Global debt watcher Moody’s Investors Service said the outlook for Philippine banks over the next 12 to 18 months remains stable, despite some risks such as higher inflation and interest rates.
Moody’s said in a banking system outlook for the Philippines that the robust economy and solid bank fundamentals supported stable outlook, although it identified the accelerating inflation rate as one of the risks the industry should watch out for.
The outlook for domestic banks has been stable since November 2015. Moody’s said the stable outlook reflected the banks’ good asset quality, strong loss buffers, and ample liquidity, allowing for the accommodation of rapid loan growth in a robust economy.
“The operating environment will continue to be supportive for banks, with GDP growth to slow but remain strong compared to the Philippines’ own historical rates and growth in peer economies in the region,” Moody’s vice president and senior credit officer Srikanth Vadlamani said in the report.
“Specifically, we forecast the country’s real GDP will grow 6.3 percent and 6.2 percent in 2018 and 2019, respectively—rates that are among the highest in the region, although lower than the 6.7 percent recorded in 2017… However, accelerating inflation is a risk,” Vadlamani said.
Inflation in October was unchanged at a nine-year high of 6.7 percent, the same rate in September, on faster increases in the prices of food and oil. This brought average inflation in the first 10 months to 5.1 percent, above the target range of 2 percent to 4 percent for the year.
Higher inflation was identified as one of the reasons GDP growth in the third quarter slowed to 6.1 percent from 7.2 percent a year ago and 6.2 percent in the second quarter.
The Philippine Statistics Authority said high inflation caused the slowdown in household spending. The decline in agricultural output also pulled down the gross domestic product during the period.
Moody’s assesses six key drivers for the banking system’s outlook, including operating environment (stable); asset quality (stable); capital (stable); funding and liquidity (deteriorating); profitability and efficiency (improving); and government support (stable).
It said the favorable macroeconomic factors would underpin asset performance even as loans grow rapidly, but sharper-than-expected increases in interest rates and a heavy concentration of exposures to large conglomerates posed key risks to asset quality.
“Capital ratios will decline due to fast loan growth, but the banks’ ability to raise external capital will limit capital erosion. Consequently, the capital ratios of Philippine banks will remain among
the highest in Asia and will continue to be a key credit strength,” Moody’s said.
“Net interest margins will improve—thereby raising profitability—as a result of rising interest rates. Because a large share of Philippine banks’ deposits comprise current and savings accounts, which tend to be relatively insensitive to changes in overall interest rates, funding costs will not rise as fast as lending rates even as term deposit rates will see a sharp increase. The result will be wider margins,” it said.
Moody’s also said funding would tighten due to rapid loan growth. It said growth would outpace deposit growth, further pushing up loan-to-deposit ratios, which had been rising. It said local currency funding was particularly tight, with the system-wide local-currency LDR exceeding the overall LDR.
“Government support will remain strong for the large banks. In addition, the government’s capacity to provide support in times of stress has improved, but smaller banks will receive less support than systemically important banks,” Moody’s said.
The Philippines currently enjoys an investment grade rating of “Baa2” from Moody’s.