Debt watcher Fitch Ratings said major universal and commercial banks in the Philippines should be well positioned to meet the central bank’s newly adopted Basel liquidity rules.
“Ample domestic system liquidity, and banks’ balance sheets being mostly funded by deposits are positive structural factors that will help banks comply with upcoming Liquidity Coverage Ratio (LCR) requirements,” Fitch said in a statement released on Friday.
Even so, Fitch said those banks with relatively large pools of corporate deposits will have a greater reason to pursue retail deposits more aggressively, and long-term debt issuance may rise.
On Tuesday, the Bangko Sentral ng Pilipinas (BSP) announced the new rules requiring universal and commercial banks to meet an LCR of 90 percent by January 1, 2018, rising to 100 percent by January 1, 2019.
“Besides meeting the overall requirement, banks will likely need to monitor their LCRs for certain currencies where they have significant activity as well. The US dollar could be one such currency for many banks, other than the peso,” the credit ratings firm said.
The LCR rule is aimed at strengthening the ability of individual banks to withstand short-term liquidity shocks. It seeks to ensure that banks hold sufficient cash and other high-quality liquid assets to meet their liquidity needs–including potential deposit withdrawals–under a 30-day stress scenario.
Fitch said system liquidity is healthy in the Philippines, as evident in the reported banking system loan-to-deposit ratio of 70.7 percent and liquid assets-to-deposits of 53.5 percent at end-2015.
Banks’ surplus funds are often invested in peso or US dollar-denominated Philippine government bonds, which would typically qualify as high-quality liquid assets under the LCR framework–for US dollar bonds as long as they back US dollar liabilities, it explained.
“More detailed guidelines have yet to be published, but Fitch’s internal estimates for its rated banks indicate broadly that most of the top 10 domestic banks should comfortably meet the LCR rules, based on the last available annual reports,” it added.
That said, the credit ratings agency noted that loan growth in the country has exceeded deposit and domestic liquidity or M3 growth over the last five years, and system liquidity would tighten gradually if this dynamic were to continue.
Against this backdrop, the LCR regime will enforce an added layer of balance-sheet discipline on the Philippine universal and commercial banks, in addition to existing conservative regulatory hurdles on capital, it said.
“The new rules will provide even more of an incentive for banks to raise retail deposits, particularly customers’ current and savings accounts,” it stated.
Fitch said banks with strong retail deposit franchises will enjoy an advantage in meeting the LCR hurdle, as such balances are usually more stable in times of stress.
The debt watcher said those that rely more on corporate deposits, however, could be subject to higher run-off assumptions under the LCR calculations, which would result in lower ratios on a like-for-like basis.
“We believe banks–especially those outside the big three–are likely to continue their push to open more branches and ATMs, in part to widen their retail deposit base,” it said.
This is likely to place further pressure on operating costs and weigh on profitability in the medium term–although profit growth should remain robust overall amid broadly–resilient economic conditions, Fitch stressed.
Some banks may also issue more long-term debt in order to lengthen their liability profiles and expand their LCR buffers, it added.