S&P Global Ratings has maintained its stable credit outlook on Asia Pacific financial institutions including Philippine banks which are expected to remain profitable despite slowing economic growth.
In an Oct. 17 “Asia-Pacific Financial Institutions Monitor 4Q 2023: Outlook Stable, Strains Manageable” report which was released Wednesday, Oct. 18, S&P Global said that generally, 83 percent of bank rating outlooks in the region were stable.
Meanwhile, it noted that property is a key risk but the “unfolding property market strain” is still considered “broadly manageable” across the Asia Pacific banking systems at current rating levels.
It added that other key risks are an “economic downside significantly outside our base case” and a “high public and private sector indebtedness.”
The last report on Philippine banks that S&P Global released was in August this year and its assessment remains the same, according to analysts.
Two months ago, the credit rating agency said banks in the Philippines are exposed to very high economic risks in a low-income economy. It has an estimate that local GDP will grow by six percent this year and in 2024 due to high inflation. However in the latest report, it has revised that forecast to 5.2 percent in 2023 and 6.1 percent next year.
In the August report, S&P Global said economic growth in the Philippines remains well above the average of peers at a similar level of development, on a 10-year weighted-average per capita basis. However, GDP per capita remains lower than most peers, it added.
In the latest report, region-wide, the credit rating agency said banks' net interest margins continue to benefit from the higher interest rate environment – “but materially weaker economic growth prospects or higher-for-longer interest rates will hurt banks' asset quality.”
“We continue to anticipate higher credit losses across Asia-Pacific banking in both 2023 and 2024. Interest rate hikes and slowing economies will drive these losses,” it added.
As for the contagion risks following Credit Suisse and US regional bank failures earlier this year, S&P Global said these risks “have moderated” but “nonetheless, amid higher rates and lower growth, investor confidence could again easily waver.”
“Furthermore, we believe that climate change, cyber risks, and digitalization trends affecting the competitive landscape are structural risks that will increasingly test banks and their borrowers,” it further noted in the report.
On the whole, S&P Global said ratings on Asia-Pacific banks “have stayed resilient.”
“More than 80% of bank outlooks in the region are on stable outlook and the median rating is solidly in the investment-grade category at 'A-' as of end-September 2023,” it said.
The credit rating agency also noted that capital ratios remain on a “normalizing trend”.
The report touched on the contagion risk of the property market on Asia Pacific banks amid high rates and decline in residential property sales in some markets such as China. “We view the unfolding strains as broadly manageable across Asia-Pacific banking systems,” it said.
Still, as more banks become digitally and technologically advanced, cyber risks are also elevated.
“We anticipate that cyber risk, as with other cyclical and structural risks impacting financial institutions also could also play out differently across sub-sectors and geographies across the industry,” said S&P Global.