June 19, 2018, 7:51 pm
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S&P lifts rating of PH banking sector 

Standard & Poor’s Global Ratings (S&P) has upgraded the Philippine banking system’s rating by a notch, citing favorable economic environment that is supportive of growth of banks, sound regulations, and improving industry fundamentals and trends. 

With the upgrade, the Philippine banking sector is now classified under the stronger category of ‘6’ from the previous ‘7’.  Scores range from 1 to 10, with the latter reflecting the highest risk.

“High household consumption, investment, and exports mainly of electronics, commodities, and services continue to support economic activity. These strengths will likely be underpinned by strong household and company balance sheets, sound growth in jobs and income, inward remittance flows, and an adequately performing financial system,” S&P said in its latest Banking Industry Country Risk Assessment (BICRA) report on the Philippines released Tuesday.

It positively mentioned the Duterte administration’s Tax Reform for Acceleration and Inclusion (Train) and infrastructure agenda, saying these would respectively help improve the government’s fiscal situation and overall economic performance, which in turn will provide a favorable operating environment for banks. 

“The Philippine government is enacting increasingly effective fiscal policies, marked by improvements to the quality of expenditures, still-limited fiscal deficits, and low levels of general government debt. At the same time, the economy continues to achieve consistently robust growth.

In our view, the Philippines’ institutional capacity has started to improve, as seen in its increasingly sustainable public finances,” the rating agency added. 

S&P also cited the country’s strong external payments position, saying this “forms the cornerstone of the Philippines’ credit strengths.”

With ample foreign exchange reserves, which amounts to about $80 billion, the Philippines is able to cushion the impact of external shocks and maintain a stable economic environment that is beneficial for businesses, including banks.  

On the regulatory environment, S&P said banking regulations in the Philippines are at par with, and in some cases even more stringent than, international standards. 

With the kind of regulations in place, S&P added, the risk of a credit-fueled asset bubble in the country is low. 

“Pre-emptive prudential measures to control banks’ real estate exposures have led to moderation of credit growth in this segment, which mitigates the build-up of economic imbalances. We expect that credit losses will remain low, supported by robust economic growth and healthy corporate balance sheets…” it added. 

S&P also cited a host of other factors seen to have reduced credit risks in the Philippine banking sector. These include their low exposure to bad debts, with the non-performing loans ratio standing at a mere 1.7 percent as of end-2017, conservative underwriting standards and well established credit approval process of banks, as well as low exposure to foreign currency denominated debt. 

Other favorable fundamentals that help maintain the soundness and stability of the Philippine banking system include continually rising deposits and other assets, as well as strong capitalization.  As ofend-December 2017, capital adequacy ratio (CAR) was 15.0 percent, higher than
BSP’s requirement of 10.0 percent and international standard of 8 .0 percent.  

Meantime, S&P also favorably cited the establishment of a central credit registry.

“We believe the risks associated with consumer lending have diminished with theestablishment of a centralized credit registry and banks’ improving underwriting practices in this segment,” it added.

S&P acknowledged the work done by government-led Credit Information Corp. over the last five years in collecting data on credit history of borrowers that are accessible to financial institutions. It also cited as a positive development the expected issuance of credit reports and credit scores by accredited credit bureaus starting toward the end of 2018. 

In response to the BICRA upgrade from S&P, Bangko Sentral ng Pilipinas Governor Nestor A. Espenilla, Jr. said it reflected the sustained robust performance of the Philippine banking system amid a sound regulatory environment. 

He said the BSP is pursuing more reforms to further improve capacity to regulate the banking sector and support the industry’s continued development. 
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