Moody’s Investors Service lowered its outlook for the Philippine banking system from “stable” to “negative,” as it sees the enhanced community quarantine in Luzon raising asset risks and increasing pressure on profitability for banks.
In a report on Thursday, the credit ratings agency said the spread of the coronavirus disease 2019 (Covid-19) in the Philippines “will result in a material slowdown in economic growth in 2020,” as large parts of the country were locked down, severely constricting economic activity.
It now sees Philippine gross domestic product (GDP) to accelerate by only 5.4 percent, instead of the earlier 6.1 percent. The estimate is lower than the eight-year low of 5.9 percent the economy posted last year and the government’s 6.5 to 7.5-percent growth goal this year.
The report comes after another credit rater, Fitch Ratings, downgraded on March 24 its outlook for the banking sector to negative on the back of “asset-quality risks amid a deteriorating environment environment” resulting from the Covid-19 pandemic.
It also comes after the government on March 17 expanded the community quarantine it earlier imposed on Metro Manila to Luzon to contain the spread on the coronavirus. The lockdown resulted in the temporary closure of most businesses. Only those providing essential services in the areas of health, food and logistics continue to operate.
First breaking out in the city of Wuhan in China’s central Hubei province in December, Covid-19 has infected more than 937,100 people worldwide, of which at least 47,260 died.
In the Philippines, the number of confirmed coronavirus cases surged to 2,633 as of Thursday. Of this, 107 died and 51 recovered.
Slowing economic growth, Moody’s said, will worsen banks’ asset quality as key asset risks stem from concentrated exposures to large domestic conglomerates.
“These business groups may withstand immediate disruptions, but if the situation persists for a prolonged period, debt payment capacity of weaker companies will deteriorate materially,” it warned.
The credit ratings agency said most conglomerates had significantly increased investment in the past few years, which resulted in debt growth.
“Because banks’ loans are heavily concentrated on them, even a default by one of them will weaken asset quality in the overall banking system,” it added.
Moody’s also believes that banks’ profitability would lose strength as it expects weaker asset quality to increase credit costs.
Nevertheless, it said banks’ capitalization would be stable at strong levels as growth in both retained earnings and loan growth slows.
Moody’s outlook represents its forward-looking assessment of fundamental credit conditions that would affect the creditworthiness of banks in a given system over the next 12 to 18 months.
To date, it rates nine commercial banks: BDO Unibank Inc., Metropolitan Bank & Trust Co., Bank of the Philippine Islands, Philippine National Bank, China Banking Corp., Security Bank Corp., Union Bank of the Philippines, Rizal Commercial Banking Corp., and United Coconut Planters Bank, as well as state-owned Land Bank of the Philippines.
These lenders accounted for more than 80 percent of the country’s total banking assets at the end of 2019.