Bank risks easing in PH

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S&P sees improving credit performance in next 12 to 18 mths

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Banks operating in the Philippines will see improving chances of credit performance in the next 12 to 18 months as the economy sustains its robust growth and the government’s creation of a consumer credit bureau enhances lending efficiency in the country, Standard and Poor’s Global Ratings said in its latest report.

“The trend for economic risks faced by the banks operating in the Philippines is positive, in our opinion. We believe that there is a one-in-three chance that credit risks faced by the banks in Philippines would improve within the next 12 to 18 months,” S&P said in the report “Banking Industry Country Risk Assessment: Philippines,” released Monday.

“The positive economic trend is predicated on sustained credit performance in the corporate segment.

Philippine banks predominantly lend to the corporate segment, particularly larger companies with long credit histories and a strong repayment track record. The corporate sector has healthy margins, good profitability, and adequate interest coverage. We believe robust economic conditions will continue to support borrower repayment, and we expect credit losses from the corporate sector to remain low,” it said.

Credit bureau

In particular, S&P expects consumer-lending quality to improve if the authorities prepare well for the launch of a comprehensive database for the recently established consumer credit bureau.

S&P is referring to the government-led Credit Information Corp. (CIC), which is in the final stages of aggregating a comprehensive database with five years of data. The full launch is scheduled for early 2018.

“…The credit bureau should help in improving transparency and availability of borrower information on the household sector, which forms a significant 18 percent of lending by the banking sector and has historically been a material contributor to credit losses,” it said.

It also expects that the upcoming launch of CIC database will improve information availability and assist banks in making better lending decisions as they refine their risk management.

“We believe this will lead to a convergence of the consumer NPL [nonperforming loans| ratio with the industry average,” it pointed out.

On record, the ratio of nonperforming consumer loans to total consumer loans has consistently been about double that of total NPLs. As of December 2016, the consumer NPL ratio was 3.9 percent, compared with the overall industry’s 2 percent.

International standards

S&P also cited the Philippines’ banking regulations as being broadly in line with international standards, and in some instances, even more stringent.

“In our view, banking regulation and supervision in the Philippines are broadly in line with – in some cases, more stringent than – international standards… It utilizes a prompt corrective action framework to detect emerging weaknesses in its licensed institutions and take preventive measures,” it said.

However, S&P believes inadequate legislation and legal protection for supervisory staff could compromise the regulator’s ability to implement prudential measures.

“The legal protection offered to supervisory staff when performing their duties is inadequate, and this has undermined the implementation of prudent policies and measures,” it said.

The credit watchdog said specifically, supervisors are civilly liable if they have not applied “extraordinary diligence,” an onerous requirement.

The country’s financial regulation has taken administrative measures to mitigate this risk, including the establishment of an insurance fund for lawsuits against Bangko Sentral ng Pilipinas officials.

“We view this as a positive, but insufficient measure, for the protection of supervisory staff,’ it said.

Low incomes, weak infra factored in

The ratings agency said its its assessment of economic risk in the country already takes into account low income levels and inadequate infrastructure, which together hamper economic diversification and growth.

“Uncertain conditions in export markets and inadequate infrastructure mainly in transportation and energy are the main downside risks to our growth outlook. Without the closure of infrastructure gaps and improvements in the business climate through greater political stability and regulatory reforms, the Philippines’ relatively robust economic expansion may falter over the medium to long term,” it said.

S&P also took note that the country’s weak payment culture and rule of law heighten credit risk.

Citing the World Bank’s “Doing Business Report 2017,” it said the average time taken to resolve insolvency in
the Philippines is 2.7 years and the recovery rate is 21.3 percent.

Most of Philippines’ peers have a better recovery rate due to the shorter time taken in resolving insolvencies, it said.

Additionally, it sees the World Bank’s 2015 governance indicators for “rule of law” at -0.35 and “control of corruption” at -0.43 for the Philippines reflecting weaknesses in the country.

However, S&P pointed out an expected turning point for economic risks to a positive trend and an improvement in credit risks within the next one-and-a-half years.

S&P has a ‘BBB’ credit rating for the Philippines with a “stable” outlook. This set the country’s credit rating a notch higher than the minimum investment grade status granted to it by S&P on May 2, 2013.

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