Global debt watcher Moody’s Investors Service downgraded the outlook for the banking system in the Philippines and 11 other Asia-Pacific countries to negative because of the impact of coronavirus-related disruptions that will weaken the lenders’ operating environment and weigh on asset quality.
Moody’s said in a report Thursday it also maintained its negative outlook on the banking systems of Hong Kong and Japan, which meant the outlook on 14 systems in the region became negative.
“Outlooks for the Australian, Chinese, Indian, Indonesian, Korean, Malaysian, New Zealand, Philippines, Singapore, Taiwan, Thailand and Vietnam banking systems are changed to negative. Moody’s expects that the operating environment for these banking systems will deteriorate significantly as a result of coronavirus-related disruption,” Moody’s said.
It said that changing the outlook for the Philippine banking system to negative from stable reflected expectation that a shutdown of the Luzon island, which includes Metro Manila, as a result of the coronavirus outbreak would negatively impact the near-term economic outlook for the Philippines, raising asset risks and increasing pressure on profitability for banks.
“Large parts of the country are under a lockdown, which will severely constrict economic activity. The number of confirmed coronavirus cases is increasing, so restrictions on activity may remain in place for a prolonged period, further weakening the economic outlook. Further, remittances may decline due to disruptions in the Middle East and the United States, the two largest origins of remittances to the Philippines,” it said.
Moody’s said the asset quality of domestic banks would deteriorate as economic growth slows sharply. It said the key asset risks stemmed from concentrated exposures to large domestic conglomerates. It said these business groups could withstand immediate disruptions but if the situation persists for a prolonged period, debt payment capacity of weaker companies will deteriorate materially.
Moody’s said capitalization of domestic banks would be stable at strong levels as growth in both retained earnings and loan growth slows. Rated Philippine banks are comfortably capitalized, with an average common equity tier 1 capital ratio of 13.7 percent as of the end of 2019.
It said any material downgrade of credit ratings of borrowers would increase the capital that banks need to set aside for those exposures, which would erode capitalization.
“Philippine banks’ credit costs will increase as asset quality weakens. Philippine banks credit costs have been among the lowest in Asia, benefiting from healthy economic conditions, and this has supported profitability despite low pre-provisioning profit as a percentage of assets compared to banks in other emerging markets in the region. Net interest margins will be supported by low reserve requirements but conversely lower interest rates will pressure NIM,” it said.
“The system is largely deposit funded, and risks to the stability of banks’ deposit bases are low. Further, the central bank has been very proactive in providing liquidity to the system to prevent any near-term liquidity stress that can result from a sudden change in economic conditions,” it said.