RP banks exposed to high credit losses – Moody’s

Philippine banks have strong earnings profile but Moody’s Investors Service said they are exposed to high credit losses because of weak operating environment and low government support yesterday.

Moody’s released its first banking industry overview on the Philippines yesterday, saying that reforms undertaken since the Asian currency crisis have helped improve regulation and supervision.

However, Moody’s senior analyst Richard Lung said confidence would be further improved by greater transparency, formalization of procedures and institutionalization of reforms.

“Bank credit risk in the Philippines has been elevated by a difficult operating environment, a new and developing supervisory and regulatory framework, and low level of government support,” Lung said.

In the report, Lung observed that Philippine banks have historically faced little competition from the domestic capital markets or from non-bank financial institutions.

Despite the rapid expansion of the equities market especially last year, banks still remain the main source of corporate financing particularly for small and medium-sized companies that find it costlier to access the stock market for raising capital.

As the dominant financial intermediaries, Lung said Philippine banks have developed strong earnings profiles, supported by the fact that most of the large banks have universal banking licenses.

Owning UKB licenses, Lung explained, allowed these banks to offer a wide range of financial services that increased their revenue flows over the years.

However, Lung said that because of problems in their operating environment, banks in the Philippines are exposed to potentially high credit losses similar to that experienced following the Asian financial crisis.

“In addition to the moderately high volatility in the country’s business cycles, credit losses have historically been exacerbated by weak governance,” Lung said.

As a result, Lung said that once asset quality has begun to deteriorate, recovery from credit losses had been prolonged by deficiencies in the legal system preventing an orderly and expeditious resolution of bad assets.

“These challenges outweigh the benefits derived from the dominant role of banks within the financial system, and also help explain the low intrinsic financial strength and deposit ratings of the Moody’s-rated Philippine banks,” says Lung.

However, Lung noted that proposed legislation pending in Congress could correct some of the deficiencies in the supervisory framework.

In considering external support factors, Lung said that based on Moody’s assessment, the Philippines is considered to be a low-support country based on the relatively low importance of the banking sector relative to the size of the economy, the uneven history of past government interventions and limits on deposit insurance coverage.

True enough, the Philippine banking sector has had to pick itself up from the Asian financial crisis and unlike banks in other countries affected by the crisis, the industry had to recover with no government bail-out.

At best, the Bangko Sentral ng Pilipinas (BSP) was only able to provide the banking sector some regulatory relief as it struggled to unload over P200 billion worth of bad assets that resulted from the 1997 crisis.