RP banks get 'negative' credit outlook

MANILA, Philippines - Moody’s Investors Service announced yesterday that its fundamental credit outlook for the Philippine banking system is “negative”, reflecting expectations that a slowing economy would contribute to a cyclical weakening in the country’s bank credit fundamentals.

Moody’s said even the regulatory issues surrounding the collapse of 12 rural banks under the Legacy Group highlighted weaknesses in the Bangko Sentral ng Pilipinas’ (BSP) ability to move swiftly and decisively on collapsing banks.

“Moody’s industry outlook for Philippine banks is negative based on our expectation that challenges in their operating environment will depress bank earnings and pressure their asset quality,” said Richard Lung, a Moody’s vice president/senior analyst.

Despite the overall negative outlook, however, Lung said Moody’s outlook for the “intrinsic stand-alone” financial strength ratings of individual banks is still “stable.”

“We believe that they can absorb these pressures without experiencing a prolonged deterioration in their relative credit metrics,” Lung explained.  

Moody’s released its latest Banking System Outlook for the Philippines which detailed the credit rating agency’s outlook for the next 12 to 18 months.

The report covered positive and negative rating trends, the impact of the global credit crunch and slowdown in Philippine economic growth, and key system performance measures, including financial fundamentals.

Moody’s said in the report that Philippine banks remained broadly stable in 2008 but the impact of the global recession is beginning to take its toll on the industry, especially with declining remittances that would have a negative impact on consumer spending and, in turn, affect corporate performances.

Lung said that an additional challenge to banks from the global recession is its impact on their plans to dispose of their extensive holdings of ROPA.  The disposal of these dead weight assets is set to slow with the expiry on July 14, 2008 of the special tax and regulatory incentives allowed under the two-year extension of the Special Purpose Vehicle Act.

With the economy softening, Lung said the real estate market is not expected to be as robust as in recent years. This slowdown could in turn impact the rates of return the banks are expecting to achieve on joint-venture projects with property firms to redevelop their ROPA.

Curiously, Moody’s said the controversy surrounding the Legacy Group of banks also highlighted the weaknesses in financial supervision.

Lung said the collapse within the past year of the Legacy Group of rural banks highlighted the continuing dangers posed to banking stability due to gaps in the Philippine supervisory framework. 

Although these banks represent a small portion of the country’s total banking industry, Moody’s said the factors leading to the failure of these banks and the constraints preventing banking supervisors from acting in a more forceful manner reinforce concerns over the efficacy of recent reforms to strengthen regulation and supervision.

However, Moody’s said a repeat of the 1997 crisis is not likely, because the financial health of large Philippine corporations is much stronger than it was going into the last crisis.

“Strong earnings, helped in part by a robust local economy, have been retained or used to pay down debt, especially foreign-currency denominated bonds,” the report said. “This situation stands in contrast to the late 1990s where several large corporations borrowed heavily before the crisis, especially in international debt markets, to fund expansion into additional capacity or into non-core enterprises.”