Union Bank’s capital buffers to weaken following Citi purchase: analyst

Any potential earnings boost remain uncertain; whilst reduced capital will take years to rebuild.

Moody’s Investors Service is iffy with UnionBank of the Philippines’ (UBP) decision to purchase Citi’s retail assets in the country, saying that it will weaken the bank’s capital buffers amidst heightened risks due to the still-raging pandemic.

“The acquisition will reduce UnionBank's capital, and the bank will take multiple years to rebuild its capital buffer,” according to an outlook published by Moody’s.

The ratings agency did note that the acquisition will improve UBP's core profitability due to an increase in the share of higher-yielding retail loans. 

On the other hand, it argued that the extent and sustainability of the potential earnings boost from this acquisition is uncertain, as it is highly dependent on a successful post-acquisition retention of Citi's clients.

“The negative outlook reflects Moody's view that UBP's solvency will weaken after the acquisition is completed, a result of a significant reduction in UBP's post-acquisition capital buffers amid heightened asset risks due to the ongoing pandemic,” the ratings agency said.

Further, Moody’s also regards the bank's acquisition strategy as a supposed governance risk under its environmental, social, and governance framework, given the implications for the bank's capital, financial strategy and risk management.

UnionBank's tangible common equity to adjusted risk-weighted assets ratio will decline to around 13% following the acquisition, from 15.3% as of the end of 2020. 

The bank’s asset risk also remains elevated due to disruptions caused by the ongoing pandemic. UnionBank’s gross non-performing loan ratio increased significantly to 4.9% as of the end of September 2021 from 3.3% as of the end of 2019, reported Moody’s.