DBP Daiwa says Moody's concerns exaggerated

MANILA, Philippines -  DBP Daiwa Capital Markets Phils. Inc. believes that the concern of New York-based Moody’s Investors Service about higher risk taking by banks operating in the Philippines under the revised reserve requirement policy of the Bangko Sentral ng Pilipinas (BSP) is a bit exagerated.

While the reduction in the reserve requirement could free up up to P150 billion to the financial system, Daniel Picache of DBP Daiwa pointed out that additional funds would not translate to unecessary risk taking by banks.

“We don’t believe this will lead to irresponsible risk-taking by the Philippines banks,” the analyst said.

Moody’s earlier said the central bank’s revised guidelines on the reserve requirement policy are seen as credit negative for banks operating in the Philippines.

Aside from resulting in lower interest yields, Moody’s claimed that the changes would also result in potential second-round effects on credit profiles if banks offset higher margin pressure by accepting more credit risk and relaxing their underwriting standards.

 “This may involve increased lending to borrowers with poorer credit profiles, lending on an unsecured basis without sufficient credit mitigation, and lending at higher loan-to-collateral values,” Moody’s warned.

The additional credit exposures would boost the banks’ loan margins immediately but would also increase the banks’ risk profiles and eventually hurt their risk-adjusted profits.

However, Picache pointed out that banks operating in the Philippines are among the most underleveraged with average assets to equity of 10 times for 2012 and with under-lent balance sheets in the region with 71 percent or the second lowest after Hong Kong.

He added that the reduced reserve requirement ratio of 18 percent would still be one of the highest in the region

“This will actually limit the banks from taking full advantage of the low funding cost of their deposits amid resurgent credit demand and the normalization of the rate cycle,” Pichache explained

Furthermore, he added that the industry’s robust capital adequacy ratio (CAR) of 16.1 percent which is the third highest in the region as well as its sufficient loan-loss coverage would serve as buffers for incremental risk taking activities arising from the changes of the central bank’s reserve requirement policy.

The investment bank added that the non-remuneration of the reserve requirement that previously earned four percent per annum in interest rate would have drastic effect on net interest margins as stated by Moody’s.

“In our view, the cut in the reserve requirement ratio will allow the banks to improve the overall yield of their loan portfolios as they will allocate such funds to higher interest-paying assets,” Picache said.

According to him, the freed-up funds especially those previously included in liquidity reserves that earned interest rates 50 basis points lower than comparable government securities could be lent and repriced at current average lending rates of about six percent per annum.

DBP Daiwa sees a slight recovery in the industry’s net interest margin at 3.63 percent for 2012 to 2014 after averaging 3.54 percent between 2009 and 2011.

“Our views are in line with recent comments by the BSP that the banks should continue to preserve credit standards amid the boost in systemwide liquidity,” he said.

Early this year, the BSP finalized three operational adjustments in its reserve requirement policy to increase the effectiveness of reserve requirement as a monetary policy tool, simplify its implementation, and improve the monitoring of banks’ compliance.

The changes include the unification of the existing statutory reserve requirement and liquidity reserve requirement into a single set of reserve requirement; the non-remuneration of the unified reserve requirement; and the exclusion of vault cash and demand deposits as eligible forms of reserve requirement compliance.

BSP Governor Amando M. Tetangco Jr. already clarified that surveys conducted by the central bank including the recent Senior Bank Loan Officers’ Survey showed that banks have not significantly altered their respective lending standards.

This, Tetangco said, showed that the revisions in its reserve requirement policy would prompt banks into “lending to risky businesses.”

“I don’t believe banks will be drawn to that. Our surveys have shown that loan officers have not significantly altered their lending standards. This, together with sufficient liquidity in the system, should not lead to large lending to risky businesses,” he clarified earlier.