Moody's: Stable outlook for Philippine banks, but differentiation in government support for banks

Moody's Investors Service says that its outlook for the Philippine banking system over the next 12-18 months is stable, based on the robust fundamentals of the system, and the country's macroeconomic stability.

"Asset quality will remain broadly stable, supported by stable macroeconomic factors, and the stable debt servicing metrics of borrowers," says Alka Anbarasu, a Moody's Vice President and Senior Analyst.

"Profitability remains stable and the banks' high loss absorbing buffers will provide support for unexpected losses," adds Anbarasu. "Ample domestic liquidity will also support the banks' funding profiles."

However, Moody's points out that while the Philippine government's (Baa2 stable) capacity to provide support to banks in times of stress has improved in recent years -- owing to the country's strong economic performance and improvements in fiscal management -- systemically important banks will likely receive greater support from the government than smaller banks.

Moody's conclusions were contained in its just-released report on Philippine banks titled, "Banking System Outlook -- The Philippines: Robust 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).

With the operating environment, Moody's says that Philippine banks will continue operating in a stable environment, and that such a situation will support bank credit growth.

Moody's expects that the Philippines will achieve real GDP growth of 6.5% for 2016 and 2017; much higher than other countries in the Association of Southeast Asian Nations. Strong domestic consumption and an increased pace of investments, backed by macroeconomic stability, underpin the robust growth expectations. Business sentiment remains strong, banking sector credit growth will stay robust, and the economy has demonstrated resilience to global shocks.

However, the country's growth prospects could be undermined, if there is a significant shift in the government's policies.

Asset quality will remain broadly stable, supported by the aforementioned macroeconomic factors, and the stable debt servicing metrics of borrowers. Household leverage has increased in the past few years, but remains manageable, while the strength of corporate sector balance sheets is robust.

However, risks are emerging in terms of the banks' increasing exposure to real estate-related loans and higher yielding small and medium enterprises.

Loss absorbing buffers are high and will provide support for unexpected losses. Proactive capital raising by the banks over the past few years, and higher regulatory capital requirements than international norms will help the banks maintain buffers against downside risks. Moody's stress test results also reflect the banks' strong loss absorbing capacity.

Profitability will remain stable, because the improvement in the banks' net interest margins -- due to the rebalancing of their loan exposure -- will be broadly offset by a gradual increase in credit costs. At the same time, their high cost base represents a key hurdle in improving their profitability metrics.

As for liquidity, Moody's report says ample domestic liquidity will support the banks' funding profiles. Philippine banks demonstrate strong funding profiles, dominated by deposits, and with little reliance on short-term wholesale funding. They also hold a sizable stock of liquid assets.

On the issue of systemic support, Moody's points out that the Philippine government demonstrates a mixed track record of providing support to banks in need. Moody's says the larger universal and commercial banks -- mainly the 10 domestic systemically important banks -- would be more likely to receive financial assistance or regulatory forbearance if needed, because of the greater impact that their failure would have on the domestic economy.

As for a bank resolution regime, Moody's does not expect the Philippine central bank to adopt a bank resolution regime that includes bail-in mechanisms for unsecured creditors at least over the next 12-18 months.

Moody's rates eight commercial banks in the Philippines. Their assets accounted for approximately 64% of total banking system assets at 30 June 2016.

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