Stable outlook for PHL banking system

DESPITE A NEGATIVE outlook for Asia-Pacific banks due to challenging operating conditions in the region that continue to dampen asset qualities, the Philippine banking system remains generally stable, according to a global debt watcher.

In a Dec. 12 research note by Moody’s Investors Service, the banking system of the Philippines, along with Japan, New Zealand, Taiwan, India, Indonesia, Malaysia, Thailand, Sri Lanka and Vietnam, were given stable outlooks, “mostly driven by banks’ greater resilience against higher solvency risks.”

The Philippines and India were the only two banking systems with “stable” indicators in terms of: operating environment, asset quality, capital, funding and liquidity, profitability and efficiency, and government support.

Having a “stable” outlook means that a country’s banking system is not likely to have a negative credit cycle because of improved economic prospects, due to lower new non-performing loan (NPL) formation rates, robust capital buffers and reserve coverage of soured loans, sound private sector deleveraging, and sustained government support to banks.

Out of the 16 banking systems Moody’s rates in Asia Pacific, six were given a negative outlook, namely Australia, Hong Kong, Singapore, South Korea, China and Mongolia. This was an increase from three Asia-Pacific economies with negative outlooks in early 2016.

Having a “negative” outlook meant banks have a negative credit cycle amid rapid credit expansion and challenging environments that weigh on their asset quality and profitability, higher corporate and household debts as well as property prices, and potential strengthening of the US dollar that could mean higher risks of volatility in capital flows.

Not a single country had “positive” banking system outlook from Moody’s.

“Problem assets will rise from a generally low level, due to previous rapid credit expansion, elevated corporate and household leverage in some economies, the ongoing recognition of credit problems, and challenges in commodities and cyclical industries,” Stephen Long, a Moody’s managing director who authored the note, was quoted as saying in a statement.

“Foreign private capital flows will remain volatile in emerging Asia, pressuring domestic currencies and weakening operating conditions for the banks… And, property price increases in parts of Asia Pacific will further amplify credit risk for the banks,” he added.

Moody’s had already given Philippine banks a “stable” outlook in its Oct. 31

report, buoyed by sound economic fundamentals despite potential risks of the country’s rising property sector, conglomerates and small businesses as well as possible shifts in policies under the current administration.

Local lenders that held a “stable” outlook — which is not likely to change in the next 12-18 months — were identified as BDO Unibank, Inc.; Metropolitan Bank & Trust Co.; Bank of the Philippine Islands; Land Bank of the Philippines; Philippine National Bank; Rizal Commercial Banking Corp.; Security Bank Corp. and United Coconut Planters Bank. These banks comprise 64% of assets in the Philippine banking system as of end-June.

In the Dec. 12 report, Moody’s noted bank asset quality will weaken next year in most Asia Pacific markets, but will be generally resilient to headwinds amid the region’s robust economic growth and sustained government support for banks in the region.

“Bank asset quality will weaken in 2017 in most APAC markets, driven by previously rapid credit growth, ongoing recognition of credit problems, challenges in commodities and cyclical industries,” the global debt watcher said.

Moody’s also noted that it expects a rise in NPLs in the corporate sector on the back of “previous rapid credit growth, both in nominal terms and as share of GDP ( gross domestic product), continued weakness in commodity-related exposure, other cyclical industries and ongoing recognition of past asset quality challenges.”

Despite a negative outlook, banks in the region have robust capital buffers, with Moody’s noting that, “We expect that capital buffers will continue to increase in 2017 in many banking systems.”

“The banks’ generally strong bottom- line profitability will continue to be pressured by higher credit costs,” the global debt watcher said, along with net interest margins (NIMs) — which measures a bank’s profitability — expected to be “moderate upside” in 2017 amid the anticipated monetary policy tightening by the US Federal Reserve in its policy meeting this week.

Moody’s also expects a “generally stable” or “high- to-veryhigh” government support for Asian banks in 2017 and “are unlikely to change in 2017 because regulators are not keen to embrace wider bail-in measures. Early public support remains the preferred way to prevent banking stress.”

Latest data from the Bangko Sentral ng Pilipinas revealed that universal and commercial banks’ NPL ratios in August declined to 1.63%, lower from a 1.65% booked in July and well below the 1.86% share seen in August 2015.

BusinessWorld’s 3rd Quarter Banking Report also showed that the median capital adequacy ratio (CAR) — which measures a bank’s solvency, an indicator of its ability to absorb losses without having to put its funds at risk — of Philippine universal and commercial banks improved to 17.89% from 2nd quarter’s 17.63%. —