The local banking system is expected to stay healthy despite local and international headwinds, given the “drastic improvements” in the last decade, global debt watcher Moody’s Investor Service said.
In a statement issued on Monday, Moody’s said it was maintaining its positive outlook on the Philippine banking system for the next 12 to 18 months, as it has been since December 2012.
The positive assessment for the industry matches Moody’s outlook for the country’s sovereign debt, which improved to investment grade earlier this year.
“The positive outlook is in line with our expectation that gross domestic product (GDP) growth in the Philippines will remain one of the strongest among emerging-market economies over the next 12-18 months,” Moody’s assistant vice president Simon Chen said.
“In that context, credit growth is likely to range from 13 to 15 percent on an annual basis, while asset quality will be supported by the robust economy and relatively low retail credit penetration,” he said.
A positive outlook indicates the likelihood of a rating upgrade in the next 12 to 18 months.
The Moody’s report says that the positive outlook for the banking system is based on an assessment of five factors: the country’s positive operating environment, stable asset qualities and capitalization levels, ample liquidity, stable profitability and efficiency and “positive systemic support.”
Moody’s pointed out that the Philippine government’s preliminary forecast after Typhoon “Yolanda” hit Eastern Visayas early last month was that the storm would lower GDP growth this year by 0.3 to 0.8 percentage point.
In contrast, the country’s GDP rose 7.4 percent year-on-year in the first nine months of 2013.
“The system’s level of nonperforming assets should remain stable, after dramatic improvements in recent years, while provision coverage continues to rise,” Moody’s said.
In addition, despite strong loan growth in recent years, household indebtedness and corporate leverage remained low, with total system credit to GDP at about 40 percent, and on a slightly declining trend.
“We expect the Philippines’ robust economy and low interest rates to continue being supportive of borrowers’ ability to service debt. In addition, the low interest rate environment should result in the banks focusing on growing higher-yielding segments like small- and medium-size enterprises and retail,” Chen said.
Moody’s also said the banks were likely to open more branches next year, once restrictions on doing so in certain areas of Metro Manila were lifted by the middle of next year. Moody’s said the restrictions were intended to encourage banks to set up operations in rural areas and to limit the banking system’s concentration in Metro Manila.
On capitalization, Moody’s says the banks continue to be well-positioned to meet the new Basel III requirements coming into effect on Jan. 1, 2014.
The rating firm added that banks in the country had no problem maintaining their liquidity profiles, which were among the strongest globally, given that they were fully funded by customer deposits, reducing the need to borrow from the wholesale market.