Strong economy prompts S&P to hike PH banks’ credit rating

The credit rating of the Philippine banking system was raised by a notch by Standard & Poor’s (S&P) Global Ratings, citing favorable economic environment that is supportive of growth, sound regulations and improving industry fundamentals and trends.

With the upgrade, the local banking sector is now classified under the stronger category of “6” from the previous “7” on a scale of 1 to 10, with the latter reflecting the highest risk.

“High household consumption, investment, and exports (mainly of electronics, commodities, and services) continue to support economic activity,” S&P said in its latest Banking Industry Country Risk Assessment (Bicra) report on the Philippines released on Tuesday. “These strengths will likely be underpinned by strong household and company balance sheets, sound growth in jobs and income, inward remittance flows and an adequately performing financial system.”

It mentioned the Duterte administration’s Tax Reform for Acceleration and Inclusion (TRAIN) and infrastructure agenda, saying these would respectively help improve the government’s fiscal situation and overall economic performance, which in turn would provide a favorable operating environment for banks.

“The Philippine government is enacting increasingly effective fiscal policies, marked by improvements to the quality of expenditures, still-limited fiscal deficits and low levels of general government debt,” the rating agency said.

“At the same time, the economy continues to achieve consistently robust growth,” it added. “In our view, the Philippines’ institutional capacity has started to improve, as seen in its increasingly sustainable public finances.”

S&P also cited the country’s strong external payments position, saying this “forms the cornerstone of [the Philippines’] credit strengths.”

With ample foreign exchange reserves, amounting to about $80 billion, the Philippines is able to cushion the impact of external shocks and maintain a stable economic environment that is beneficial for businesses, including banks.

On the regulatory environment, S&P said banking regulations in the Philippines were on par with, and in some cases even more stringent than, international standards.

With the kind of regulations in place, S&P added the risk of a credit-fueled asset bubble in the country was low.

“Preemptive prudential measures to control banks’ real estate exposures have led to moderation of credit growth in this segment, which mitigates the buildup of economic imbalances,” S&P said. “We expect that credit losses will remain low, supported by robust economic growth and healthy corporate balance sheets.”