Fitch says Phl banks can weather debt crisis

MANILA, Philippines - Fitch Ratings believes that Philippine banks have enough “firepower” to survive the negative impact of the fragile economic growth in the US and the debt crisis in Europe as the Bangko Sentral ng Pilipinas (BSP) reported yesterday that the capitalization of the country’s banking system remained well above the central bank and international standards.

Ambreesh Srivastava, senior director and head of financial institutions in South Asia of Fitch Ratings, said in a press conference that the impact of what is happening in the US and Europe on Asian economies, including the Philippines would put some pressure on the performance of the banking industry.

“This will likely result in a moderation in the performance of the banks,” Srivastava stressed.

He pointed out that banks generated historically high profitabilities in 2009 and 2010 after their return on average assets were driven by their treasury profits on the back of record low interest rates.

“But clearly interest rates will not likely stay at the levels that we have. Some have started tightening their monetary policy,” he added.

In the case of the Philippines, the BSP has raised key policy rates by 25 basis points last March 24 and by another 25 basis points last May 5 as a preemptive move to keep inflation expectations well anchored amid rising oil prices in the world market. This brought the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent.

The twin action was followed by an increase in the reserve requirement for banks to 20 percent from 19 percent to siphon off at least P38 billion from the financial system to curb additional inflationary pressures arising from excess liquidity.

However, he explained that the economic uncertainties in advanced economies led by the US and the debt crisis in Europe would not have a direct impact on Asian banks unless the slowdown in growth rates would be considerable.

The perceived economic slowdown would also affect the paying ability of bank borrowers resulting to an increase in non-performing loans (NPLs) of banks.

“In general we expect some pressures on the borrowers ability to service their obligations and therefore our best case scenario really is a slight uptick in NPL ratios of many of the banking systems including in the Philippines,” Srivastava added.

He reiterated that banks in Asia including the Philippines have considerable amount of tolerance on the possible rise in credit costs on the back of their strong earnings over the past two years.

He cited a stess test conducted in the Philippines wherein banks were found to have a reasonable amount of ability to absorb any hypothetical higher credit costs.

“If credit cost rise to five percent of loans that is when their profits would perhaps disappear and capital impairment risk would become imminent. But as long as credit cost stay below that threshold, profits will obviously suffer but there is no real risk of capital impairment and government having to bail out the banks,” he added.

The BSP reported yesterday that the country’s banking system registered average capital adequacy ratio (CAR) of 16.02 percent on solo basis and 16.97 percent on a consolidated basis as of end-December 2010. Similarly, the Tier 1 capital ratios of the banking system remained high at 13.64 percent on a solo basis and 13.69 percent on a consolidated basis.

“The Philippine banking system remained stable as capital adequacy ratios of different bank categories continued to exceed the BSP’s minimum ratio of 10 percent and the Basel Accord’s standard ratio of 8 percent,” the BSP said.

It pointed out that the banking system’s CARs hardly moved from the last quarter’s 16.04 percent on a solo basis and 16.97 percent on a consolidated basis.

The growth rate of qualifying capital was matched by almost the same growth rate of risk weighted assets (RWA). Qualifying capital grew by 3.93 percent or P27 billion) on solo basis and 3.72 percent or P28.0 billion on a consolidated basis. RWA, on the other hand, increased by four percent or P171.1 billion on solo basis and 3.76 percent or P167.3 billion on a consolidated basis.

Early this month, Fitch upgraded the ratings of Philippine banks as the country’s projected sustained economic growth would help financial institutions maintain sufficient capital and liquid balance sheets in the event of a renewed global downturn.