Debt watcher Fitch Ratings has upgraded the credit ratings of four Philippine banks, citing the steady growth in the economy and enhancements to banking regulations over the last few years.
However, it noted that there are existing gaps in domestic anti money-laundering standards in the country following the Bangladesh Bank heist.
In a statement on Monday, Fitch said it upgraded the long-term issuer default ratings (IDRs) of China Banking Corp. (CBC), Philippine National Bank (PNB), Rizal Commercial Banking Corp. (RCBC), and Security Bank Corp. (SBC) to ‘BB+’ from ‘BB’, and their Viability Ratings (VRs) to ‘bb+’ from ‘bb.’
The respective outlooks for the four banks were also rated stable.
Fitch said it believes steady growth in the Philippine economy and enhancements to banking regulations over the last few years have strengthened the domestic operating environment, notwithstanding long-standing structural issues, such as concentrated loan portfolios, developing corporate governance standards, and family control and conglomerate ownership of the banks.
“This drives Fitch’s upgrade of the Operating Environment factor to ‘bbb-’ from ‘bb+’,” it said.
The credit rater also expects continued economic improvement and proactive regulatory oversight alongside gradually improving regulatory frameworks to benefit banks’ asset quality and ultimately their credit profiles through the cycle.
“This is an important factor underlying today’s ratings upgrades,” it explained.
Fitch said the ratings reflect the banks’ higher growth appetite amid a broadly-favorable backdrop and their smaller but still meaningful local franchises as mid-sized banks in the Philippines.
“They also incorporate Fitch’s expectation that the banks will maintain broadly-steady asset quality, adequate capital buffers, and stable funding and liquidity profiles as they grow and potentially gain market share,” it said.
Meanwhile, the stable outlooks reflect Fitch’s expectation that the banks’ financial profiles will remain steady over the near- to medium-term.
The credit ratings agency believes the continued economic growth, a relatively conservative regulatory environment, and a liquid banking system—backed by a growing middle-class population and strong remittances from overseas workers—will support the banks’ rating profiles.
Fitch also expects the four banks to continue growing their branch footprints as they allocate more resources to consumer-centric portfolios.
The banks continue to target high loan growth in the mid-teens to high-20s and may also undertake acquisitions as they build their franchises and enhance their market positions, it noted.
The four banks’ asset quality should remain broadly steady, it added, aided by a favorable macroeconomic environment and rising incomes.
It also believes the four mid-size banks would qualify as mid-tier domestic systemically important banks and incur a minimum common equity Tier 1 (CET1) ratio of 10.0 percent by January 2019.
“Ambitions for market share gains and high risk-weighted asset growth—exceeding internal capital generation—are likely to erode existing capital ratios, but Fitch expects the banks to maintain adequate capital buffers to support growth targets and offset rapid-growth risks,” it said.
Despite its otherwise upbeat appraisal, Fitch said a money-laundering case involving RCBC and other Philippine and international entities in the first half of 2016 highlighted existing gaps in domestic anti money-laundering standards
“Fitch believes such issues are in line with the Philippine banks’ rating levels and expects regulators to take action to deter similar incidents,” it said.
Fitch said it might downgrade the banks’ ratings if their higher risk appetites result in significant asset quality deterioration and earnings volatility.
The ratings would also come under pressure with increasing concentration risk, excessive growth in riskier, more volatile sectors, such as real estate, unsecured personal loans or unsecured project finance, or if their capitalization, funding and liquidity strengths diminished, potentially as a result of rapid growth.