PHL bank bonds may underperform

CREDITSIGHTS kept its “market underperform” recommendation on most Philippine bank dollar bonds, citing weaker growth expectations after last year’s flood control graft scandal and continued asset-quality pressures.

The research firm kept underperform ratings on BDO Unibank, Inc. (BDO) and Bank of the Philippine Islands (BPI) from a relative value standpoint. It also assigned underperformance to Security Bank Corp., Rizal Commercial Banking Corp. (RCBC) and Philippine National Bank (PNB) due to a combination of weaker fundamentals and tight relative-value spreads. Metropolitan Bank & Trust Co. retains a market perform rating, CreditSights said in a report dated March 9.

CreditSights expects BDO, BPI and Metrobank dollar bonds to trade largely flat against the State Bank of India’s dollar issuance, citing India’s stronger economic momentum and healthier asset quality.

The report also notes that Philippine banks’ loan profitability might face less pressure from policy rate cuts this year.

Security Bank’s dollar bonds are expected to trade at a 20-30 basis points discount relative to BDO, reflecting thinner capital and higher credit costs from its rapid retail growth.

RCBC’s dollar bonds are expected to face a similar spread, as aggressive expansion into higher-yielding but riskier retail and small and medium enterprise segments has weighed on profitability.

CreditSights highlighted RCBC as having the weakest earnings performance among its covered banks.

“Management said risk-weighted asset growth will be more targeted and recalibrated going forward to keep the common equity Tier 1 ratio above 13% (at 13.6% as of the fourth quarter of 2025), but we see some execution risk as aggressive lending at RCBC has typically outpaced internal capital accumulation, leading to a decline in capital ratios over time,” it said.

PNB’s dollar bonds are expected to trade flat to Security Bank’s, maintaining underperformance due to tight spreads across the Philippine bank dollar senior debt complex.

While the bank improved profitability and asset quality last year, its retail expansion introduces potential asset quality risks.

CreditSights said it continues to favor the large first-tier Philippine banks from a credit perspective but remains cautious on second-tier lenders.

Risks arise from rapid growth in higher-risk lending, thin reserve coverage (72-86%) and capital buffers that are strained by brisk risk-weighted asset expansion outpacing internal capital accumulation, it added. — AMCS