PH banking outlook remains stable – Moody’s

The Philippine banking system is expected to remain stable as normalization of economic activities will reduce loan loss provisioning, international credit watcher Moody’s Investors Service said.

“We maintain our stable outlook for the Philippines’ banking system. An easing of coronavirus-related restrictions in the country will stabilise the banks’ operating environment and slow the growth in problem loans,” said Moody’s on Monday, April 11, in its latest “Banking System Outlook – The Philippines” report.

Moody’s Investors Service

Moody’s said the country’s real GDP this year will likely expand by seven percent and 6.2 percent for 2023, providing a good operating environment for the banking system.

“The accelerating inflation due to the Russia-Ukraine military conflict, lingering pandemic woes due to new variants, and possible rate hikes in the country will dampen but not derail the economy’s recovery,” said Moody’s. It added that local banks’ profitability will improve with the decrease in credit provisioning and earnings’ growth as more sectors of the economy resume normal activities.

“Banks’ capital ratios will modestly decline closer to pre-pandemic levels as loan growth picks up, but they will remain high, well above regulatory requirements. Still, the system continues to face high tail risks as ratios of nonperforming, restructured and overdue loans will remain higher than pre-pandemic levels,” said Moody’s.

The credit rating agency said nonperforming loans (NPLs) this year will slow down with an improving business and consumer sentiments and that the defaulting small and medium-sized enterprises (SMEs) and retail borrowers in 2021 have all been taken into consideration.

“A lifting of forbearance measures related to the pandemic will not lead to a sharp deterioration of banks’ asset quality. Although conglomerates are a key source of systemic risk because bank loans are heavily concentrated among them, they will remain resilient because their diversified revenue sources will help avert a sharp drop in cash flow,” said Moody’s.

Meantime, local banks are expected to continue to have strong capital buffers while profitability will improve as loan-loss provisions decline and fee income grows, said Moody’s.

“Loan-loss provisions as a percentage of gross loans will decrease to an average of about 0.8 percent in 2022 as asset quality stabilizes. Loan-loss provisions will still remain above pre-pandemic levels as banks continue to set aside provisions to cover lingering asset risks,” noted Moody’s. It added that fee income “will grow as transaction volumes increase in tandem with the economic recovery (while) net interest margins will be broadly stable even if interest rates rise because the repricing of loan rates and a gradual recovery in the origination of high-yield retail loans to pre-pandemic levels will offset increases in funding costs.”

As for funding conditions, Moody’s also expect this to remain stable for local banks which are dependent on deposits.

“Loan-to-deposit ratios will rise to pre-pandemic levels as loan growth accelerates along with the economic recovery and deposit growth slows amid tighter liquidity in the system. However, banks will still have sufficient deposits to cover loan growth,” according to the credit watchdog. “Further, we expect the central bank (Bangko Sentral ng Pilipinas) to remain proactive in providing liquidity to the system to prevent any near-term liquidity stress that can result from a sudden change in economic conditions,” it added in the report.

Moody’s currently rate eight big banks in the country. These eight banks accounted for 82 percent of the total banking assets as of end-2021, namely: BDO Unibank Inc.; Metropolitan Bank and Trust Co.; Land Bank of the Philippines; Bank of the Philippine Islands; China Banking Corp.; Union Bank of the Philippines; Rizal Commercial Banking Corp.; and Security Banking Corp.

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