Investing.com -- Moody’s Ratings has reaffirmed the Baa2 and P-2 long-term and short-term local and foreign currency deposit ratings of Security Bank Corporation. This includes the Baa2 foreign currency senior unsecured rating, the Baa2/P-2 long-term and short-term local and foreign currency issuer ratings, and the Baa2/P-2 long-term and short-term local and foreign currency Counterparty Risk Ratings. The Baa2(cr)/P-2(cr) long-term and short-term Counterparty Risk Assessments, as well as the baa3 Baseline Credit Assessments (BCA) and Adjusted BCA of Security Bank, were also affirmed.
Security Bank’s Baa2 foreign currency senior unsecured medium-term note program rating and its P-2 foreign currency other short-term rating were also confirmed. However, the outlook on Security Bank’s deposit, issuer and senior unsecured ratings was changed to negative from stable. This shift primarily results from negative pressure on the bank’s capital buffer.
The change in outlook also takes into account the potential adverse effect of the bank’s robust loan growth and weakened ability to absorb future losses. This is seen under the environmental, social and governance (ESG) framework, which indicates Security Bank’s relatively aggressive financial strategy and risk management. This could negatively impact the bank’s credit profile. Mistakes in the 2023 and 2024 annual audited financial statements, although later corrected, have exposed weaknesses in the bank’s internal controls compared to its peers, potentially increasing operational risk. These challenges are reflected in a moderate governance issuer profile score of G-3.
The affirmation of Security Bank’s Baa2 ratings and baa3 BCA reflects the bank’s average solvency and liquidity metrics. However, it also indicates Security Bank’s weaker-than-peers funding structure.
The revision in the outlook on Security Bank’s ratings to negative from stable reflects the expectation that the bank’s capitalization, measured by tangible common equity as a percentage of risk weighted assets (TCE/RWA), will remain under negative pressure. The bank’s TCE/RWA declined to 13.7% as of December 2024 from 17.0% a year earlier. This decline was due to an acceleration in loan growth to 25% in 2024 from 7% in 2023. With the upcoming acquisition of a minority stake in Home Credit Philippines, a consumer finance company, it is expected that TCE/RWA will fall below 13%. Meanwhile, loan growth outpaced return on equity (ROE) in 2024, and the bank’s capital ratios will continue to decrease if rapid credit growth continues over the next 12 to 18 months. For 2025, loan growth is expected to be about 10%.
Security Bank’s asset quality, measured by the bank’s stage 3 loans ratio, improved to 2.9% as of December 2024 from 3.4% a year earlier, partly as a consequence of rapid loan growth. Its stage 2 loans ratio declined to 4.9% from 10% over the same period. However, retail loans have grown strongly over the past two years, posing unseasoned loan risk. Loan loss reserves as a percentage of stage 3 loans declined to 81% as of December 2024 from 83% a year earlier, lower than the average of 97% for the rated banks in Philippines.
Net income as a percentage of tangible assets remained stable at 1.04% in 2024, as compared to 1.06% in 2023. While the bank’s net interest margin improved to 4.5% from 4.1% over the same period, the benefit to earnings was offset by higher credit costs. In 2024, loan loss provisions as a percentage of gross loans increased to 0.94% from 0.79% the year before. Credit costs are expected to stay elevated and profitability to remain broadly stable at current levels over the next 12 to 18 months.
Security Bank’s funding structure deteriorated modestly in 2024 as market funds as a percentage of tangible banking assets increased to 14.2% as of December 2024 from 12.3% a year earlier. This reflects an increase in reliance on market funds to support loan growth and protect margins. At the same time, the proportion of current and savings account (CASA) deposits declined to 52.4% from 59.9% over the same period. Despite this, the bank maintained sufficient liquidity to meet short-term funding obligations. As of December 2024, liquid banking assets as a percentage of tangible banking assets was at 31.1% while the liquidity coverage ratio was 181.9%.
Security Bank’s Baa2 ratings are one notch above its baa3 BCA, reflecting a moderate likelihood of support from the Philippine government if needed, given the bank’s modest share of total system deposits of 4%, as of end-2024. The bank’s ESG credit impact score was repositioned to CIS-3 from CIS-2, indicating that ESG factors have no material impact on the current ratings with potential for greater negative impact over time as government support assumptions mitigate but not fully offset governance pressures on the ratings.
The bank’s deposit ratings and BCA could face a downgrade if the bank’s TCE/TWA falls below 12% due to loan growth surpassing ROE or if asset quality deteriorates, leading to an increase in credit costs and consequently lower profitability. A significant weakening in Security Bank’s funding and liquidity would also be negative for the BCA and ratings.
The bank’s ratings could also face a downgrade if the Government of Philippines’ sovereign rating is downgraded, due to the lower capacity of the sovereign to provide support for Security Bank.
An upgrade of Security Bank’s ratings is unlikely as they are already at the same level as the Philippines sovereign rating.
Security Bank’s outlook could be revised to stable if the bank’s TCE/RWA remains above 12% and if net income / tangible assets stays above 1% on a sustained basis.
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