Moody's: Philippine banking system stable, despite rapid loan growth

Moody's Investors Service says that the outlook for the Philippine banking system is stable over the next 12-18 months and reflects the banks' good asset performance, strong loss buffers and ample liquidity capacity - factors that will allow banks to accommodate rapid loan growth, against the backdrop of a robust economy.

"The banks' asset performance will be supported by a strong economy, and the private sector's benign leverage and debt servicing metrics," says 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," adds Chen. "Such loans tend to show higher delinquency rates when compared with corporate loans."

Moody's conclusions are contained in its just-released report on Philippine banks titled, "Banking System Outlook -- The Philippines: Robust economy and resilient private sector fundamentals drive stable outlook".

The stable outlook is based on Moody's assessment of five drivers: operating environment (stable); asset quality and capital (stable); funding and liquidity (stable); profitability and efficiency (stable); and systemic support (stable).

On the operating environment, Moody's says that the banks' credit growth — which will likely stay in the high teens through 2017 and 2018 — will be supported by their stable operating environment.

Moody's baseline scenario assumes that the Philippines (Baa2 stable) will achieve higher real GDP growth versus similarly rated sovereigns. In particular, the country should record GDP growth of 6.5% in 2017 and 6.8% in 2018, on strong domestic consumption and an increased pace of investments.

Moody's report says that the banks' asset performance will stay stable over the next 12-18 months, based on Moody's assessment that the credit metrics of their corporate customers will remain sound over this period. Such customers account for some 80% of the banks' loan portfolio.

With capitalization, Moody's says that the banks' capitalization will stay strong, but will weaken slightly, because of pressure from rapid credit growth and the adoption of PFRS9, which requires the banks to recognize expected credit losses rather than waiting for loss events to occur.

Nevertheless, Moody's stress test results show that the banks' loss absorbing capacity is strong. And, their strong and proven access to the external capital markets will also mitigate potential pressure on their capital levels.

As for funding and liquidity, Moody's says that Philippine banks exhibit strong funding profiles that are dominated by deposits, and demonstrate little reliance on short-term wholesale funding. Their loan-to-deposit ratios registered a low 67% at mid-2017, and they hold sizable stocks of liquid assets.

And on profitability, the banks will show stable profitability over the next 12-18 months, with the improvement in their net interest margins attributable to the rebalancing of their loan exposures. However, their high cost base will remain a key drag on their profitability metrics.

With government support, Moody's says that 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.

However, systemically important banks will receive greater support from the government than smaller banks.

Moody's rates nine commercial banks in the Philippines, with assets accounting for approximately 75% of total banking system assets at 30 June 2017.

Moody's has maintained a stable outlook on the Philippine banking system since November 2015.