The local banking industry will continue to help stabilize the country’s booming economy in the coming year, despite the risk of lower profits and tighter monetary conditions.
According to Global debt watcher Fitch Ratings, recent stress tests showed that major Philippine banks had enough buffers to absorb financial shocks. The industry’s regulator, the Bangko Sentral ng Pilipinas (BSP), also continues to keep close watch on systemic risks that may undermine the industry’s strength.
“Based on Fitch’s stress tests, however, most large banks should be able to cope with a reasonable deterioration in operating conditions, due to their funding, earnings and capital buffers,” the rating firm said in a report this week.
Fitch said two major banks in the country—namely Metropolitan Bank & Trust Co. and Union Bank in the Philippines—secured “positive” outlooks, indicating the likelihood of an upgrade in the next 12 to 18 months.
The rating firm’s outlook for the rest of the industry is stable. This reflects the industry’s high core capitalization, sound funding and liquidity, and rising loan-loss reserves.
“These strengths should offset the risks of higher credit growth in a buoyant local economy,” Fitch said.
In most countries, Fitch said, high lending growth would be a source of concern since this would indicate an overexpansion of banks’ risk portfolio, implying riskier lending practices.
But in a country like the Philippines, where credit amounts for just a third of gross domestic product (GDP), Fitch said higher levels of lending growth were understandable given the low base.
Fitch said its rating for the industry would have been higher, had it not been for long-standing issues. These include the high concentration of loans to conglomerates that dominate most major industries in the country, modest reserves for foreclosed properties, and the presence of family members as controlling shareholders in banks.
Fitch likewise noted the possibility of “irrational exuberance” that could lead to a rapid rise in asset prices and risk-taking tendencies in the next three years.
The industry’s loans are also expected to stay concentrated on local conglomerates—due partly to their likely participation in projects under the administration’s public-private partnership program.
“However, the Bangko Sentral ng Pilipinas (BSP) has been closely monitoring such broad developments, and may introduce macro-prudential measures to counter a rise in systemic risks,” Fitch said.