-2009, well above the industry average of 3% to 4%. These bad assets could be a threat to PNB's solvency position in the event of a difficult environment," Fitch said in a report on Thursday.
Fitch said Allied Bank's rating reflects its comparatively healthier balance sheet with a strong capital buffer that mitigates the risks of its concentrated loan book and weak underlying profitability.
While Allied Bank has a better risk profile than PNB, the expected share-swap merger of the two banks has a negative financial impact on Allied Bank's profile, but it will be positive for PNB's credit profile.
Fitch said the financial position of both entities on a combined basis has improved since early-2008 when the merger was formally announced, and likely to improve further on the back of an improving economic environment in the Philippines.
PNB and Allied Bank are both controlled by the Lucio Tan Group. The plan to merge both banks is still pending regulatory approval, after which Tan's group will still hold a controlling stake in the enlarged entity.