Moody’s flags default risk from retail lending

THE Philippine banking system should be stable over the next 12 to 18 months as banks are strong enough to accommodate “rapid” lending growth, Moody’s Investor Service said in a report on Friday even as it flagged the likelihood of higher defaults from retail loans.

“This reflects this system’s good asset performance, strong loss buffers and ample liquidity capacity, which will allow it to accommodate current rapid loan growth amid a robust economy,” the credit rater said in the Sept. 28 Banking System Outlook report.

“The banks’ asset performance will be supported by a strong economy, and the private sector’s benign leverage and debt servicing metrics,” explained Simon Chen, a Moody’s vice president and senior analyst.

The Philippines currently has a Baa2 rating under Moody’s, and the ratings agency’s stable banking outlook was anchored on its assumption that the economy will grow by 6.5% this year and by 6.8% in 2018, according to the report.

The government has officially set a 6.5-7.5% gross domestic product (GDP) growth target this year, and a 7-8% goal for 2018.

Moody’s said it expects credit metrics for Philippine lenders’ corporate customers will remain sound. However, it noted that non-performing loans could swell amid retail loans’ growing share in banks’ portfolio.

“Such loans tend to show higher delinquency rates when compared with corporate loans,” said Mr. Chen.

Due to rising credit growth, Moody’s said that capitalization will likely weaken in the next 12-18 months, noting insufficient internal capital generation and the adoption of Philippine Financial Reporting Standards 9 by 2018.

“Moody’s stress test results show that the banks’ loss absorbing capacity is strong. And, their strong and proven access to the external capital markets will also mitigate potential pressure on their capital levels,” it said, while noting ample liquidity given banks’ strong deposits base and little reliance on short-term funding.

In effect, most banks will comply “comfortably” with the Basel III liquidity coverage ratio framework, effective next year.

The ratings agency said that profitability would remain stable as banks’ net interest margins improve given the rebalancing of loan exposure in favor of higher yielding segments. However, that will be slightly offset by a gradual increase in credit and operating costs, Moody’s said.

Moody’s rates nine commercial banks here whose combined assets represent about 75% of total banking system. – Elijah Joseph C. Tubayan