BDO-EPCI union may result in higher profits

The union of Banco de Oro Universal Bank (BDO) and Equitable PCI Bank (EPCI) should result in higher profits for the merged bank over time, but revenues might be constrained by expenses related to the integration. The merged entity’s profitability will particularly benefit from EPCI’s strength in consumer banking, especially its credit card and overseas Filipino workers’ business, as well as its expanded distribution network and wider product range, Fitch Ratings said. In a statement, the global debt watcher also said the merged entity would likely get the higher individual rating of BDO. "The merged entity will be superior to the pre-merged EPCI in several aspects, and will likely take on the higher individual rating of BDO," Fitch said. BDO President Nestor Tan said the news was positive for both banks. "The only thing we have to say is that the merged entity will be a lot stronger than either one of us," he said in an interview. "Hopefully, in the future, we could even get a rating upgrade. But right now, we have to focus on our integration first," he added. The merger of equals is expected to be completed in the first quarter. Together, the two banks will form the country’s second-largest bank with about 14% of system-wide assets. BDO and EPCI are the fifth- and third-largest banks with 6% and 8% of the industry’s total assets, respectively. The two will form the country’s second-largest bank with P615 billion in combined assets. BDO has a present rating of C/D, while EPCI has a D. Both banks have been given a support rating of 3. Based on the ratings agency’s Web site, a bank is rated C if it is "an adequate bank, which, however, possesses one or more troublesome aspects." A bank with a rating of D means that it has "weaknesses of internal and/or external origin." In both instances, there may be concerns about its profitability and balance sheet integrity, franchise, management, operating environment or prospects. Fitch said balance sheet strength of the merged entity should remain satisfactory. "On a pro-forma basis, the merged bank’s nonperforming asset ratio (consisting of both nonperforming loans and foreclosed properties) would be 14.4%, with a reserves coverage ratio of 50%," it said. At the same time, the equity-to-assets ratio should come in at 10.2% and capital adequacy ratio at 15%. "Even after assuming substantial ultimate losses on the bank’s foreclosed property assets, its capitalization would remain just satisfactory," Fitch said. In addition to BDO and EPCI, the Sy family also owns China Banking Corp., which has a strong consumer and small and medium enterprise franchise among Chinese Filipinos, the rating agency said. If and when this too will be merged with the larger entity remains to be seen. Any merger plan here will prioritize protecting China Bank’s strong franchise within its niche market, it added. — Paolo Joseph L. Lising/BusinessWorld