Fitch says Phl banks to remain stable despite global slowdown

MANILA, Philippines - London-based Fitch Ratings believes that Philippine banks still have the ability to withstand the global economic slowdown but warned of a possible weakening of asset quality and profitability due to the debt crisis in Europe.

Alfred Chan, director in Fitch’s Financial Institutions team, said in a report that local banks are likely to remain stable, given their ability to withstand a fresh economic slowdown and to preserve their liquidity and satisfactory capitalization.

However, Chan warned of a possible downgrade should such a downturn, particularly if sharp and prolonged, result in significant capital impairment risks for local banks.

“Nevertheless, Fitch believes this likelihood at present to be low as the banks’ non-investment grade ratings are already fairly low by regional comparison. Moreover, higher credit costs are expected to be manageable for most rated local banks, largely due to their reasonable loss-absorption buffer,” he said.

According to him, Philippine banks are not immune from the slackening global economy but the impact on the country’s banking industry would be limited.

“Although the ongoing sovereign crisis in Europe presents only limited direct impact on most domestic banks’ credit profiles, the economy and banking sector will not be immune to the growing risk of a weak global economy. In such a scenario, a weakening of asset quality and profitability cannot be ruled out,” Chan said.

He explained that the structural balance sheet issues of many major Philippine banks including concentrated loan portfolios, foreclosed properties for which reserves coverage is low and deferred charges to be a main source of impairment in a difficult operating environment.

However, he said the rating agency believes that major Philippine banks generally hold satisfactory capitalization, even after assuming “stressed” markdowns on their non-performing assets.

Under the stress tests conducted by Fitch, the core Tier 1 capital adequacy ratio (CAR) of all rated banks is likely to remain on average at around 11 percent, with the ratio for the weakest banks unlikely to fall below eight percent.

“This compares with an average core Tier 1 CAR of about 13 percent at end-September 2011, and reflects the sound capitalization of most major banks. Most Philippine banks have liquid balance sheets and deposits as their main funding source, with the system-wide loan or deposit ratio of 60 percent one of the lowest in southeast Asia,” Chan said.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed that universal and commercial banks operating in the Philippines posted a double digit growth of 12.2 percent in earnings to P69.63 billion in the first nine months of the year from P62.03 billion in the same period last year.

The universal and commercial banking industry posted a return on equity of 12.44 percent in the first nine months of the year from 12.24 percent in the same period last year as well as a return on asset of 1.52 percent from 1.44 percent.

BSP Governor Amando Tetangco Jr. earlier said that the strong earnings of universal and commercial banks this year has affirmed the financial sector policy of the central bank.

“The robust performance of the country’s banking system has affirmed the BSP’s financial sector policy,” Tetangco stressed.

He pointed out that structural reforms introduced by the bank regulator included the reduction in banks’ bad assets; the promotion of good corporate governance; the institution of greater transparency and other accountability practices and the upgrading of risk management standards.