Outlook for Philippine Banking System Remains Positive

Moody's Investors Service says that its outlook for the Philippine banking system is positive over the next 12-18 months.

The outlook is in line with the ratings agency's expectation that robust economic growth and low banking-sector penetration will continue to support sustainable credit growth.

"The positive operating environment is supportive of the banks' asset quality. Moreover, given their strong capitalization and reserve levels, the banks are well-positioned to manage unexpected downward pressures," says Alka Anbarasu, a Moody's Assistant Vice President and Analyst.

"Ample domestic liquidity conditions have also strengthened the banks' funding and liquidity profiles, and we expect profitability levels to gradually improve," adds Anbarasu.

Moody's points out that the Philippines is the only banking system of the close to 70 that Moody's rates globally, which carries a positive outlook.

This year is the third in a row since December 2012 that Moody's has maintained a positive outlook for the Philippine banking system.

In a report, Moody's says the banks' profitability levels should recover in 2015, as interest rates rise. In addition, the greater exposure of the banks to higher yielding small and medium-sized enterprises and retail loans will alleviate pressure on net interest margins.

As for loan levels, Moody's expects loans to grow 15%-17% over the next 12-18 months, as against the 22% annualized growth experienced in the first nine months of 2014.

Moody's says the slight moderation in loan growth reflects the tightening in monetary policy, and the introduction of macro-prudential measures adopted by the central bank, aimed at preventing excess credit growth in the system.

On the banks' asset quality in particular, Moody's report says the banks should report stable asset quality over the next 12-18 months, as the favorable operating environment will limit the formation of new non-performing loans, while supporting the remediation of legacy non-performing assets.

While Moody's central scenario is one of stable asset quality, Moody's notes the potential downside risks that could emerge, as the banking sector loan book seasons. Moody's points out that the banks have increased their exposures to higher-yielding but also riskier segments such as real estate, small and medium enterprises and other retail loans to improve their profitability levels.

At this juncture, Moody's is not overly concerned that the banks' asset quality profiles will deteriorate significantly, given that growth in real estate loans has moderated over the past year, and the fact that there is significant latent demand from potential borrowers, as reflected by the low penetration rate of consumer loans accounting only for 7% of GDP.

Furthermore, Moody's expects the new regulations — such as the real estate stress test, limit on the value of real estate collateral, and expanded definition of large exposures — will pre-empt excess credit growth in the system.

Moody's report also points out that successive capital-raising exercises, through the issuance of common equity and Basel III capital instruments, and the consistent build-up of loan loss reserves have improved the banks' loss absorbing buffers, thereby providing support in case of asset quality stress.

In addition, the banks can raise capital if necessary, owing to a fairly active equity market, and strong commitment by key family shareholders to their bank investments.

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