Philippine banks in better shape 20 years after Asian crisis — S&P

RAPID credit growth in the Philippines is unlikely to trigger a domestic funding crunch, as it comes alongside upbeat economic activity and as banks stand better positioned 20 years after the Asian Financial Crisis, analysts at S&P Global Ratings said.

The international credit ratings firm did not sound the alarm despite the sustained double-digit growth in bank lending — a trend over the last two years — as the trend merely follows the robust growth in gross domestic product (GDP).

Bank lending grew by 18.7% in May from a year earlier to P6.595 trillion, according to central bank data.

“At the moment, we don’t see that ( credit growth) as a big risk mainly because of a few reasons. One is the Philippine financial system remains relatively small compared to the economy, and we’ve seen the economy has been growing quite strongly and steadily for quite a long while. The rate of investment has also picked up so I don’t think it should be too much of a surprise that credit growth is also growing faster than usual,” Kim Eng Tan, S& P’s senior director for sovereign ratings, said in a Wednesday webcast.

S& P hosted a webcast to commemorate the 1997 Asian Financial Crisis, triggered by Thailand floating the baht due to lack of dollar reserves, eventually triggering a series of currency devaluations as the funding crunch spread across neighboring economies.

Two decades since the crash of Asian markets, analysts believe that regulators and corporates in the region have grown more prudent with “improved” governance standards in place, said S&P head of analytics and research Terry Chan. In turn, this leaves a slimmer chance of reckless lending activity that could trigger another crisis.

A steady decline in the share of non-performing loans in the Philippines and strong domestic sources of funding also enhance the resilience of local banks, the credit rater added. “[B]ecause of our analysis of the overall economic situation, we believe most of this lending will go to investments which are likely to be productive and are able to repay their loan. If not, the systemic impact is unlikely to be big because the financial system is relatively small,” Mr. Tan said. Limited exposure to foreign funding also gives local players one less thing to worry about, Mr. Tan added: “Most importantly, because we see the financial system as largely financed by domestic sources of funds, it is therefore not exposed to the more flighty kinds of capital, for instance relying on international interbank borrowing.” Across the region, S&P said reforms taken by central banks and financial regulators have made economies “less vulnerable” to external shocks, although political risks are now “higher.” The Philippines holds a “BBB” rating with a “stable” outlook from S&P, one notch above minimum investment grade which was affirmed last April.