Banks’ fund raising to bolster lending
ACTIVE fund-raising initiatives taken by Philippine banks should help sustain robust lending in the country, especially amid strong demand for infrastructure financing, a global credit rater said.
“What we are seeing over the last 12 months... I think all these initiatives are to prepare for future growth. I think the good thing is banks are actively thinking about what they need to prepare themselves,” Moody’s senior analyst Simon Chen said in a recent interview.
Universal and commercial banks have taken turns in soliciting fresh investments in order to beef up their capital bases by issuing long-term notes and stock rights offerings from both local and foreign investors, shoring up billions of pesos for the lenders.
“Capital is something that is perhaps an area that banks need to work on every couple of years. So it really will sustain the kind of growth banks need to replenish the capital every three to four years,” Mr. Chen said. “I think the reason they need to do it is because the profitability isn’t strong enough to sustain strong growth.”
Return on equity clocked in at a 5.09% median rate from January-March, slipping from the 5.70% tallied the previous quarter, according to data from BusinessWorld Research. This came alongside a 17.8% year-on-year growth in total loans to hit P8.07 trillion, which ushered in assets growth by nearly 11% for big banks.
Officials from the Bangko Sentral ng Pilipinas (BSP) have also said that the industry trend for capital- raising represents the banks’ steps towards the full implementation of tighter standards imposed by the regulator.
Starting Jan. 1, 2019, big banks are expected to be fully compliant with capital and liquidity standards set under the international Basel 3 framework, a set of prudential measures meant to improve risk management that ensures a solid footing for banks.
These stricter rules ensure that banks will not fold even during a financial crisis.
The BSP has been introducing tighter regulatory standards under the Basel 3 regime since 2014, which include the 10% capital adequacy ratio, a framework for domestic systemically important banks, the 5% leverage ratio, a 30day liquidity coverage ratio, and a year-long net stable funding ratio.
Moody’s holds a “stable” outlook for the Philippine banking system as they see macroeconomic conditions remaining robust, which they said will “trickle down” to lend support to local lenders.
INFRASTRUCTURE LENDING
Meanwhile, Mr. Chen said the recent change in relaxed ceilings for infrastructure lending entails a “neutral” adjustment as far as Philippine banks are concerned.
The central bank announced in April that they will allow firms implementing major infrastructure projects to have a separate single borrower’s limit in securing credit lines from banks and quasi-banks.
The new rules allow project contractors — called special purpose entities — to have a separate 25% exposure cap from lenders. This effectively leaves a bigger loan line for them to tap, as it would be treated separately from credit secured by their parent firms.
“Right now... the demand for financing is really coming from infrastructure- related projects, and banks are participating in these projects,” the credit analyst said. “How we view the change is really more neutral where the regulations are now tweaked so that banks have the capacity to support these projects, but at the same time banks are cognizant of the risks.”
The BSP has said that this move is “in support of the government’s Build, Build, Build initiative,” referring to the plan of the Duterte administration to spend as much as P8 trillion from 2016 to 2022 on high-impact infrastructure projects nationwide.