Moody’s expects profit pressure on local banks

MANILA, Philippines—Profits of local banks may come under more pressure in the coming months as interest rates rise, bringing down the value of government securities that make up much of lenders’ assets.

Moody’s Investor Service said that while Southeast Asian banks, in general, remained strong, the tapering of the US Federal Reserve’s bond-buying program would still have its toll.

“The strengths of these banking systems are underpinned by their relatively strong capital buffers, modest levels of problem loans, high recurrent profitability and low reliance on foreign funding,” Moody’s said in a report released yesterday.

Banks in the Philippines and India could see their profits fall as a result of higher interest rates on government securities, which reduce their value. Banks in India and the Philippines are the most exposed to an increase in yields as they hold around 25 percent of their assets in securities, mostly in government bonds, Moody’s said.

“Such a substantial proportion of securities holdings is reflected in the large amount of unrealized gains both systems have reported since 2009,” the rating firm said.

“[This] could reverse once interest rates start to rise. Another consideration is that mark-to-market losses could prompt the banks to look for other avenues for profits, possibly through higher credit risk appetite,” it added.

Yields from government securities previously fell to record lows as a result of the Fed’s bond-buying program that was introduced in 2009. This form of monetary stimulus involved the purchase of $85 billion worth of mortgage-backed securities and US treasuries every month. Since the start of the year, these asset purchases have been reduced by $30 billion a month, prompting fund managers to divest from emerging markets to return to the United States.

Banks in the region are expected to fare relatively well, benefiting from supportive economic conditions, characterized by growing trade flows between Asia and the recovering economies of the US and Europe, Moody’s said.

However, the region’s banks still face risks particularly as a result of their weakening currencies, resulting in higher loan defaults on their corporate and retail exposures, especially on foreign currency loans. Weaker currencies make it more expensive for companies to repay their foreign obligations.—Paolo G. Montecillo