S&P upgrades credit risk assessment on Philippine banks

MANILA, Philippines — S&P Global Ratings upgraded its assessment on the country’s banking industry amid reduced credit risk with the establishment of credit bureaus as well as improving credit fundamentals.

In its latest Philippine banking sector review, S&P revised its Banking Industry Country Risk Assessment (BICRA) on the Philippines, a notch higher to group 6 from group 7.

“In our view, the credit risk facing Philippine banks has reduced with the establishment of credit bureaus and banks’ improving underwriting practices in the consumer loans segment,” S&P said.

S&P’s risk methodology evaluates the strengths and weaknesses of the broader operating environment for banks by assessing economic and industry characteristics in a standardized framework.

A BICRA is scored on a scale from ‘1’ to ‘10’, ranging from the lowest-risk banking systems (group 1) to the highest-risk (group 10), with a time horizon of three to five years, similar to that of investment-grade ratings in the ‘BBB’ and higher categories.

State-run Credit Information Corp. (CIC) has been collecting and cleaning five-year data on the credit history of borrowers. Participating financial institutions have access to this database.

Accredited credit bureaus are set to dispense credit scores and reports by the end of the year.

S&P said better data availability of credit history is positive for the consumer segment where credit quality has historically been constrained by lack of information.

“In our view, clarity on creditworthiness should foster risk based pricing in the segment. We believe this will strengthen the underwriting standards in consumer lending and, over the long-term, better transparency should lower consumer non-performing loans closer to the overall banking system NPLs,” it said.

It noted Philippine banks have been expanding their consumer loans portfolio in pursuit of higher margins. While the yields are better than corporate loans, the segment has historically had higher delinquencies.

Data showed the ratio of NPLs in the consumer loans portfolio remains higher than the total NPL ratio of 1.7 percent at 3.9 percent as of end-December. However, NPLs in banks’ consumer loans portfolio have been consistently declining from 5.3 percent as of Dec. 31, 2013.

“The narrowing of the gap with total NPLs points to banks’ gradually refining their risk management practices in this segment and making better lending decisions,” S&P said.

Consumer loans corner a smaller portion of banks’ lending portfolios at 17.6 percent as of end-2017 from 16 percent as of end-2013.

The rating agency pointed out the strong gross domestic product (GDP) growth, low interest rates, and adequate liquidity in the Philippines would continue to support the debt-servicing capacity of corporate borrowers, in our view, which constitute about 80 percent of the banking sector loans.

“We expect the banking sector’s credit losses from the corporate sector to remain low. Diminished risks from the consumer segment along with sustained credit performance of the corporate segment should support the favorable asset quality trends at Philippine banks,” it said.

S&P has also revised its economic risk trend for the Philippines to stable from positive.