Outlook for PH banks ‘largely stable’ – Fitch

Fitch Ratings said Philippine banks’ “healthy" liquidity buffers on the back of sound economic fundamentals and stronger regulatory environment will continue to support industry growth and likely keep its stable and positive outlooks in the near term.

In a report (Financial Institutions 2017 Outlooks Compendium), Fitch noted that among banks monitored in the Asia Pacific, the Philippines and Vietnam are the only two countries that have both stable rating and sector outlook. The credit rating agency rates nine emerging market countries in the region that includes China, Malaysia, Indonesia, India and Thailand.

Fitch said for the Philppines, most banks are tagged with stable outlook and are unlikely to be upgraded again in the near term after the 2016 upgrades which were anchored on a “robust economy, steadily strengthening regulatory and risk frameworks.”

It monitors six local banks and the two government banks Land Bank of the Philippines and Development Bank of the Philippines which are not included in the “unlikely” group to be upgraded soon. “(The two state banks) mirror the outlook of the sovereign ratings,” it said.

Fitch is confident that growth trajectory is sustainable – it forecasts a 6.6 percent GDP growth for 2017 –since economic growth drivers such as remittances and the BPOs, the favorable demographics, capital investments and government infrastructure spending are “intact.”

The banking sector is also supported by sustained credit expansion and at the same time, an “alert” central bank with a close eye on potential credit and asset bubbles. “The robust economy will continue to drive brisk loan growth which we forecast in the mid- to high-teens for 2017. We also foresee the bulk of this channelled into infrastructure, real estate and other business investment activities while strong consumer demand will continue to spur household borrowing,” said Fitch.

Fitch also attributed its stable rating outlook to a steady profit growth and asset quality and comfortable funding and liquidity.

It expects a gradual shift in the loan mix towards “higher-yielding consumer and project finance” while also projecting a healthy system liquidity with a loan/deposit ratio of 71 percent as end-September last year. “Liquidity conditions should remain comfortable in 2017 as existing liquidity buffers, credit creation and foreign remittance inflows help to cushion against debt and currency market uncertainty.”

Fitch also commented about the industry’s capitalization which it noted continue to be high by global standards. “Risk-weighted asset growth is likely to continue to outpace internal capital generation. We expect the banks to address this by raising fresh capital when needed.”

Fitch said the central bank’s regulatory strengthening such as the net stable funding ratio rules should further improve banks’ stable condition, as well as the pending amendments to the law that established the Bangko Sentral ng Pilipinas.

Such strong regulatory frameworks will address Fitch’s “outlook sensititives” including banks’ overall credit profiles. “Sustained economic development and further improvement in system regulation and risk management could strengthen banks’ overall credit profiles, if they maintain their existing healthy financial metrics and balance-sheet strengths,” said Fitch.

“A reversal of recent positive economic and governance trends would hurt banks’ profiles in the longer term.”