Moody's Investors Service says it has maintained its stable outlook for the Philippine banking system as the domestic operating conditions will remain positive for business growth and support the robust credit fundamentals of the banks over the next 12-18 months.

"The outlook reflects our analysis that consistently improving asset quality, good liquidity and the favorable capital profiles of Philippine banks would act as a cushion in a significantly adverse operating environment," says Simon Chen, a Moody's Analyst.

"We expect the banks to benefit from the continuing growth in the demand for loans from domestic sources, both public and private," he adds.

Chen was speaking at the release of a report on the outlook for the Philippine banking system, and which he authored.

According to the report, overseas remittances and fiscal spending will help sustain the economic growth in the country amidst difficult global economic conditions. The outlook on the Ba2 sovereign rating for Philippines is also stable.

However, asset quality pressures may surface, particularly in the export manufacturing sector which accounts for about 12% of the total loans in the system, and the profitability of banks may weaken. In addition, operating costs will remain high and cost efficiency weak as banks continue to expand.

"The impact on individual banks' asset quality may be magnified by high single-borrower concentrations. Nonetheless, we expect a slowdown in the growth of non-performing loans for the industry as a whole because of a benign operating environment and better risk underwriting and monitoring practices," Chen says.

Although the banks' margins could be under pressure due to stronger price competition and possibly lower interest rates, the net impact on profits will be tempered by the growth in lending from public-private partnerships projects, the outsourcing sector, and strong consumer spending.