Fundamental ViewAS OF 15 Nov 2022
UnionBank of the Philippines (UBP) is rated Baa2 (negative) by Moody’s. The rating outlook was revised from stable to negative in January 2022 due to a significant decline in capital buffers post-acquisition of Citigroup’s local retail unit, amid heightened risks due to the ongoing pandemic.
UBP’s liquidity is one of the highest in the sector with its distinctively low loan-deposit ratio (LDR).
The bank has historically generated higher returns than peers, with trading-related income as a key contributor to profits. However, the non-recurring nature of such gains introduces greater volatility to operating performance.
Business DescriptionAS OF 15 Nov 2022
- UnionBank of the Philippines was incorporated in 1968, and listed in the Philippine Stock Exchange in June 1992. Principal shareholders are Aboitiz Equity Ventures (49.66%), Insular Life (16%), & Social Security System (18%).
- UBP has undertaken two mergers with International Corporate Bank in 1994 and International Exchange Bank in 2006. City Savings Bank (a thrift bank) was purchased in Jan 2013. City Savings received merger approval with PR Savings (a bank engaged in motorcycle, agri-machinery, & teachers' salary loans) in Dec 2018 from the BSP.
- On a consolidated basis, post-Citi acquisition as at 9M22, the loan book was split 18% commercial & MSME loans, 30% corporate loans, and the remaining 52% being retail loans.
Risk & CatalystsAS OF 15 Nov 2022
Any downgrade of the Philippine sovereign ratings (Baa2/ BBB+/ BBB) or reduction of shareholding by Aboitiz Equity Ventures would negatively impact UBP’s credit ratings.
The bank has been focusing on the consumer and MSME segments in order to preserve NIMs. We are cautious given the current growth headwinds, persistent inflation and rapid pace of rate hikes, all while the bank’s reserve cover and capital buffer (pro-forma for the Citi acquisition) are on the thinner side.
We view UBP’s acquisition of Citi’s retail business as credit positive in the long haul given the latter’s larger scale and greater strength in the upscale consumer market and wealth management businesses, high margins and strong profitability record. The upfront capital impact is significant, but the bank benefits from good shareholder support.
Key MetricsAS OF 15 Nov 2022
|Reported ROA (Cumulative)||1.4%||1.6%||1.5%||1.9%|
|Reported ROE (Cumulative)||10.4%||11.6%||11.5%||15.3%|
|Total Equity/Total Assets||13.8%||13.5%||13.6%||12.7%|
|Gross NPL Ratio||n/m||5.00%||5.10%||3.10%|
|Gross Customer Loans/Deposits||65.9%||63.1%||64.3%||81.2%|
|Net Interest Margin||4.87%||4.60%||4.50%||3.60%|
CreditSights ViewAS OF 15 Nov 2022
UBP delivered a softer performance this year as volatile trading income as a key contributor to revenues led to a weaker showing, but profitability metrics remain decent as core topline revenue generation held up well despite the challenging operating environment. The acquisition of the Citi retail portfolio closed in 3Q22, providing a significant uplift to the NIM and expanding the loan book by about a fifth of its previous size. However, its reserve cover is on the thinner side, as are its capital buffers post-Citi acquisition. The Citi acquisition should boost profitability in the long term but there are near term integration risks. We are cautious on asset quality due to the growth headwinds. We see the bank as finely priced given its size and business model and maintain a U/P reco.
Recommendation Reviewed: November 18, 2022
Recommendation Changed: April 17, 2020