S&P: Strength of Philippine banks ‘improving’

The trend in economic risks facing financial institutions operating in the Philippines has become positive, based on improving credit fundamentals, S&P Global Ratings said in its latest “Banking Industry Country Risk Assessment: Philippines.” 

S&P continue to classify the banking sector of Philippines (BBB/Stable/A-2; axA/axA-2) in group ‘7’ under our Banking Industry Country Risk Assessment (BICRA) criteria.

S&P noted the government-led Credit Information Corp. (CIC) has been established and is in the final stages of aggregating a comprehensive database with five years of data.

“The full launch is scheduled for early 2018. We expect consumer lending quality to benefit if the authorities prepare well for the launch,” the credit rating firm said.

It added the credit bureau will help improve transparency and availability of borrower information on the household sector, which forms a significant 18 percent of lending by the banking sector and has historically contributed materially to credit losses.

“The ratio of nonperforming consumer loans to total consumer loans has consistently been about double that of total nonperforming loans (NPLs),” it noted.

As of December 2016, the consumer NPL ratio was 3.9 percent, compared with the overall

industry’s two percent.

It said Philippine banks are traditionally corporate focused, and consumer lending is a relatively unfamiliar territory for them.

Lending and underwriting standards are also constrained by the lack of data on borrowers, S&P said.

“We expect the upcoming launch of CIC’s database to improve information availability and assist banks to make better lending decisions as they refine their risk management. We believe this will lead to a convergence of the consumer NPL ratio with the industry average,” it added.

The positive economic trend is predicated on sustained credit performance in the corporate segment, S&P said.

Local banks predominantly lend to the corporate segment, particularly larger companies with long credit histories and a strong repayment track record.

S&P said the corporate sector has healthy margins, good profitability, and adequate interest coverage.

“We believe robust economic conditions will continue to support borrower repayment, and we expect credit losses from the corporate sector to remain low,” it added.

“If the abovementioned economic trend improvement materializes, we could revise our economic risk assessments to a stronger category of ‘6’. Such an action would result in a revision of our BICRA group score to ‘6’ and that would raise the anchor up one notch to ‘bb+’ from ‘bb’ currently.

“Our assessment of economic risk in the Philippines already takes into account the country’s low income level and inadequate infrastructure, which together hamper economic diversification and growth,” S&P said.

S&P, nonetheless, said the country’s weak payment culture and rule of law heighten credit risk. “Pre-emptive prudential measures to control banks’ real estate exposures have led to a moderation of credit growth, which mitigates the build-up of economic imbalances,” it noted.

“In our opinion, Philippines’ banking regulations are broadly in line with international standards, and in some instances more stringent. However, we believe inadequate legislation and legal protection for supervisory staff could compromise the regulator’s ability to implement prudential measures,” it said.

“The regulator has taken administrative measures to mitigate this risk, including the establishment of an insurance fund for lawsuits against Bangko Sentral ng Pilipinas (BSP) officials,” it said.

S&P said the local banking industry’s risk appetite is generally restrained, and banking products are straightforward.

“A high level of stable customer deposits supports banks’ funding profiles despite banks having few funding alternatives,” it said.