Fitch: Bank buffers adequate to cushion impact of POGO ban

MANILA, Philippines — The ban on Philippines offshore gaming operators (POGOs) could hurt the asset quality and performance of Philippine banks, but loss-absorption buffers will be sufficient to weather limited losses, Fitch Ratings said.

In a commentary written by Fitch Ratings director Tamma Febrian and senior directors Willie Tanoto and Duncan Innes-Ker, the debt watcher said POGOs’ influence over the country’s property market has diminished since 2019 due to tighter oversight and regulations.

“We do not expect property-related losses associated with POGO closures to be significant for banks,” Fitch said.

The debt watcher noted that if the impact of the POGO ban would be greater than expected, banks are still required to demonstrate common equity Tier 1 (CET1) and total capital ratios of six percent and 10 percent, respectively, after writing off 25 percent of their real estate exposures.

This should ensure that banks’ loss-absorption buffers are aligned with their exposure to the real estate sector, Fitch Ratings said.

“We believe Fitch-rated private banks’ CET1 ratios, at around 13.6 to 16 percent in the first quarter of 2024, provide sufficient buffers to absorb POGO-related losses without pressuring their current standalone viability ratings,” it said.

Banks also posted record high margins and elevated loan growth, which would likely compensate for higher credit costs associated with potential new impairments from the POGO ban.

“We expect debt-servicing capacity to remain strong among the large listed firms that have higher reliance on POGO tenants, and estimate their EBITDA at over four times annual interest expense, even if all of their POGO tenants were to depart,” it said.

On the other hand, rising vacancies following the POGO ban may pressure rental yields, with broader impacts on real estate firms. Smaller property developers and management companies may be also more vulnerable.

However, most large operators should be able to withstand at least a 15 percent drop in overall EBITDA without significantly affecting debt-servicing capacity, Fitch said.

“Most of these large players have diversified real estate portfolios, so these effects could also be offset partially by better residential sales if interest rates fall as we expect in the second half of 2024 and 2025,” it said.

“We believe this means banking-asset impairments from real estate companies will remain relatively contained.”

Credit quality of residential mortgage and consumer loans might be affected by job losses, but additional bank-asset impairments are expected to remain relatively small as some riskier POGO-related mortgages have already soured.