Moody's downgrades outlook rating for RP banks to 'negative'

Moody’s has downgraded its outlook rating on Philippine banks from “stable” to “negative,” saying that the expected global slowdown and its effects on the economy would drag the earnings and asset quality of the local banking industry.

Moody’s said in its updated banking sector report for Asia and the Pacific that its outlook have been downgraded not just for Philippine banks but also for banks in Australia, Hong Kong, Taiwan, Mongolia and Cambodia.

“While the direct impact of the current global financial crisis on banks in Asia Pacific has been comparatively limited, these changes in the industry outlook reflect expectations that gathering economic headwinds from a global recession will increasingly test the resilience and strength of regional banking industries,” said Jerry Chien, managing director for Moody’s Financial Institutions Group in Asia Pacific.

“In terms of the macroeconomic outlook, Moody’s central scenario for 2009-2010 has shifted to one of Global Healing, and in which the process of global de-leveraging and tight financial conditions depress emerging markets to below-trend growth and leads to economic stagnation,” said Chien.

Chien said this shift in Moody’s central macroeconomic scenario pointed to a more challenging operating environment for banks over the next 12-18 months with the most significant threats to their creditworthiness moving from high inflation to a pronounced deceleration in growth and trade.

For the Philippines in particular, Moody’s said banks would experience a slowdown in bank deposit and loan growth because the inflow of remittances would also begin to slow from earlier in the year.

Banks additionally have already adopted a more cautious approach to lending and Moody’s said this would constrain growth in their interest income. Non-performing loans, especially from the high-end residential and commercial real estate sectors, are also expected to rise.

On the bright side, Moody’s said it is unlikely that Philippine banks would ever drop back to the difficulties they experienced in the beginning of the decade given the improved leverage and financial health of most local corporations.

However, Moody’s said banks would have difficulties maintaining the improving trend in their asset quality.

“In light of the pressure on bank earnings and asset quality, the outlook for credit conditions in the Philippine banking system is negative,” Moody’s said. “The outlook for individual bank foreign currency deposit ratings remains positive, reflecting the positive outlook on the country’s sovereign ratings.”

Moody’s noted that while the country is less dependent on merchandise exports than some of its neighbours, it had less policy flexibility to cushion the impact of the global slowdown. 

“Export demand, especially for its electronics, has already begun to decline and foreign investment has also decelerated this year,” Moody’s said.

The intensification of the global recession, according to Moody’s, could reduce overseas demand for Filipino workers and in some cases might also mean lay-offs and unemployment.