Moody’s affirms UnionBank ratings

MOODY’S RATINGS has affirmed the credit ratings and outlook of Union Bank of the Philippines (UnionBank), citing the lender’s strong capital position and liquidity buffers, even as it flagged persistent weaknesses in asset quality and exposure to retail lending risks.

In a statement late on Monday, the credit rater maintained UnionBank’s “Baa3” long- and short-term issuer and deposit ratings, along with a “stable” outlook.

Moody’s said the affirmation reflects the bank’s solid capital and liquidity profile, which it described as key buffers against weaker-than-peer asset quality indicators, including higher problem loan ratios, elevated credit costs and relatively low provisioning coverage.

“The affirmation of UnionBank’s ratings and Baseline Credit Assessment reflects the bank’s strong capital and liquidity, which provide buffers against its weaker-than-peer asset quality,” Moody’s said in a note.

However, the debt watcher cautioned that inflationary pressures pose a continuing risk to the bank’s asset quality, particularly due to its high exposure to retail lending. Retail loans account for about 60% of UnionBank’s total loan portfolio as of end-2025, the highest among Moody’s-rated banks.

A significant portion of this exposure is also unsecured. About 40% of the bank’s total loan book consists of unsecured retail loans, increasing vulnerability to borrower stress during periods of rising prices and tighter financial conditions.

Moody’s also pointed to the bank’s units — CitySavings Bank and UnionDigital Bank — as additional sources of exposure, noting their focus on lending to lower-income and underbanked segments.

“As such, we expect the bank, on a consolidated basis, to be more exposed to risks arising from the shrinking financial buffers of retail borrowers amid higher inflation,” it said.

The credit rater expects UnionBank’s bad loan ratio to remain elevated at about 6% to 7%, reflecting continuing pressure across retail, commercial and corporate segments.

It also said the bank’s high share of unsecured loans would likely keep credit costs elevated, even as this segment supports relatively higher yields and profitability potential.

“We expect the bank’s net interest margin and credit costs to remain the highest among its domestic rated peers,” Moody’s said, adding that problematic exposures in commercial and corporate loans could further strain earnings.

While margin expansion may support return on assets, Moody’s noted that profitability would still depend on how effectively the bank manages credit costs and operating expenses.

UnionBank’s return on assets fell to 0.9% in 2025 from 1.1% in 2024, as higher credit costs and operating expenses offset gains from net interest margin expansion.

The decline was partly attributed to the cleanup of legacy exposures in its commercial portfolio and units.

Moody’s described the bank’s profitability as modest, noting that the benefits of its higher-risk, higher-return strategy have yet to fully materialize. It also cited its funding profile as relatively constrained compared with peers.

Moody’s expects UnionBank’s capital adequacy ratio to remain at 15% to 16%, slightly below its 16.4% level as of end-2025.

The projected moderation reflects loan growth outpacing internal capital generation, though levels are still seen as sufficient to absorb asset quality shocks.

Liquidity remains a strength, with a liquidity coverage ratio of 260% and a stable funding base supported by a 68% current and savings account ratio. Funding costs, however, were noted to be higher than peers, at 20.5%.

Moody’s said its assessment assumes a contained impact from global energy market disruptions linked to the Iran war, though it warned that a more severe scenario could pressure UnionBank’s credit profile through macroeconomic and supply chain transmission channels.

The bank’s ratings could be upgraded if its bad loan ratio falls below 5%, credit costs decline, provisioning improves to industry levels or if return on assets sustainably exceeds 1.5% alongside stronger capital buffers.

Conversely, downgrades could occur if asset quality deteriorates significantly, credit costs rise sharply, or if return on assets falls below 0.8% or capital ratios drop under 13%. — Aaron Michael C. Sy