The Philippine banking system has scored another positive outlook from credit ratings agency Moody’s Investor Service, which the central bank said was in recognition of the industry’s ability to meet the funding requirements of a robustly growing economy.
In its Banking System Outlook report on the Philippines, Moody’s said it is maintaining its positive outlook on the country’s banking system over the next 12 to 18 months.
Moody’s pointed out that of the nearly 70 country banking systems that it rates globally, the Philippines was the only one that carried a positive outlook. This year is the third in a row during which the country’s banks sustained such outlook since December 2012.
“The outlook is in line with our expectation that robust economic growth and low banking-sector penetration will continue to support sustainable credit growth,” the Moody’s report said.
The ratings firm based its assessment on five factors, namely, the operating environment, asset quality and capital, funding and liquidity, profitability and efficiency, and systemic support.
A “virtuous cycle of improved government finances leading to higher economic growth will support credit expansion,” it said.
Improving loans, asset quality
As for loan levels, Moody’s expects loans to grow 15 percent to 17 percent over the next 12 to 18 months, slowing from 22 percent in annualized growth experienced in the first nine months of 2014. This was seen as reflective of the impact of the macro-prudential measures adopted by the central bank aimed at preventing excess credit growth in the system.
On asset quality, Moody’s said the banks are likely to report stable asset quality over the next 12 to 18 months as a favorable operating environment will limit the formation of new non-performing loans while supporting the remediation of legacy non-performing assets.
Risks not too worrisome
While the central scenario is one of stable asset quality, Moody’s also called attention to potential downside risks which could emerge.
The ratings agency said banks have increased their exposure to higher-yielding but also riskier segments such as real estate, small and medium enterprises and other retail loans to improve their profitability levels.
“At this juncture, we are not overly concerned and we expect the new regulations will pre-empt excess credit growth in the system, particularly with regard to the real estate and related sectors,” it said.
It also cited new regulations, such as the real estate stress test, limit on the value of real estate collateral, and expanded definition of large exposures, which will also pre-empt excess credit growth in the system.
Providing additional support in case of asset quality stress are the successive capital-raising exercises, through the issuance of common equity and Basel III capital instruments, and the consistent build-up of loan-loss reserves that have improved the banks’ loss absorbing buffers, it added.
Deposit growth to ease
Over the next 12 to 18 months, the credit ratings agency expects deposit growth will moderate, following the liquidity-tightening implemented by the Bangko Sentral ng Pilipinas (BSP), including the increase in reserve requirements for universal and commercial banks to 20 percent in May 2014 and an increase in interest rates on the special deposit account facility to 2.5 percent in September 2014.
“Philippine banks will continue to have ample deposits to fund loan growth, and their holdings of liquid assets to manage liquidity needs are very high,” it said.
Banks’ profitability levels should also recover in 2015 as interest rates rise, the report said, adding that the greater exposure of the banks to higher yielding small and medium-sized enterprises and retail loans will alleviate pressure on net interest margins.
Moody’s also noted that the government’s capacity to extend support to banks if needed is improving.
“Our positive outlook on the Philippines Baa3 sovereign credit rating reflects our expectation that continued improvement in the government’s fiscal position will strengthen its capacity to provide support to the banks in times of stress,” it concluded.
“This outlook is a recognition of the prudent regulations by the Bangko Sentral ng Pilipinas that have pushed banks to maintain sufficient buffers against shocks and to keep their risk exposures manageable,” BSP Governor Amando Tetangco Jr. said over the weekend in reaction to Moody’s latest ratings move.
Tetangco stressed that the positive banking sector outlook, which the Philippines solely enjoys out of 69 countries, cements the view that banks in the country have what it takes to continue serving the funding requirements of a robustly growing economy while keeping their balance sheets healthy.
“With its favorable metrics, the country’s banking sector will remain a pillar of strength for the Philippine economy,” he concluded.