CREDIT rating agency Moody’s Investors Service yesterday changed the outlook for Philippine banks to negative from stable on perceived weaker operating environment as a direct result of the enhanced community quarantine in Luzon.
In a statement, Moody’s said a shutdown of the Luzon island, which includes Metro Manila, “will negatively impact the near-term economic outlook for the Philippines, raising asset risks and increasing pressure on profitability for banks.”
“The coronavirus outbreak will result in a material slowdown in economic growth in 2020. Large parts of the country are under a lockdown, which will severely constrict economic activity,” Moody’s said.
It noted that with the number of confirmed coronavirus cases increasing, restrictions on activity “may remain in place for a prolonged period, further weakening the economic outlook.”
Moody’s also stressed remittances may decline due to disruptions in the Middle East and the United States, the two largest origins of remittances to the Philippines.
Moody’s maintained that key asset risks for Philippine banks stem from concentrated exposures to large domestic conglomerates.
“These business groups may withstand immediate disruptions but if the situation persists for a prolonged period, debt payment capacity of weaker companies will deteriorate materially. Most conglomerates have significantly increased investment in the past few years, which has resulted in growth in their debt,” Moody’s said.
“Because banks’ loans are heavily concentrated on them, even a default by one of them will weaken asset quality in the overall banking system,” it also said.
“The quality of loans to small and medium-sized enterprises (SMEs) and retail borrowers will weaken because they have limited buffers against stress,” Moody’s added.
Philippine banks’ credit costs are also seen to 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,” Moody’s said.
However, Moody’s said capitalization of Philippine banks will be stable at strong levels even as growth in both retained earnings and loan growth slows.
“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,” Moody’s said.
“We expect the government to prioritize systemic stability and support for rated banks when needed. Reflecting this, we continue to incorporate a very high level of government support in the ratings of the three largest banks and a high level of support for smaller banks,” it added.
Moody’s also changed the outlook for the banking systems on 11 other Asia-Pacific countries — Australia, China, India, Indonesia, Korea, Malaysia, New Zealand, Singapore, Taiwan, Thailand and Vietnam.
It has maintained its negative outlook on the banking systems of Hong Kong and Japan.
