MANILA, Philippines--The Philippine banking system has to carry out deeper structural reforms if it hopes to cope with the "difficult" operating environment, evolving regulatory frameworks and "low" level of government support, according to global credit watchdog Moody's Investor Service.

In a banking report released Tuesday, Moody's said reforms undertaken since the last crisis--the Asian currency turmoil that erupted in 1997 and which, in turn, led to unprecedented currency devaluations and corporate defaults--had helped improve the regulatory and supervisory system.

"Confidence in these efforts would be further enhanced by greater transparency, formalization of procedures and institutionalization of the reforms," Moody's said.

Moody's also reported that the Philippines is a "low-support" country, meaning that the banking sector rates "low" in importance relative to the size of the economy, the uneven history of past government interventions and limits on deposit insurance coverage.

"These challenges outweigh the benefits derived from the dominant role of banks in the financial system and contribute to the low intrinsic financial strength and deposit ratings of Moody's-rated Philippine banks," the report said.

The credit rating firm noted that Philippine banks have historically faced little competition from the domestic capital markets or nonbank financial institutions. As the dominant financial intermediaries, Moody's said they have therefore developed strong earnings profiles, buttressed by the fact that most of the large banks have universal banking licenses through which they can offer a wide range of financial services.

"However, banks in the Philippines are exposed to potentially high credit losses (as was experienced following the Asian financial crisis) due to their operating environment," Moody's said. "In addition to the moderately high volatility in the country's business cycles, credit losses have historically been exacerbated by weak governance."

While large remittance inflows sent by overseas Filipino workers provide key support for the economy, on the whole, Moody's said the domestic economy was dependent on a handful of engines for growth, namely: Agriculture, electronics manufacturing, tourism and business process outsourcing.

Bank supervision in the Philippines, Moody's said, has been improving. However, it said a number of legal and regulatory gaps remained, limiting their overall effectiveness. Attempts to close these gaps through additional legislative reform have proven unsuccessful to date, it reported.