RCBC unable to sustain improved capital amidst bad loans: Moody’s

Its NPL ratio is “one of the weakest” amongst its domestic peers, Moody’s said.

Rizal Commercial Banking Corporation (RCBC) is expected to see a higher share of bad loans over the next 12-18 months amidst accelerated growth into riskier retail loans.

The Philippine-based bank is not expected to sustain its improved capitalisation, according to Moody’s Ratings, based on a report where it affirmed RCBC’s Baa3 ratings and changed its outlook to stable from positive.

“The change in outlook to stable from positive reflects our expectation that RCBC's improvement in capitalization following Sumitomo Mitsui Banking Corporation's capital infusion in July 2023 is unlikely to be sustained,” Moody’s Ratings warned. 

“The outlook change also considers the moderation in its asset quality improvement, given the bank's accelerated growth into riskier retail loans,” Moody’s said.

Whilst RCBC’s capital ratios have strengthened, its non-performing loans (NPL) ratio is expected to hover at a range higher than its pre-pandemic levels.

“RCBC's NPL coverage is also one of the weakest among its domestic rated peers, providing a smaller buffer against expected loan losses,” Moody’s said.

NPL ratio is expected to hover at 3.5% to 3.7% over the next 12-18 months, higher than pre-pandemic levels. This comes as RCBC continues to rebalance its portfolio towards higher-yielding yet riskier retail and small and medium-sized enterprise (SME) segments.

Common Equity Tier 1 (CET1) ratio is sighted to improve to 14.7% from 12.3%, following SMBC's capital infusion. However, the bank's CET1 ratio decreased to 13.7% as of 31 March 2024 as loan growth outpaced internal capital generation in Q1.

“Its new and unseasoned retail and SME loans could pose risks to its asset quality given the bank's fast growth, whilst its large loans to corporates will remain a concentration risk,” Moody’s warned. 

Profitability or return of assets (ROA) is expected to remain stable at around 0.9% in 2024, with assets sold to offset its increasing share of retail and SME loans.

The bank's gains on assets sold, such as foreclosed properties, accounted for 8% of its total operating income in 2023. 

The bank's deposit franchise remains modest, and its reliance on market funds moderate at 7.2% of tangible banking assets as of end-2023, according to Moody’s.

RCBC maintains a high level of liquidity, with a liquidity coverage ratio at 170% as at end-2023.