PH banks seen mostly ‘resilient’ to shocks

The Philippine banking sector remains resilient to shocks as key players are well-capitalized, but smaller banks need guidance from regulators, according to Asean+3 Macroeconomic Research Office (AMRO).

The Singapore-based think tank stress-tested 17 Philippine banks using three adverse scenarios: recession, sharp interest rate hike and a combination of these two shocks.

AMRO noted that although the pandemic-induced surge in bad loans had abated with the recovering economy, it had to assess the banking sector’s resilience to economic or financial risks.

“The stress test results suggest that the credit losses of the Philippine banking sector increase across various shocks,” AMRO said.

“However, the Philippine banking sector remains resilient to shocks as the banks are well-placed to meet Bangko Sentral ng Pilipinas’ capital requirements,” it added.

AMRO added that despite the banking system being quite resilient, “a few” small and medium-sized banks may be vulnerable, given their lower capital adequacy ratios.

Tending the weak

Particularly seen vulnerable are small and medium-sized banks that are more concentrated in certain sectors, such as trade or tourism and specific groups of borrowers, like medium-sized corporations.

AMRO further said that while the local central bank had been closely monitoring and providing guidelines to systemically important banks to mitigate any systemic risk, smaller players may need more attention as they had smaller buffers and relatively vulnerable balance sheets.

“The BSP can offer help in designing a recovery and resolution plan for small and medium-sized banks,” it said.

“In addition, the BSP can provide support on liquidity and new financial tools for these banks,” AMRO added. “For example, the BSP can provide policy support to guide the small and medium-sized banks to invest in green and sustainable projects.”

For all banks, AMRO suggested that regulators:

ʎ provide guidance on formulating forward-looking risk assessment and risk management scheme;

ʎ develop and strengthen preemptive, risk-based provisioning guidelines to absorb potential losses and require sufficient provisioning; and,

ʎ deal with potential credit losses by enforcing regulations, such as increasing retained earnings and restricting dividend distribution, to maintain a higher capital adequacy ratio until pandemic-related uncertainties dissipate.

AMRO is an independent organization that acts as policy advisor to Asean+3, which includes the 10 Southeast Asian nations (Philippines, Indonesia, Malaysia, Thailand, Singapore, Brunei, Cambodia, Laos, Myanmar and Vietnam) plus China, Japan and South Korea.