Local banks well-positioned to meet new liquidity requirement

BIG BANKS are well- positioned to meet new liquidity rules from the central bank, but will have to boost deposit taking and long- term loans to beef up funding, Moody’s Investors Service said.

The credit watcher said the net stable funding ratio (NSFR) requirement announced by the Bangko Sentral ng Pilipinas (BSP) stands “credit positive” for Philippine banks, as the new tool would bolster funding profiles and improve the stability of the banking sector.

“The banks’ adherence to NSFR rules will limit their reliance on less stable funding sources, reducing their sensitivity to tightening market liquidity in times of stress,” Moody’s said in a statement sent yesterday.

The NSFR will require universal and commercial banks to hold enough liquidity or “reliable” sources of funding to match their expected funding needs for one year. These will require big players to hold enough money supply to meet “expected and unexpected cash flows and collateral needs” during day-to-day operations.

The central bank set July-December as the observation period to facilitate a smooth transition and “allow prompt assessment and calibration” of the new requirement. By Jan. 1, 2019, banks unable to meet full coverage will face sanctions from the BSP.

Moody’s said the new rule will strengthen “funding resilience” among big banks by ensuring ample liquidity. In particular, 10 players rated by Moody’s are expected to comfortably meet the NSFR “without challenges.”

These are BDO Unibank, Inc., Bank of the Philippine Islands, China Banking Corp., Land Bank of the Philippines, Metropolitan Bank & Trust Co., Philippine National Bank, Security Bank Corp., Rizal Commercial Banking Corp., UnionBank of the Philippines and the United Coconut Planters Bank.

“These banks currently have strong capital profiles and large bases of current and savings account (CASA) deposits, which are among the most favorable funding sources under NSFR rules, and low reliance on short-term confidence-sensitive wholesale funding,” Moody’s said, noting that these players have been largely reliant on customer deposits.

“We expect the new rule to raise the industry’s demand for CASA and term deposits, and long- term borrowings as banks seek to expand their stable funding base to support future asset growth.”

However, Moody’s noted that mid- sized lenders Security Bank Corp. and UnionBank may incur higher compliance costs as they have smaller deposit bases.

Deposits held by big lenders totalled P10.861 trillion as of endMarch which have supported P7.997-trillion outstanding loans, according to BSP data.

The central bank wants lenders to hold enough cash and liquid assets at all times as their inability to service withdrawals or process transactions could bear “unacceptable costs” and affect the financial footing of these firms. This will also bolster safeguards against a repeat of a widespread financial crisis, which is the main goal of the international Basel 3 framework adhered to by central banks.

Moody’s gave a “stable” outlook for the Philippine banking sector for 2018, saying that local players will benefit from “synchronized global recovery and moderate credit growth.”