Low income level, infrastructure bottlenecks, relaxed underwriting standards, and institutional and governance framework were the risks that badger the Philippine banking industry, STANDARD & Poor’s (S&P) Ratings Services said in statement on Thursday.
S&P said its assessment of economic risk in the Philippines reflects the low income level and infrastructure bottlenecks that serve as constraints to growth prospects.
However, in its “Banking Industry Country Risk Assessment: Philippines,” released on Thursday, the credit rating agency noted the Philippine economic risk trend is stable. It sees the risk of economic imbalances, such as in the property market, can be contained.
“We believe the risk of imbalances in the economy has not increased materially despite a pickup in credit growth and property prices in the past two years,” S&P said.
The relaxed underwriting standards and a developing institutional and governance framework have heightened credit risk in the industry, the agency noted.
“While the credit quality of banks operating in the Philippines is improving, we feel poor transparency, weak corporate governance, and inefficient legal infrastructure may limit any material reduction in credit risk,” it said.
S&P warned that credit risk in the system may increase if acceleration in property prices or credit growth is prolonged.
In terms of industry risk, S&P pointed out that regulatory standards in the Philippines are broadly in line with international standards—and in some instances more stringent.
But inadequate legislation and legal protection for supervisory staff weaken the central bank’s ability to implement prudent measures, it said.
“The government’s attempts to amend the legislation have so far been protracted,” it noted.
On the other hand, S&P said the risk appetite of Philippine banks is generally restrained and banking products are straightforward.
A high level of stable customer deposits supports funding profiles although banks have few funding alternatives, it pointed out.
Nevertheless, S&P see the risk trend as stable. It is optimistic that a well-established franchise will continue to help domestic banks in sustaining a strong, stable, and diversified customer deposit profile.
Still, the pace of deposit growth may continue to be moderate this year as real returns on bank deposits continue to be negative and lower than those from other investment avenues, it said.
“The country’s recent liberalization of foreign banks’ entry into the market may further intensify competition among domestic banks,” S&P added.