But prolonged ME war may hurt bank profits
“We see pockets of vulnerability in energy- and interest-rate-sensitive sectors and in valuation pressures from higher bond yields. Nonetheless, the financial system remains on solid footing. Banks have adequate capital and liquidity buffers to absorb shocks and keep lending to households and firms.”
MANILA, Philippines — The Financial Stability Coordination Council (FSCC) is keeping a close watch on the fallout from the US?Iran war and mounting household and corporate debt levels but stressed that the banking sector remains resilient.
At its quarterly meeting on May 20, the FSCC identified the ongoing Middle East war, vulnerabilities in corporate debt and rising household debt as risks to the Philippine financial system.
It warned that a prolonged war in the Middle East could push oil prices higher, dampen market sentiment, tighten financing and dent both global and domestic economic growth.
“Geopolitical risks remain a key source of uncertainty. We are watching global developments closely to spot and address potential systemic risks,” Bangko Sentral ng Pilipinas Governor and FSCC chairman Eli Remolona Jr. said.
The FSCC consists of the central bank, the Department of Finance, Securities and Exchange Commission, Insurance Commission and the Philippine Deposit Insurance Corp.
The council also noted exposures in energy- and interest-rate-sensitive sectors as “areas to watch,” where elevated energy costs and tighter financing could weigh on firms’ debt-servicing burden and compress margins.
This could in turn affect bank asset quality, it added.
“We see pockets of vulnerability in energy- and interest-rate-sensitive sectors and in valuation pressures from higher bond yields. Nonetheless, the financial system remains on solid footing. Banks have adequate capital and liquidity buffers to absorb shocks and keep lending to households and firms,” Remolona said.
Moody’s Ratings likewise has warned that Philippine banks may see weaker profitability as high energy prices stemming from the Middle East war strain household budgets and small and medium-sized enterprises (SMEs)’ cash flows, constricting their capacity to meet debt obligations.
In a report, Moody’s said higher energy costs would hurt households’ purchasing power and SMEs’ cash flows, raising asset quality risks.
“Banks with large retail and SME books – such as in Thailand, Indonesia and the Philippines – could see weaker profitability due to growing impairment charges,” it said.
The debt watcher added that it expects some deterioration in non-mortgage retail loans across the region, with the Philippines among those vulnerable as retail loans account for 10 to 15 percent of its gross loans.
The BSP has started to require banks to build releasable capital during periods of strong credit growth and even in times of stress to sustain lending.
FSCC said household debt also remains a concern, with regulators monitoring borrowers’ ability to meet obligations as borrowing costs climb.
Last week, Remolona said the Monetary Board is weighing another rate hike ahead of its June 18 meeting. This would mark a second straight increase after the central bank raised the key policy rate by 25 basis points to 4.5 percent in April.
“The Council remains alert as borrowing costs rise and debt levels for both the household and corporate sectors continue to grow,” it said.
It is also strengthening oversight of non-bank financial institutions or NBFIs and seeking to improve how it monitors system-wide risks and interlinkages.
NBFIs include quasi-banks, investment houses, non-stock savings and loan associations, pawnshops and trust corporations.