Philippine conglomerates remain well insulated against risks brought about by their loan-funded expansion in recent years as their revenues have risen in step to allow them to pay their liabilities, the country’s top central banker said.
According to Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr., regulators’ worries have also abated as the rate of borrowing by the country’s largest corporations had slowed by 2016 compared to previous years.
“The ability of firms to cover short-term borrowing costs, such as interest expenses, appears to be significantly adequate, with their aggregate interest coverage ratio at about five times their yearly interest expenses,” he said in an interview with international risk advisory firm GlobalSource Partners.
Data from a sample of non-financial corporations monitored by the BSP showed that aggregate debt rose over the past 10 years, but slowed down two years ago. The debt-to-equity ratio of Philippine firms declined slightly from 116.8 percent at end of 2015 to 114 percent by the end of 2016.
More importantly, Espenilla pointed out that “the rise in borrowing activities was accompanied by improving ability to generate profit, with the return-on-equity ratio nearly steady at 15 percent to 16 percent over the past four years.”
Nonetheless, he said that regulators remained on guard against large conglomerates loading up on too much debt, which might pose risks to the financial system in the future. These measures include close monitoring of credit and capital ratios not only of banks, but their borrowers as well.
“The BSP adopts a uniform stress test, which involves simulating the impact of credit and market risks on the regulatory capital ratios of banks,” the BSP chief said. “Based on these stress tests, the Philippine banking system continues to be resilient to a 20-percent write-off on their exposure to the top 20 conglomerates, with their respective stressed capital adequacy ratios still above the 10-percent minimum requirement.”
“The results provide confidence on the aggregate resilience of the banks to withstand pressure from their conglomerate exposures,” Espenilla pointed out.