By Lee C. Chipongian
Moody’s Investors Service is maintaining its stable outlook for Philippine banks on its assessment of continued strong asset and liquidity growth but cautioned against the build-up of soured retail loans.
The credit rating agency said the stable outlook is good for another 12 to 18 months “based on (its) assessment that the credit metrics of their corporate customers will remain sound over this period.”
Moody’s monitors and rates nine of the country’s top commercial banks. The combined assets of these banks represent about 75 percent of total industry. The stable outlook on Philippine banks have been in placed since November 2015.
The extended stable outlook also “reflects the banks’ good asset performance, strong loss buffers and ample liquidity capacity – factors that will allow banks to accommodate rapid loan growth, against the backdrop of a robust economy,” said Moody’s. Its vice president and senior analyst Simon Chen said the banks’ asset performance will be backed by “benign leverage and debt servicing metrics.”
“However, non-performing loan formation could edge up, as the banks migrate to a loan mix which is heavier on retail loans,” said Chen. “Such loans tend to show higher delinquency rates when compared with corporate loans.”
Based on Moody’s report “Banking System Outlook – The Philippines: Robust economy and resilient private sector fundamentals drive stable outlook” there are five drivers they looked at to establish the stable outlook: Operating environment (stable); asset quality and capital (stable); funding and liquidity (stable); profitability and efficiency (stable); and systemic support (stable).
An equally stable operating environment is likewise assessed for the Philippine banking sector as credit growth is seen to continue to stay “in the high teens” for this year and in 2018.
“Moody’s baseline scenario assumes that the Philippines (Baa2 stable) will achieve higher real GDP growth versus similarly rated sovereigns. In particular, the country should record GDP growth of 6.5 percent in 2017 and 6.8 percent in 2018, on strong domestic consumption and an increased pace of investments,” it said.
The report also stated that the banks’ capitalization “will stay strong, but will weaken slightly, because of pressure from rapid credit growth and the adoption of PFRS9, which requires the banks to recognize expected credit losses rather than waiting for loss events to occur.”
Moody’s said its stress test results show that local banks’ loss absorbing capacity is strong. “And, their strong and proven access to the external capital markets will also mitigate potential pressure on their capital levels,” it said.
“As for funding and liquidity (Philippine banks) exhibit strong funding profiles that are dominated by deposits, and demonstrate little reliance on short-term wholesale funding,” the report added.
“And on profitability, the banks will show stable profitability over the next 12-18 months, with the improvement in their net interest margins attributable to the rebalancing of their loan exposures. However, their high cost base will remain a key drag on their profitability metrics.”