Low-income problem among risks to banks
Despite the robust economic growth in the past few years, the low-income level prevailing in the country poses risks to the banking sector as many borrowers are unable to pay back their loans, according to debt watcher Standard and Poor’s (S&P).
In a report on the Philippines’ banking industry, S&P said the sector’s strengths include restrained risk appetite among banks, a high level of stable core customer deposits that support system-wide funding, as well as low risk of a sharp correction in property prices.
“The industry’s risk appetite is generally restrained, and banking products are straightforward. A high level of stable customer deposits supports banks’ funding profiles despite banks having few funding alternatives,” it explained.
However, S&P also flagged the weaknesses coming mostly from economic and regulatory risks. “Our assessment of economic risk in the Philippines reflects the country’s low-income level and inadequate infrastructure, which together hamper economic diversification and growth. The country’s weak payment culture and rule of law heighten credit risk. Pre-emptive prudential measures to control banks’ real estate exposures has led to moderation of credit growth, which mitigates the buildup of economic imbalances.”
S&P said that while it was seeing the economic trend in the country as “stable” in the medium term, “the Philippines’ low-income level remains a key constraint to economic resilience despite a prosperous economy.”
“While the credit quality of the banks has been improving over the years, we believe poor transparency and inefficient legal infrastructure may limit any material reduction in the credit risk of banks operating in the country,” it added.
On the regulatory front, S&P said “standards are broadly in line with international standards, but inadequate legislation and legal protection for supervisory staff weaken the regulator’s ability to implement prudential measures.”
Payment culture and rule of law, S&P said, remained “weak,” and “had resulted in low efficiency in the legal system and caused significant delays and uncertainty in the recovery of bad loans.”
As a whole, S&P said “the Philippine banking industry is moderately unstable, in our opinion.”
“The banking system is overcrowded with 40 commercial banks, 68 thrift banks, and 524 rural banks as of Dec. 31, 2015. While the number of banks operating in the Philippines has been decreasing over the past decade, most of the consolidation continues to happen among small rural banks, which account for only a fraction of total loans. Commercial banks continue to dominate the market, with more than 80-percent share of total loans,” it noted.
Also, despite liberalization allowing the entry of foreign banks and lifting of restrictions on granting of new licenses by 2018, S&P said it was still expecting that “large domestic banks that are part of family-owned conglomerates will continue to dominate the system.”Ben O. de Vera
