FITCH RATINGS-BMI RESEARCH COMMENTARY:

Liberalization may boost PH banks consolidation

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The Philippines has taken the biggest steps among the Asean members toward banking-sector liberalization, which provides opportunities for further consolidation in the industry, Fitch Ratings and affiliate BMI Research said.

In a commentary released Tuesday, Fitch Ratings said member countries of the Association of Southeast Asian Nations have made slow and uneven progress toward regional banking-sector integration.

“Further moves are likely to remain gradual, and full regional financial integration looks like a very distant goal,” it said.

The credit rater said bilateral deals under the Asean Banking Integration Framework (ABIF) have been slow to get off the ground.


Endorsed in December 2014, ABIF envisions qualified Asean banks being eventually allowed to operate freely in the region.

Asean banking integration

The ABIF recognized that some banking systems were more ready to open up than others, and that greater integration could allow financial risks to spill across borders if the right regulatory institutions were not in place.

According to the ABIF’s timeline, the Asean-5 (Indonesia, Malaysia, the Philippines, Singapore and Thailand) should each have at least one bilateral ABIF agreement in place by 2018 that will allow selected banks access to each other’s market, and that all Asean countries should have one deal near completion by 2020.

“Malaysia and Indonesia have signed an ABIF agreement and others are being negotiated, but the bigger moves toward regional financial liberalization well be happening outside of the ABIF framework,” it said.

In particular, Fitch said the Philippines has taken the biggest steps toward banking-sector liberalization by removing the cap on foreign ownership of local banks in 2014.

“The larger Philippine banks have sufficient access to capital and have little immediate need to sell major stakes to foreign investors, but foreign banks have established their own subsidiaries and branches in the country,” it said.

The debt watcher pointed out that the local entry of foreign banks is likely to support investment and economic growth in the near term by helping to fund much-needed infrastructure investment.

Wider pool of investors

Going forward, Fitch Ratings said lower restrictions on cross-border bank ownership would provide some under-capitalized banking systems with a wider pool of investors, and could support policymakers’ efforts at sector consolidation in some countries.

“Foreign capital could also support growth in large markets with low – but rising – banking penetration, such as the Philippines and Indonesia,” Fitch said.

“We would also expect increased cross-border ownership to support access to the latest risk-management systems and financial technology (‘fintech’), and drive governance improvements in the long term,” it added.

Forces behind consolidation

Fitch Group’s think tank, BMI Research, said small pockets of weaknesses among smaller banks would provide consolidation opportunities for larger banks.

It expects the current wave of consolidation to continue in light of competition from foreign banks and initiatives from the authorities.

“As the banking industry gears up for more competition from abroad under the Asean banking integration target set for 2020, we expect more of these smaller and weaker banks to be scooped up by stronger players,” it said.

Furthermore, the think tank noted that the Bangko Sentral ng Pilipinas (BSP) is providing incentives to banks that take part in the consolidation program to further enhance the competitiveness of domestic players.

The Philippine banking sector is well positioned to weather external uncertainty as it boasts strong asset quality, sufficient capital buffers and a healthy liquidity profile, BMI said.

“Despite external headwinds and policy uncertainty which have pushed the peso to its weakest level against the US dollar since 2007, we believe that the outlook for the Philippine banking sector remains positive,” it said.

BMI observed that the Philippine banking system continues to be backed by a constructive macroeconomic backdrop, stable asset quality, healthy capitalization and ample liquidity.

It noted that positive banking reforms introduced by the BSP and the previous Aquino administration, together with broad compliance with the improved regulatory framework, have allowed the sector as a whole to stand on a solid footing.

“That said, we note that the banking sector is heavily fragmented and risks are unevenly distributed among
industry players,” BMI said.

The Fitch Group-owned research firm further said that the Philippine banking sector boasts strong
fundamentals, such as stable and low non-performing loans (NPLs), sufficient capital adequacy buffers and a healthy liquidity profile.

As of November 2016, the Philippines’ gross NPL ratio stood at 2.0 percent, marking a slight improvement from the 2.2 percent recorded in January.

‘NPLs to remain low’

“Going forward, we believe NPLs are likely to remain low as we expect corporate earnings to correlate positively with strong economic growth, which should, in turn, help to reduce credit risk,” it said.

Additionally, capital adequacy on a solo basis (which excludes subsidiaries) was registered at 15.6 percent in the same period, which is considerably higher than the Basel III minimum requirement of 10 percent, putting Philippine banks in a good position to weather market volatility and withstand unexpected losses in the event of economic shocks, it said.

“The banking sector’s loan-to-deposit ratio is also among the lowest in Asia, suggesting that Philippine banks have financed loans largely by using deposits rather than through international wholesale funding.”

“This reduces refinancing risk in the banking system as external borrowing tends to be difficult to roll over in times of uncertainty (particularly with Brexit, rising global bond yields, and a more unilateral Trump administration, which could result in a slowdown in global trade and greater geopolitical uncertainty),” it added.

BMI said it also reduces asset-liability mismatch risk arising from monetary tightening in the US, and currency movements.

Growth drives credit uptake

Moreover, a virtuous circle is at play where a strong economic growth outlook will drive credit uptake, further supporting economic growth, it said.

“Strong economic growth momentum in the Philippines is closely linked with banking assets and loan expansion as there is a positive feedback loop at play,” it said.

The think tank expects the Philippines to be one of the fastest growing economies in Asia as an improved business environment, positive demographics and prudent macroeconomic policies that encourage savings will continue to drive investment and output growth.

“Moreover, Duterte’s pragmatic and friendly posture toward China and Japan will help to boost trade and investment relations with the two economic powerhouses in the region, further reinforcing our positive view on the economy,” it said, adding that this will help power strong credit uptake as both household and businesses in particular assume leverage against a backdrop of profitable opportunities.

BMI now forecasts loan growth to come in at 17 percent in 2017, revised upward from 15.0 percent previously, and similar to our estimate of 18 percent in 2016,” it concluded. (See related story ‘Loans to grow 17% in 2017’ – BMI on B1).

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