PH banks’ growth to continue but will strain capitalization – Moody’s

Published April 5, 2018, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian

Moody’s Investors Service said yesterday domestic banks’ loans and revenue growth will continue this year but sees some stress on the industry’s effort to match growth with required capitalization.

In a statement yesterday, Moody’s said the “capital ratios of Philippine banks will stay pressured, because increases in retained earnings will not prove sufficient to cover the banks’ rapid asset growth, against the backdrop of their low-cost efficiency.”

Moody’s report, “Banks — Philippines: Robust loan growth lifts earnings in 2017 but will continue to weigh on capitalization” project the same scenarios for this year.

Senior analyst Simon Chen, Moody’s vice president, however noted that banks’ real estate loans could face some risks. He said that while asset quality has improved, banks are still exposed to real estate sector’s potential risks. This is even with improvements in bad loans ratio or non-performing loans (NPL) and loan loss reserves.

“Growth in higher-risk loans will result in an acceleration of the formation of new NPLs, but only marginally,” according to Moody’s.

Chen expects net interest margins will improve and loan growth is assured, and that revenues for 2018 “are even brighter.” As reported, the “robust loan growth of Philippine banks drove up core earnings and improved their profitability. Most banks posted loan growth of 15-19 percent, driven by demand from consumers and domestic businesses, and under strong macroeconomic conditions. And, retail loans continued to grow faster than corporate loans at many banks.”

As for banks’ margin, Moody’s expect this to improve this year. “Combined with continued robust loan growth (this) will further boost their earnings and profitability. Net interest margins will improve, as the banks try to increase higher-yielding loans to retail customers and small and medium-sized enterprises,” it added.

Moody’s stated that credit costs which were “steady at low levels” last year will increase this year with banks’ updated reporting requirements under the Philippine Financial Reporting Standards 9 (PFRS 9). But, it said the “increases in credit costs will not be significant enough to erode the banks’ net profit growth.”

“The implementation of PFRS 9 will also lower the banks’ capital levels — although only slightly — because the banks will need to cover additional provisioning charges with retained earnings,” said Moody’s.

The local version of PFRS 9 aims to improve and simplify the classification and measurement of financial instruments, explained the BSP earlier. It requires entities to classify and subsequently measure financial assets at either amortized cost or fair value on the basis of both the entities’ business model for managing the financial assets, and the contractual cash flow characteristics of the financial assets.

The local banking system posted a cumulative net profit increase of 8.69 percent year-on-year to P167.73 billion in 2017. Total resources expanded to P15.49 trillion from the previous year’s P13.91 trillion, based on central bank data.

The large lenders or the universal and commercial banks accounted for more than 90 percent of both resources and earnings, with P146.33 billion net profits, up almost seven percent from 2016’s P136.95 billion.

Big banks’ resources last year grew by 11.72 percent to P14 trillion.