Moody’s keeps stable outlook for Philippine banking system

MOODY’S Investors Service kept its stable outlook for the Philippine banking system as their operating environment is expected to benefit from the reopening of the economy, but soured loans that remain above pre-pandemic levels will continue to pose risks.

Amid better economic conditions, Moody’s said banks’ profitability is seen to improve as loan loss buffers will likely go down.

“Loan-loss provisions as a percentage of gross loans will decrease to an average of about 0.8% in 2022 as asset quality stabilizes. Loan-loss provisions will still remain above pre-pandemic levels as banks continue to set aside provisions to cover lingering asset risks,” Moody’s said in a note on Monday.

Higher transaction volumes that will boost fee income will also be a boon for banks’ income, the debt watcher added.

“Net interest margins will be broadly stable even if interest rates rise because the repricing of loan rates and a gradual recovery in the origination of high-yield retail loans to pre-pandemic levels will offset increases in funding costs,” Moody’s said.

The credit rater expects non-performing loans to continue growing this year, although at a slower pace.

Moody’s said the lifting of regulatory relief measures is unlikely to lead to a sharp deterioration in the asset quality of lenders, as defaults by heavily affected small businesses and retail borrowers were mostly already recognized last year.

“Although conglomerates are a key source of systemic risk because bank loans are heavily concentrated among them, they will remain resilient because their diversified revenue sources will help avert a sharp drop in cash flow,” it said.

High default risk among small businesses affected by the pandemic such as those in the hospitality and retail sectors remain, but Moody’s believes the continued relaxation of mobility restrictions could help ease these.

Latest central bank data showed the banking industry’s bad loan ratio hit a three-month high of 4.24% in February. These borrowings increased by 2.38% to P472.664 billion from a year earlier.

In terms of capital buffers, Moody’s said lenders’ common equity Tier 1 capital ratio is likely to decrease to about 15% in 2022, which is still higher than the required minimum. Banks will likely use their capital to boost loan growth this year, it said.

Moody’s said banks’ funding conditions will be stable as they are largely backed by deposits.

“Loan-to-deposit ratios will rise to pre-pandemic levels as loan growth accelerates along with the economic recovery and deposit growth slows amid tighter liquidity in the system. However, banks will still have sufficient deposits to cover loan growth,” it said.

“Further, we expect the central bank to remain proactive in providing liquidity to the system to prevent any near-term liquidity stress that can result from a sudden change in economic conditions,” the debt watcher added.

Moody’s rates eight commercial banks and one state-led lender in the Philippines, which altogether account for about 82% of the industry’s total assets as of end-2021.

These are BDO Unibank, Inc. (baa2), Metropolitan Bank & Trust Co. (baa2), Land Bank of the Philippines (ba1), Bank of the Philippine Islands (baa2), Philippine National Bank (ba1), China Banking Corp. (baa3), UnionBank of the Philippines, Inc. (baa3), Rizal Commercial Banking Corp. (ba1), and Security Bank Corp. (baa3). — L.W.T. Noble