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BDO Unibank, the Philippines’ largest bank in terms of total assets, has received approval from the Philippine Stock Exchange for its planned rights issue and said late last week that the offer period will run from June 18 to 27. It also confirmed that it will seek to raise $1 billion from the deal, making it one of the largest follow-on share issues ever in the Philippines.
The price will be set on June 5 and will offer a discount of up to 20% to 25% versus the 10- to 15-day volume-weighted average price (VWAP) leading up to that date. The one-for-three share offering will result in the issuance of up to 896 million new shares and will be underwritten by five banks: BDO Capital, which is acting as the issue manager and domestic underwriter; and Citi, Deutsche Bank, J.P. Morgan and United Overseas Bank, which are joint international lead managers and international underwriters.
In a press release issued after the BDO Unibank board approved the capital raising on April 2, the bank said that its controlling shareholder SM Investments Corp, which owns about 41%, had committed to take up its entitlement in full and that it was also willing to underwrite the shares not taken up by minority shareholders. There was no mention of this commitment in last Thursday's filing, however.
The same April press release also said that strategic investors International Finance Corp and United Overseas Bank had expressed their support both for the bank’s expansion plans and the proposed rights issue.
BDO Unibank is raising money to strengthen its core tier-1 capital ahead of the introduction of more stringent Basel III guidelines. The Philippine central bank is proposing to raise the minimum capital adequacy ratio (CAR) to 12.5% from 10% and to double the tier-1 ratio to 10% from 5% as of January 2014 and while BDO Unibank’s capital ratios are currently slightly above the new minimums — it has a consolidated CAR of 15.6% and a tier-1 ratio of 10.2% — it said the additional capital raising will provide it with a buffer to allow it to sustain its growth momentum.
The bank has earlier said that it is “optimistic about the outlook of the Philippine economy and hopes to continue with its faster-than-industry loan growth, driven by a strong consumer sector and opportunities in the SME, middle market and large corporate segments". It is forecasting 10% revenue growth this year supported by higher trading gains, increased lending activity and an expansion of its branch network.
The Philippine government is expecting the country’s GDP to grow by 5% to 6% this year, compared to 3.7% growth in 2011, on the back of rising domestic demand driven by remittances from overseas workers and public spending.
Fitch Ratings last week affirmed BDO Unibank’s BB long-term foreign currency rating at BB with a stable outlook, saying it reflects the bank’s modest, but gradually improving profitability and rapid loan growth record, as well as its dominant domestic presence and satisfactory balance sheet strength.
It added that the rights issue plan reduces the risk of a ratings downgrade as it improves its capacity to support rapid loan growth, cope with unexpected losses and meet higher capital standards under Basel III in 2014. The proposed could raise BDO’s tier-1 capital ratio to 14% to 15%, it said.
According to Fitch, BDO’s return on assets has been increasing since 2009, narrowing the gap with other major Philippine banks. Its cost efficiency has also gradually improved alongside strong asset and revenue growth.
“Further growth will depend largely on the Philippines economy, which has been supportive of the bank’s lending and fee-based activities. However, the global economic backdrop is still weak and a risk,” it said. “Loan concentration to large corporations is a source of asset-quality deterioration for many major Philippine banks, including BDO, in a fresh downturn scenario. However, Fitch expects such an impact to be manageable in light of generally reasonable corporate leverage in the country. BDO has also strengthened its loss absorption capacity.”
In 2011, BDO Unibank’s gross non-performing loan (NPL) ratio declined to 3.4% from 4.7% at the end of 2010 and its NPL coverage raio improved to 106% from 92%.
BDO Unibank said its strategic growth initiatives include extending its balance sheet to meet the increased borrowing demand from the country’s growing economy. It is also seeking to deepen and expand its customer relationships, develop new business segments and broaden its product and services offering. It also intends to evaluate and pursue inorganic growth opportunities as they arise, it said.
In 2011, the bank grew its loan portfolio by 24% to Ps670.1 billion ($15.3 billion), outpacing the 19% loan growth for the Philippine banking industry as a whole. According to earlier statements, it achieved this by focusing on credit-worthy borrowers in fast-growing industry sectors. And the strong growth continued in the first quarter this year with gross customer loans expanding by 23% year-on-year.
The bank’s share price has risen 36.9% from its lows at the end of September last year and is up 8.2% so far this year. The stock initially gained on the news of the rights issue in early April, but has been under pressure in the past month as global equity markets have tumbled. On Friday, it closed 2.2% higher at Ps63.30.
The record date for the rights issue will be June 14 and the shares will start trading without the rights to participate in the offering on June 8. The rights won’t be traded on the stock exchange, but existing shareholders will be able to apply for additional shares on top of their proportional entitlements, which may help reduce the pressure on the underwriters.
