Philippine banks more resilient to external shocks – Fitch

MANILA, Philippines - Fitch Ratings said Philippine banks are in a better position to survive a tougher operating environment in Southeast Asia amid sluggish economic growth, depreciating currencies and softer commodity prices.

According to  Fitch, banks in member countries of the Association of Southeast Asian Nations (Asean) are facing a tougher environment resulting in deteriorating asset quality.

The debt watcher believes robust domestic demand, resilient external liquidity flows, and low private external debt would allow banks in the Philippines to shrug off external shocks.

“Philippine banks are better positioned to face the macroeconomic challenges than the other Asean banking systems,” it said.

The Philippine banking system maintained its strong performance in the first half as the system focused on capital raising initiatives to sustain the expansion in banks’ credit and securities trading activities.

Based on the central bank’s status report on the Philippine financial system for the first semester, capital ratios of banks stayed well above the minimum requirement set by the Bangko Sentral ng Pilipinas and the Bank for International Settlements.

The capital adequacy ratios of universal and commercial banks stood at 16.1 percent on a consolidated basis and 15.1 percent on a solo basis as of end-March this year.

The banking industry’s total assets also grew nine percent to P11.2 trillion as total deposits expanded by nine percent to P8.61 trillion.

Fitch added currency, credit and liquidity risks are increasingly coming into focus, and asset quality is likely to deteriorate particularly in Indonesia and Malaysia.

“That said, most banking systems are coming from a position of strength, and are reasonably well-positioned to manage the likely risks,” the debt watcher added.

“Banks now rely less on foreign capital, have better hedged their foreign exposures, and have more stringent regulatory frameworks,” Fitch said.

From a macro perspective, the debt watcher explained only Indonesia is running a current account deficit, whereas this was the case with most Asean countries prior to the 1997 Asian financial crisis.

Asean members except Vietnam are now also benefiting from the flexibility of a floating exchange rate while banks in the region have lower non-performing loan  ratios, lower loan or deposit ratios, higher capital adequacy ratios, and higher loan-loss reserve coverage.

Fitch said a more leveraged household sector that has increased significantly since 1997 is a key variable that is one key variable that is less favorable for banking sector stability.

It noted the debt to gross domestic product ratio in Malaysia has risen to 88 percent last year from 50 percent in 1997 while that of Thailand doubled to 80 percent from 40 percent.

“The risks facing Asean banking sectors are not evenly dispersed. Malaysia and Indonesia are likely to be more affected by the macroeconomic and external environment due to their greater dependence on commodities,” the debt watcher said.

Fitch added the Malaysian ringgit and Indonesian rupiah have depreciated the most since end-2013 and there are pockets of greater risk in specific sectors.

Furthermore, it said Indonesia is in a weaker position than Malaysia, with greater exposure to the potentially vulnerable mining and commodities sectors.