• Only one in Asia-Pacific region

    Outlook on PH banks positive for 2016 – Fitch

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    Fitch ratings has assigned the Philippine banking sector a positive outlook, the only one in the Asia-Pacific region that received such assessment from the ratings agency amid expectations of a more challenging year ahead.

    This followed after the debt watcher revised its ratings outlooks on two state-owned banks, the Development Bank of the Philippines (DBP) and Land Bank of the Philippines (LBP), to positive from stable. This was in line with similar outlook upgrade on the country’s “BBB-” investment grade rating in September.

    Fitch also assigned a positive outlook to BDO Unibank, Inc. on the back of the bank’s improving profitability and asset quality.

    In its “2016 Outlook Report,” the ratings firm said banking sectors in the Asia-Pacific region were likely to face additional challenges as financial systems adjusted to slowing growth in China and the prospect of higher US interest rates.

    “We have a higher proportion of banking systems on negative sector outlooks for 2016 than was the case in 2015,” Fitch said, noting that these were driven by the prospect of deteriorating asset quality, a more cautious risk appetite contributing to weaker credit growth and margin pressures — all of which are likely to lead to slower profit growth.

    “With respect to the outlook on ratings, we have a stable outlook on the overwhelming majority except Mongolia and the Philippines (negative and positive, respectively),” it added.

    Fitch said its positive outlook for Philippine banks was based on supportive economic conditions, robust growth, profitability, sound capitalization, and stable funding and liquidity.

    “Philippine banks’ generally-high capitalization, healthy funding and liquidity, and satisfactory loan-loss reserves help to balance the risks from relatively high credit growth over the past few years,” it said.

    The ratings also reflect concentrated loan books, developing corporate governance standards and ownership by large family-controlled conglomerates, Fitch added.

    In terms of economic growth, the debt watcher forecast gross domestic product to expand by 5.9 percent in 2016 from 5.6 percent in 2015.

    Broadly steady overseas remittances, along with revenues from business process outsourcing services, should help support the country’s external finances and resilience to shifts in investor sentiment, it said.

    “We believe the Philippines will remain attractive to foreign bank entrants in this environment and banking sector competition will stay keen overall,” it added.

    With credit growth having eased to 12.6 percent as of end-September from 19.1 percent in 2014, Fitch said it expected similar mid-teen loan growth in 2016.

    It said banks’ profitability should remain broadly stable in 2016, noting that a continued shift toward higher-yielding consumer and middle-market loans should partly offset sustained competitive pressure on net interest margins.

    The ratings firm also expects Philippine banks to maintain high core capitalization over 2016 amid more demanding capital requirements for domestic systemically important banks, to be phased in from 2017 “and are likely to apply to all Fitch-rated banks to some degree — as they are each among the 10 largest banks in the Philippines.”

    It noted that customer deposits comprise the bulk of banks’ funding.

    “The system’s loan/deposit ratio remains low at below 70 percent, and we expect system liquidity to remain generally healthy over the next year even with robust loan growth,” Fitch said.

    Meanwhile, Fitch said a sovereign ratings upgrade would have a corresponding effect on the ratings of DBP, LBP and potentially BDO.

    “Such an upgrade may reflect a general improvement in domestic operating conditions and governance standards, which would be likely to be positive for the overall operating environment and credit profiles of the Philippine banks as well,” it said.

    A more diversified loan portfolio over time, and improved corporate governance standards — including addressing the inherent conflicts of conglomerate ownership — could be positive for the ratings, assuming the banks’ balance-sheet strengths are sustained, Fitch continued.

    Lastly, the debt watcher said the ratings could face pressure if large acquisitions, excessive lending to more volatile sectors — such as real estate, consumption-related and small and medium enterprises loans — or rising concentration risk caused bank credit profiles to deteriorate.

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