Moody’s affirms UnionBank’s investment-grade rating

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April 22, 2026 | 12:00am

MANILA, Philippines — Moody’s Ratings has affirmed the investment-grade credit ratings of Union Bank of the Philippines, citing strong capital and liquidity buffers, but flagged lingering asset quality risks tied to its exposure to unsecured retail lending.

In a statement, Moody’s said it maintained the bank’s Baa3 long-term foreign and local currency deposit and issuer ratings, alongside a stable outlook, reflecting its expectation that UnionBank will sustain its financial strength despite elevated credit costs.

“The affirmation of UBP’s ratings reflects the bank’s strong capital and liquidity, which provide buffers against its weaker-than-peer asset quality,” Moody’s said.

The agency noted that UnionBank’s higher problem loan ratio and credit costs, as well as low provisioning coverage, continue to weigh on its credit profile. Profitability also remains modest, with gains from its strategic shift to higher-risk, higher-earning segments yet to fully materialize.

UnionBank’s loan book remains tilted toward retail borrowers, which Moody’s views as a source of vulnerability.

As of end-2025, retail loans accounted for about 60 percent of total loans, with unsecured retail loans making up roughly 40 percent.

“We view the latter as a relative weakness because this asset class has underperformed compared to corporate loans,” the rating agency said.

The bank’s focus on lending to lower-income and underbanked segments through subsidiaries such as CitySavings Bank and UnionDigital Bank further heightens exposure to financial stress from inflation and declining financial buffers.

“We expect the bank, on a consolidated basis, to be more exposed to risks arising from the shrinking financial buffers of retail borrowers and higher inflation,” Moody’s said.

While asset quality showed some improvement, UnionBank’s problem loan ratio remains elevated. Moody’s expects it to stay at around six to seven percent, with pressures coming from both retail and corporate portfolios.

UnionBank’s profitability also weakened in 2025, with return on assets dropping to 0.9 percent from 1.1 percent a year earlier, despite gains in net interest margins.

Credit costs surged to 3.9 percent in 2025 from 3.7 percent in 2024, driven by legacy exposures in its commercial book and subsidiaries.

“UnionBank’s credit costs are expected to remain the highest among its domestic rated peers given its large share of unsecured loans,” Moody’s said.

The agency added that further improvement in profitability would depend on the bank’s ability to manage credit costs and operating expenses.

Despite these risks, Moody’s said UnionBank’s capital position remains a key strength, with tangible common equity at 16.4 percent of risk-weighted assets as of end-2025. It expects capital ratios to remain stable at 15 to 16 percent over the next year, supported by modest loan growth.

Moody’s said an upgrade could be considered if UnionBank improves its asset quality, with problem loan ratios falling below five percent and credit costs declining, alongside sustained profitability with return on assets above 1.5 percent.

On the downside, the rating could be cut if asset quality deteriorates further, pushing credit costs higher and dragging profitability below 0.8 percent, or if capital buffers weaken.