Moody’s maintains positive outlook on Phl bank system for Phl banking system

MANILA, Philippines - Moody’s Investors Service (Moody’s) has maintained its positive outlook on the Philippine banking system for the next 12 to 18 months.

Moody’s assistant vice president and analyst Simon Chen said that the positive outlook is in line with its expectation that GDP (gross domestic product) growth in the Philippines, will remain one of the strongest among emerging market economies over the next 12 to 18 months.

“In that context, credit growth is likely to be in the range of 13 percent to 15 percent on an annual basis, while asset quality will be supported by the robust economy and relatively low retail credit penetration” Chen added.

Moody’s conclusions were contained in its just-released “Banking System Outlook: Philippines,” which expresses Moody’s expectation of how bank credit worthiness will evolve in this system over the next 12 to 18 months.

Moody’s said that the positive outlook for the banking system is based on an asessment of five factors: operating environment – positive; asset quality and capital – stable; funding and liquidity – stable; profitability and efficiency –stable; and systemic support – positive.

The Philippine government’s preliminary forecast after the powerful Typhoon Yolanda (Haiyan) hit the Philippines’ Eastern Visayas region early last month, is that the storm should lower GDP growth this year by 0.3 to 0.8 percentage point. In contrast, the country’s GDP rose 7.4 percent year-on-year in the first nine months of 2013.

Moody’s report also says the system’s level of non-performing assets (NPAs) should remain stable, after dramatic improvements in recent years, while provision coverage continues to rise.

Household indebtedness and corporate leverage remain low, with total system credit to GDP at about 40 percent, and on a slightly declining trend, despite strong loan growth in recent years.

“We expect the Philippines’ robust economy and low interest rates to continue being supportive of borrowers’ ability to service debt. In addition, the low interest rate environment should result in the banks focusing on growing higher-yielding segments like small- and medium-sized enterprises and retail,” says Chen.

Banks are likely to open more branches next year, once restrictions on doing so in certain areas of Metro Manila are lifted in mid-2014. Moody’s points out that the restrictions were intended to encourage banks to set up operations in rural areas and to limit the banking system’s concentration in Metro Manila.

On capitalization, Moody’s said the banks continue to be well-positioned to meet the new Basel III requirements coming into effect on January 2014.

It further notes that the banks are likely to maintain liquidity profiles that are among the strongest of banks globally, given that they are fully funded by customer deposits, reducing the need to borrow from the wholesale market.

Moreover, the system’s loan-to-deposit ratio is low, at 59 percent at end-September 2013. The banks have also maintained a large proportion (40 percent) of total assets in liquid assets such as cash and local government securities.

Foreign-currency liquidity is also strong, with a loan-to-deposit ratio of 38 percent at end-September.

“The banks’ core profitability should remain robust, as continued healthy loan growth offsets mild pressure on net interest margins,” Chen said.

Moody’s report also notes that the government’s improved fiscal strength will add to its ability to extend support to the banks when necessary. On average, Moody’s rated banks in the Philippines receive one to two notches of uplift in their average long-term deposit ratings of Baa3 from their standalone credit ratings.

The positive outlook on the Philippine banking system is consistent with Moody’s positive outlook on the Philippine government’s Baa3 rating.

Moody’s rates seven banks in the Philippines. These seven commercial banks accounted for 63% of total banking system assets at end-June 2013. Of the seven, six rank among the top 10 banks in the country by market share of total assets.