Banking system still weak — S&P

MELBOURNE – The Philippine banking system remains weak by global standards, with recent political and economic events further exacerbating the sector’s systemic problems.

The much-needed infusion of capital to individual financial institutions is being hindered by the desire of larger shareholders to not weaken their existing shareholdings.

Concurrently, there is weak external investor sentiment for investment in individual Philippine banks as a result of a lack of operational transparency, and economic and industry risk concerns.

"This, coupled with sluggish loan demand and poor profitability, which dates back to the 1997 Asian economic crisis, leaves the system increasingly vulnerable to credit, market, and operational risk issues," said Jason Hill, associate director, Financial Services Ratings.

The fragility of investor and stakeholder confidence during the recent political instability resulted in heightened deposit mobility from which the banking sector is still to fully recover.

"Profitability after loan loss provisioning of many of the sector’s banks remains anemic, and nonperforming assets continue to increase within those institutions where a timely resolution of these issues is most important," added Hill.

With a dearth of creditworthy borrowers, the banking sector is finding loan growth and improved profitability difficult to achieve.

The banking sector continues to remain burdened by a high level of restructured assets and real and other properties owned (ROPOAs) by global standards.

Standard & Poor’s includes ROPOAs in its nonperforming asset ratios because historically, realizing the full value of these assets in a timely manner has been difficult in a banking and economic system that is under stress.

The management time and resources needed to manage these assets, and the ultimate realization process are a diversion from the banks’ core operations, during a period when operational efficiency is most important.

"What has traditionally occurred is that a number of institutions attempt to realize similar assets into a market already characterized by weak demand, resulting in a substandard outcome," said Hill.