The near-term outlook for the Philippine banking system remains stable as indicators show it can accommodate rapid loan growth, Moody’s Investors Service said.
The debt watcher’s perspective — maintained since November 2015 and extended for the next 12 to 18 months — was detailed in a report released on Friday.
“The banks’ asset performance will be supported by a strong economy and the private sector’s benign leverage and debt servicing metrics,” Moody’s Vice-President Simon Chen said in a statement.
He warned, however, that non-performing loans could rise as banks shift to a loan mix that is heavier on retail loans.
The overall outlook was based on an assessment of the operating environment, asset quality and capital, funding and liquidity, profitability and efficiency, and systemic support, all of which were rated as stable.
Credit growth, “which will likely stay in the high teens through 2017 and 2018”, would be supported by real gross domestic product growth (GDP) above that of similarly rated sovereigns.
The Philippines — which has an investment-grade Baa2 rating and a stable outlook from Moody’s — is expected to see GDP growth of 6.5 percent in 2017 and 6.8 percent in 2018.
“Economic growth in the Philippines will be supported in the next 12-18 months by stable household consumption, the government’s focus on infrastructure development, buoyant private sector investment, and the recovery in external demand,” the debt watcher said.
Asset performance will also remain stable in the near term as the credit metrics of corporate customers, which account for some 80 percent of banks’ loan portfolios, are expected to remain sound.
Capitalization will stay strong but weaken slightly, Moody’s said, given pressure from rapid credit growth and the adoption of Philippine Financial Reporting Standards 9 that requires banks to recognize expected credit losses rather than waiting for these to occur.
”Nevertheless, Moody’s stress test results show that the 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, it said that the banks’ funding profiles were dominated by deposits and showed little reliance on short-term wholesale funding. Loan-to-deposit ratios were at a low 67 percent as of the middle of 2017 “and they hold sizable stocks of liquid assets”.
Meanwhile, an improvement in net interest margins attributable to the rebalancing of loan exposures will support profitability but “their high cost base will remain a key drag on their profitability metrics,” Moody’s said.
The government’s capacity to provide support to banks in times of stress, meanwhile, was said to have improved in recent years due to the country’s strong economic performance and fiscal management gains
Systemically important banks can expect to receive greater support from the government, Moody’s noted.
The debt watcher currently maintains ratings on nine Philippine commercial banks, whose assets account for around 75 percent of the total banking system.