By Lee C. Chipongian
The Bangko Sentral ng Pilipinas (BSP) yesterday reiterated that local banks can take on the Hanjin bankruptcy challenge because its credit risk management is strong and it has sufficient capital.
MB file photo.
“(The) BSP is confident about the local banks’ ability to manage this specific challenge,” the central bank said in its second statement since Friday. “They (five banks involved) are also equipped to handle the negotiations required to complete Hanjin’s corporate restructuring while remaining compliant with prudential regulations.”
The banks exposed in the to-be-restructured $412-million Hanjin loans are BDO Unibank, Inc. Bank of the Philippine Islands (BPI), Land Bank of the Philippines (LandBank), Metropolitan Bank & Trust Company (Metrobank) and Rizal Commercial Banking Corp. (RCBC). RCBC is reported to have the largest exposure in Hanjin.
The BSP said that as the banking regulator, it will “continue to remain vigilant in monitoring the actions taken by the banks and ensure the orderly resolution of the Hanjin case.”
Fitch Ratings in a commentary Wednesday said the Hanjin loan payment troubles will definitely pose risks to local banks’ asset quality and could affect their credit ratings.
“We believe several of HHIC-Phils (Hanjin Heavy Industries and Construction Philippines) creditor banks have been monitoring the borrower, with some paring exposure in recent years, even though loan classification and provisioning may not have fully reflected the risks. Risk mitigation, such as corporate guarantees and claims on assets, may help improve recoverability,” said Fitch.
Earlier this week, Moody’s said the exposures are credit negative for the five banks “because they will need to incur additional credit charges related to HHIC-Phil which will reduce their profit,” said Moody’s analysts.
The BSP, in its own statement, said banks have higher capitalization and stronger risk management systems to manage potential threats.
“More important, as part of the supervisory process, the BSP requires banks to stress test their own loan portfolios. In this respect, banks should have the capability to promptly address threats and stress scenarios,” said the BSP.
It added that the increase in the loan portfolio is supported by sound credit risk management (CRM) since 2014. “These guidelines set a higher standard in managing risk arising from the banks’ lending operations,” said the BSP.
Rules covering the CRM require banks to set aside allowance for expected credit losses which the BSP said should be “cognizant of potential losses in their loan portfolio even at an early stage.” As of end-October 2018, the banking system has a non-performing loans ratio to 1.83 percent while loan loss provisioning is more than 100 percent.
With a healthy capital base, the industry core earnings remained strong. As of end-September 2018, combined net profits rose by 5.8 percent year-on-year. During the same period, the big banks’ liquidity coverage ratio was at 157.6 percent on solo basis, well above the 100 percent threshold.
According to Fitch, Hanjin’s financial woes reflect the global shipping sector’s weaknesses, and mainly the problems of its parent company in South Korea, Hanjin Heavy Industries and Construction.
“Nevertheless, Philippine banks' prolonged period of rapid lending growth may indicate elevated risk appetite and relaxed controls, which will become more apparent as loans season or if the operating environment weakens,” it said.
Fitch also noted that “some mid-sized banks in the Philippines have shown higher growth appetite than the large banks in recent years, driven by their ambitions of gaining market share." This showed "aggressive growth increases" that lead to "greater exposure to more vulnerable companies."
"However, further large impairments could lead us to reassess banks' risk standards and controls, which could be negative for the ratings,” said Fitch. The big banks, on the other hand, with their larger capital and profitability, continue to be in a “stronger position to withstand potential problems with large exposures.”