Moody’s: Robust economy, high liquidity favor banks

The country’s strong mac­roeconomic fundamentals along with the high liquid­ity system in the economy and improvement of asset quality continue to back the country’s banking system, Moody’s Investors Service said.

Thus, the debt rater gives the country’s banking system a stable outlook for the next 12 to 18 months. ”Asset quality will re­main broadly stable, sup­ported by stable macro­economic factors, and the stable debt servicing metrics of borrowers,” Moody’s Vice President and Senior Ana­lyst Alka Anbarasu said in a statement Monday.

Anbarasu said profit­ability of the domestic bank­ing sector remains stable and its “high loss absorbing buffers will provide sup­port for unexpected losses.” ”Ample domestic li­quidity will also sup­port the bank’s fund­ing profiles,” she said.In a report, the debt rater said the government has proven its capacity to lend support to the sector in times of stress.

This is due to sustained improvement of the coun­try’s fundamentals, it said.Moody’s expects the do­mestic economy to expand by 6.5 percent this 2016 and in 2017, higher than its pro­jection for other members of the Association of South­east Asian Nations (Asean).

This projection is in the middle of the government’s six to seven percent growth target this year.

Its growth forecast for the country was attributed to robust domestic con­sumption and rise in invest­ments, which gains traction due to macroeconomic stability and strong growth prospects.

”Business sentiment re­mains strong, banking sec­tor credit growth will stay robust, and the economy has demonstrated resilience to global shocks,” it said but noted that “significant shift in the government’s pol­icies” serves as risks to the outlook.

In terms of the support for the banking system, the report said “systematically important banks will likely receive greater support from the government than small­er banks.”

“[This is] because of the greater impact that their failure would have on the domestic economy,” it said, referring to domestic sys­temically important banks (D-SIBS).

The credit rater, mean­while, said loss absorbing shields of the banking sec­tor “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,” it said.

Profitability of the sec­tor continues to be stable, it said, “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.”

The report, however, said that high cost base of the sector “represents a key hurdle in improving their profitability metrics.”

Liquidity remains not a problem, it said, noting that aside from the high liquidity system in the country, the deposits con­tinue to fuel the industry’s funding base.

“They also hold a siz­able stock of liquid assets,” it added.