Moody’s Investors Services has returned its “stable” outlook for Philippine banks with the economy’s gradual but “mild” improvement this year and despite that banks’ asset risks are still on high side.
“We have changed the Philippines’ banking system outlook to ‘stable’ from ‘negative’ to reflect our expectations that a mild economic recovery will support the operating environment for banks. However, asset risks remain high because of a prolonged curtailment of business activity, a high unemployment rate and weak consumer sentiment,” according to the credit rating agency’s “Banking System Outlook Update – The Philippines” released Tuesday.
Moody’s maintained the local GDP’s slow recovery this year on the back of gradual improvement in consumer spending and investment, supported by fiscal and monetary measures. The continued high rate of COVID-19 infections – more than 10,000 new cases in most days since end-March – will slow but not derail economic recovery in the first six months of 2021, it said.
Moody’s is concerned about banks’ high asset risks and big businesses’ debt repayment problems due to the pandemic. But despite hits to non-performing loans (NPL) because of grace periods granted by the two Bayanihan laws in 2020, banks’ capital buffers appear adequate.
“Ongoing social distancing measures, though less restrictive than in 2020, amid a high unemployment rate and weak consumer sentiment will continue to weigh on the debt repayment capacity of retail borrowers and some small and medium-sized enterprises,” noted Moody’s. In the meantime the large corporate groups’ debt repayment capacity, which deteriorated last year, “remains a key source of systemic risk because banks’ loans are heavily concentrated on them.”
Moody’s thinks the Bangko Sentral ng Pilipinas’ (BSP) support of its supervised financial instutions remain strong. “We expect the government to prioritize systemic stability and support for rated banks when needed. It is unlikely to adopt a bail-in regime in the next 12-18 months,” it added.
As for capital buffers, Moody’s said this will remain sufficient. “Internal capital generation will keep pace with capital consumption, with credit growth likely to remain below pre-pandemic levels,” it said.
Moody’s said its rated Philippine banks will continue to have sufficient capital buffers. Their rated big banks’ average Common Equity Tier 1 capital ratio stood at 15.5 percent at the end of 2020. “However, any material downgrades of internal ratings of borrowers would increase the capital that banks need to set aside for those exposures, which would reduce their capital ratios.”
Moody’s said so far, banks’ profitability show signs of being stable. It said banks’ credit costs will be lower with significant loan-loss provisioning amounts in 2020. “Still, they will remain high because of lingering asset risks,” it added.
Banks’ trading income will also fall. “(It will) likely decline as markets turn less volatile,” it said, adding that loan yields will decrease as banks “reprice their loans at lower rates amid abundant liquidity and weak credit demand. A combination of these factors will keep banks’ profitability at 2020 levels.”
The credit watchdog’s Philippine banking updates also kept its previous favorable views on funding conditions due to the banking system’s large deposit base which have low risks. “The central bank has been proactive in providing liquidity to the system to prevent any near-term liquidity stress that can result from a sudden change in economic conditions. The weak credit demand will also help banks maintain ample liquidity buffer,” it said.
Loan-to-deposit ratios are expected stable with ample liquidity in the system.
Moody’s rate 10 big local banks with 77 percent of total banking assets as of end-2020. Rated “stable” banks include BDO Unibank Inc., Metropolitan Bank and Trust Co., Bank of the Philippine Islands, Land Bank of the Philippines, China Banking Corp., Union Bank of the Philippines, Security Bank Corp. and United Coconut Planters Bank. Rated with “negative” outlook, for now, is Philippine National Bank and Rizal Commercial Banking Corp.
Moody’s banking system outlook is its forward-looking assessment of the “fundamental credit conditions that will affect the creditworthiness of banks in a given system over the next 12-18 months.” It considers asset quality, capital, funding, liquidity and profitability in its assessment.