CREDIT rating agency Moody’s Investors Service retained its stable outlook for the Philippine banking system on the back of the government’s capacity to support banks in times of stress, but flagged emerging risks brought about by growing exposure to the property sector.
A stable outlook indicates that the debt watcher is unlikely to change its investment-grade rating on Philippine banks over the next 12 to 18 months. The outlook has been maintained since November 2015.
In a report released Monday, it said the stable outlook was based on its assessment of five drivers: operating environment (stable); asset quality and capital (stable); funding and liquidity (stable); profitability and efficiency (stable); and systemic support (stable).
Philippine banks will continue operating in a stable environment, and such a situation will support credit growth, Moody’s said.
It pointed out that the Philippine government’s capacity to provide support to banks in times of stress has improved in recent years because of strong economic growth and improvements in fiscal management.
It expects the Philippines to achieve real gross domestic product growth of 6.5 percent for 2016 and 2017, higher than other countries in the Association of Southeast Asian Nations.
However, growth prospects may be undermined by a significant shift in the government’s policies.
“While we expect economic and fiscal policy to be anchored by the government’s well-defined development agenda, a sustained focus on political matters could divert attention away from economic and fiscal reform,” the credit rating agency warned.
Banks’ asset quality will remain broadly stable, supported by macroeconomic factors, and the stable debt servicing metrics of borrowers, it said.
Household debt has increased in the past few years but remains manageable, while corporate sector balance sheets are robust, it noted.
Real estate risks
However, risks are emerging amid increasing exposure to real estate-related loans and higher-yielding small and medium enterprises (SMEs).
Moody’s said loans to the real estate sector—both commercial and residential—have grown by an average of 19 percent annually since 2008, and represented 23 percent of banks’ total loans at end-June 2016 compared with just 15 percent at the end of 2008.
“While the growth in real estate loans has been supported by demand for residential and commercial property, we remain mindful of the increasing dominance of this sector, which can leave banks vulnerable to a decline in property prices,” Moody’s said.
“In addition, we understand that real estate developers are increasingly providing direct financing to borrowers for the purchase of properties. Such a situation could result in a build-up of leverage outside the banking system, as represented by the shadow banking sector,” its added.
Moody’s said banks’ exposure to the corporate and SME sectors—which together represent 66.5 percent of banks’ gross loans—should remain broadly stable, supported by robust macroeconomic factors.
“However, our discussions with the banks has also indicated that many large corporate groups have increased their leverage levels over the past two to three years, taking advantage of the low interest rate environment,” it said.
Given the complex nature of some of groups who have multiple operating subsidiaries and cross-holdings across companies, the contagion risk cannot be ruled out if the borrower or one of its operating companies face liquidity or funding challenges, Moody’s explained.
Despite these risks, loss-absorbing buffers of Philippines banks are high and will provide support for unexpected losses, Moody’s said.
Proactive capital raising by banks over the past few years, and higher regulatory capital requirements than international norms will help banks maintain buffers against downside risks, it said, noting that stress test results also reflect the banks’ strong loss-absorbing capacity.
Moody’s also said profitability would remain stable because the improvement in the banks’ net interest margins—as a result of the rebalancing of their loan exposure—will be broadly offset by a gradual increase in credit costs.
“At the same time, their high cost base represents a key hurdle in improving their profitability metrics,” it said.
Ample domestic liquidity will support banks’ funding profiles, which are dominated by deposits, with little reliance on short-term wholesale funding. Banks also hold a sizable stock of liquid assets, the report said.
Big banks likely get more support
“Systemically important” banks will likely receive greater support from the government than smaller entities, as the Philippine government has a mixed track record of providing support to troubled banks, Moody’s said.
The credit watchdog said the larger universal and commercial banks —mainly the 10 domestic systemically important banks—would be more likely to receive financial assistance or regulatory forbearance if needed, because of the greater impact that their failure would have on the domestic economy.
Moody’s does not expect the Bangko Sentral ng Pilipinas to adopt a regime that includes bail-in mechanisms for unsecured creditors at least over the next 12 to 18 months.
Moody’s rates eight commercial banks in the Philippines, namely: Banco de Oro Unibank Inc. (BDO), Metropolitan Bank & Trust Co. (Metrobank), Bank of the Philippine Islands (BPI), Land Bank of the Philippines, Philippine National Bank (PNB), Rizal Commercial Banking Corp. (RCBC), Security Bank Corp. and United Coconut Planters Bank (UCPB).
Their assets accounted for 64 percent of total banking system assets as of the second quarter of 2016.
Of Moody’s rated banks, BDO ranked No. 1 in terms of assets with P2.040 trillion based on central bank data as of end-June.
It was followed by Metrobank (P1.42 trillion), BPI (P1.29 trillion), LandBank (P1.28 trillion), PNB (P678.73 billion), Security Bank (P613.76 billion), RCBC (P412 billion), and UCPB (P265.44 billion).