Philippine banking system outlook stable despite rapid loan growth

Moody’s Investors Service on Friday said the Philippine banking system’s outlook over the next 12-18 months was stable, reflecting the lenders’ asset performance, strong loss provisioning and liquidity capacity.
These factors, according to the ratings agencies would allow the banks to accommodate rapid loan growth as the Southeast Asian country’s economy gathers pace.
The Philippine economy grew by 6.5 percent in the second quarter, faster than the 6.4 percent pace from the previous quarter but weaker compared with the 7.1 percent posted during the same period of 2016.
“The banks’ asset performance will be supported by a strong economy, and the private sector’s benign leverage and debt servicing metrics,” said Simon Chen, a Moody’s Vice President and Senior Analyst.
“However, nonperforming loan formation could edge up, as the banks migrate to a loan mix which is heavier on retail loans,” Chen said. “Such loans tend to show higher delinquency rates when compared with corporate loans.”
The Philippines’ central monetary authority, Bangko Sentral ng Pilipinas (BSP), reported on Friday that the outstanding loans of commercial banks, net of reverse repurchase placements, grew by 20.4 percent in August from 19.7 percent a month earlier.
Bank lending for production activities — which comprised 88.5 percent of banks’ aggregate loan portfolio — grew by 19.5 percent in August from 18.9 percent in July.
Lending for household consumption meanwhile rose 22.8 percent in August, from 22.3 percent in July, on higher exposure auto loans and credit card loans as well as sustained growth in salary-based general purpose loans and other types of household loans, the BSP said.
The stable outlook is based the assessment of five drivers: operating environment; asset quality and capital; funding and liquidity; profitability and efficiency and systemic support, Moody’s said.
On the operating environment, the banks’ credit growth — which will likely stay in the high teens through 2017 and 2018 — will be supported by their stable operating environment.
The credit metrics of the banks’ corporate customers will remain sound over the 12-to-18-month period, Moody’s said, while their capitalization will stay strong although there would be pressure because of the adoption of a regulation which requires them to recognize expected credit losses rather than waiting for loss events to occur.
As for funding and liquidity, Moody’s said that Philippine banks maintain strong funding profiles dominated by deposits and less reliance on short-term wholesale funding.
This should ensure stable profitability over the next 12-18 months, with the improvement in their net interest margins attributable to the rebalancing of their loan exposures, the ratings agency said.
“The Philippine government’s capacity to provide support to the banks in times of stress has improved in recent years, because of the country’s strong economic performance and improvements in fiscal management,” Moody’s commented.