Positive outlook for Phl banks amid risks – BMI Research

MANILA, Philippines - BMI Research said structural reforms adopted by the Bangko Sentral ng Pilipinas (BSP) and the robust economy support the positive outlook for the country’s banking industry.

In its latest industry trend analysis, BMI Research said key factors supporting its constructive view on Philippine banks include a strong economic growth outlook, healthy capitalisation and liquidity profiles, and ongoing positive structural reforms.

“We believe the growth outlook for the Philippine banking sector remains positive, and there are few risks to financial stability over the medium term,” it added.

The researh arm of the Fitch Group said the country’s gross domestic product (GDP) growth would taper off to 6.3 percent this year from 6.8 percent last year, but would remain one of the fastest growing economies in the region.

“This outperformance will be underpinned by an improved business environment, positive demographics, and the government expansionary fiscal plans, which will continue to drive investment and output growth,” BMI Research said.

It expects credit growth to stabilize at 17 percent this year from 16 percent last year as improved bilateral relations with China and Japan would help boost trade and investment with the two economic powerhouses in the region.

“This should help to drive credit demand as both households and businesses assume leverage against a backdrop of profitable opportunities and relatively low existing indebtedness,” it said.

It expects asset quality across Philippine banks to remain broadly stable and low as corporate earnings and asset valuations typically correlate positively with strong economic growth.

BMI Research pointed out the strong capitalization of banks would provide buffer to economic shocks with a capital-to-asset ratio of 12.1 percent as of February and a capital adequacy ratio of 15.6 percent as of September 2016.

“We expect the industry to maintain healthy buffers amid active supervision by the central bank and given that many of the leading banks have the ability to raise fresh capital due to strong financial backing from large conglomerates,” it said.

BMI Research said the banking sector’s loan-to-deposit ratio is among the lowest in Asia, suggesting that Philippine banks have financed loans largely by using deposits rather than through international wholesale funding.

The BSP is pushing consolidation in the banking industry to reduce the regulatory burden and improve financial intermediation in the country.

It is also opening up the country’s banking sector to banks in the Association of Southeast Asian Nations through the Asean Banking Integration Framework.