PH banks are strong but Fitch warns against ‘emerging issues’

Fitch Ratings said the country’s big banks – namely the banks it has current ratings review – have enough support from domestic demand and growth-inducing environment to sustain healthy asset profiles, however the credit watcher cautions against rapid expansion.

“Rapid expansion places a greater demand on banks’ risk frameworks, systems and balance-sheet buffers, and increases the risk of credit misallocation which may only become clearer later on,” Fitch said in a special report: “Peer Review: Philippine Privately Owned Banks” released yesterday. It also warned that “today’s favorable environment can mask any emerging issues fairly easily, giving reason to tread with caution notwithstanding the banks’ current benign operating metrics.”

Fitch currently rates six Philippine banks which account for about 55 percent to 60 percent of total assets and deposits as of end-2017. Three are large banks such as BDO Unibank, Inc., Bank of the Philippine Islands and Metropolitan Bank & Trust Co. – all are rated “BBB-” with stable outlook.

The other three they consider as mid-tier banks with common “BB+” stable outlook – Philippine National Bank, China Banking Corp., and Rizal Commercial Banking Corp.

Current ratings reflect the banks’ high borrower concentration and sustained rapid credit growth, said Fitch, which “could render them vulnerable to an economic correction.”

Fitch reported that in the last five years, bank credit has risen to near twice the rate of nominal GDP on average. “Despite this, broad indicators suggest that aggregate leverage in the Philippines remains moderate – with banking system credit at around 52 percent of GDP,” it stated. “Healthy GDP growth and rising corporate and household incomes will continue to support the debt-servicing capacity of borrowers. However, sustained rapid credit growth warrants close monitoring as it can disguise the build-up of asset-quality risks.”

Credit growth in the Philippines, it added, brings with it banking-sector credit risks that “may only become apparent towards the end of the current upswing.”

Fitch noted banks’ real estate exposures which it said has contained risks, at the moment. Real estate loans have “grown rapidly” at 22 percent a year between 2012 and 2017, compared to overall banking lending growth of 17 percent.

It further noted that banks generally keep to a 60 percent loan-to-value (LTV) ratio on commercial property loans, in light of a 60 percent regulatory limit on the allowable value of collateral relative to appraised property value. “Residential LTVs are typically higher at inception; credit assessments are based on debt-servicing capacity as a primary measure in line with international practice,” said Fitch.

In the meantime, the credit watcher said the Bangko Sentral ng Pilipinas (BSP) seems to be on top of real estate exposures’ scrutiny with its “regular prudential monitoring and a fairly stringent regulatory real estate stress test help to temper banks’ risk appetites for real estate exposure” particularly since “a further rise in leverage could render the sector more vulnerable to a cyclical downturn if unchecked, particularly with interest rates on the rise.”

Fitch ratings on BPI, BDO and Metrobank “reflect their strong domestic franchises as the three largest banks in the country with market shares around 3x those of mid-tier banks Chinabank, RCBC and PNB, which benefit their profitability and funding and liquidity profiles – and ultimately their credit resilience.”

Generally, for all rated banks, Fitch said asset-quality risks are expected to be manageable in the near term on the back of “favorable operating conditions and banks’ acceptable risk controls.”

They also issued “satisfactory profitability” notes on these banks, although the large banks continue to outperform their mid-tier peers in earnings. Capital-wise, local banks have adequate numbers. “Five of the six banks have raised – or are raising – fresh capital over 2017-2018. This helps to ease pressure on capital ratios from loan growth in excess of internal capital generation.”

The Philippines has a sovereign rating of “BBB” from Fitch, last upgraded in December 2017, from “BBB-”. It cited the continued strong macroeconomic performance “underpinned by sound economic policies” as one of the factors for the upgrade, and while inflationary pressures are on the up, Fitch “expects any effects to be manageable for the economy barring significant external shocks – considering the authorities’ (BSP) credible inflation management record.”