MANILA, Philippines — International rating agency Fitch Ratings in a report released yesterday said that Philippine banks will continue to remain stable on a relatively strong capital and liquidity base.

Fitch noted local banks' strength which will probably continue to "withstand a fresh economic slowdown" backed by risk-averse capital strength and the ability to preserve liquidity to fund requirements in foreign exchange.

"Fitch believes that major Philippine banks generally hold satisfactory capitalization, even after assuming 'stressed' markdowns on their non-performing assets," said Fitch Director Alfred Chan. "Under the agency's stress tests, the core Tier1 capital adequacy ratio (CAR excluding hybrids) of all rated banks is likely to remain on average at around 11 percent, with the ratio for the weakest banks unlikely to fall below eight percent."

Chan said that this compares with an average core Tier1 CAR of about 13 percent as of the end of the third quarter, and reflects banks' stable capitalization. "Most Philippine banks have liquid balance sheets and deposits as their main funding source, with the system-wide loan/deposit ratio of 60 percent one of the lowest in southeast Asia," he said.

The latest central bank data show that CAR, which measures banks' capability to meet its liabilities and other credit exposures and risks, remained healthy at 16.48 percent as of the end of the first quarter this year, an improvement from end-December’s 16.02 percent.

The Bangko Sentral ng Pilipinas (BSP) in a report said the banks were able to maintain its adequate capitalization despite the political troubles in the Middle East and North Africa region which reached heightened levels during the monitoring period, and the debt crisis worries over Europe.

BSP Deputy Governor Diwa C. Guinigundo has said that the banking industry’s capital and liquidity health are expected to remain stable, which would enable banks to maintain an adequate credit position despite the external troubles brought on by the US and Euro debt crisis.

In the Fitch report, Chan said the problems in Europe has a moderated or limited impact on Philippine banks.

"Although the ongoing sovereign crisis in Europe presents only limited direct impact on most domestic banks' credit profiles, the Philippine economy and banking sector will not be immune to the growing risk of a weak global economy," warned Chan. "In such a scenario, a weakening of asset quality and profitability cannot be ruled out."

Fitch said however that the structural balance sheet issues of many major Philippine banks – including concentrated loan portfolios, foreclosed properties for which reserves coverage is low and deferred charges continue to be a "main source of impairment in a difficult operating environment."

As for a possible downward rating pressure, Chan said this may result "should such a downturn, particularly if sharp and prolonged, result in significant capital impairment risks for the banks."

"Nevertheless, Fitch believes this likelihood at present to be low as the banks' non-investment grade ratings are already fairly low by regional comparison. Moreover, higher credit costs are expected to be manageable for most rated local banks, largely due to their reasonable loss-absorption buffer," said Chan.