Philippine banks unlikely to face significant risks from FX volatility

PHILIPPINE BANKS are unlikely to face significant risks from foreign exchange volatility as their dollar exposures are low, analysts from Moody’s Investors Service and Fitch Ratings said.

“C�ܰ�����Գ��� fluctuations, in particular, a weaker peso, would have limited impact on Philippine banks’ liquidity and capital given most of the banks are funded by local currency deposits and have a relatively low share of unhedged foreign currency borrowings,” Moody’s Investors Service Financial Institutions Group Analyst Joyce Ong said in an e-mail.

Moody’s likewise said in a report released on Monday titled “Foreign Currency Risk is Acute for Some Banking Systems” that foreign exchange risk is low for banks in the Philippines.

It said banking systems in countries such as the Philippines, Indonesia, Vietnam, Chile, Cote d’Ivoire, and Guatemala have minimal exposure denominated in dollars compared with other economies in the region.

“On the other hand, Philippine banks could see some uptick in problem loans from corporate borrowers that derive their earnings in pesos but are heavily reliant on foreign currency borrowings, such as those in the import business, as these companies face higher debt burden with weaker pesos and elevated refinancing risks amid tight dollar liquidity,” Ms. Ong said.

“But the exposure to such at-risk corporate borrowers is small in the Philippine banking system and we expect overall asset quality to remain manageable given the banks lend mostly to local corporates that have diversified cash flows and buffers to withstand currency fluctuations,” she added. 

The peso this year slumped by as much as 13.6% against the dollar from its P51 close on Dec. 31,2021, hitting a record low of P59, last seen on Oct. 17, due to the hawkish stance of the US Federal Reserve.

The local unit has since bounced back, ending at P55.45 a dollar on Wednesday, up by 52.5 centavos from its P55.975 close on Tuesday, based on data from the Bankers Association of the Philippines.

“Philippine banks generally only have moderate direct foreign exchange (FX) exposures, so we don’t see movement in the FX market posing a huge risk to their balance sheets” Fitch Asia-Pacific Financial Institutions Director Tamma Febrian said in an interview with ����ý.

He added that only 8% of Philippine banks’ loans are denominated in dollars, while on the funding side, around 15% of their deposits are denominated in foreign currency.

“We could see some repercussion on the banks’ asset quality should FX continue to fluctuate, in particular for borrowers who have borrowed a significant proportion in foreign currency and have unhedged exposures,” he said.

Mr. Febrian said these borrowers, such as firms in the energy sector, rely heavily on import materials and may see their cash flows challenged by volatility in the foreign exchange market as this would directly impact their input costs.

He added that borrowers are more concerned about uncertainties in cash flow management.

“Right now, if they see that the peso is going to start stabilizing to a level where they are a little bit more comfortable in the past few years, I think that’s good in terms of their cash flow,” he said. 

On the other hand, currency fluctuations could also support banks’ profitability with regards to their trading gains, Mr. Febrian said.

“For some banks, we did see a bit of a spike on trading gains in recent quarter on the back of the movements in the FX currency as they reap benefit from the wider bid-ask spread,” he said.

“But in recent weeks, we have seen some stabilization in the USD/PHP. Overall, we don’t expect the movements in the FX market to have significant impact for the banking sector’s financial performance over the next few quarters,” Mr. Febrian added. — Keisha B. Ta-asan