PH banks can handle stress from Europe, says S&P

Standard & Poor’s said the Philippine banking sector would likely be able to withstand stress caused by the deterioration of the debt-ridden euro zone economy.

But at the same time, S&P said the banking sector in Southeast Asia should brace itself for the adverse effects of the crisis in the West, such as a potential rise in loan defaults by export-oriented clients that are exposed to the euro zone.

The credit watchdog also said the dampening effect of the euro zone crisis on Southeast Asian economies, mainly through reduced export revenues, would hit the bottom line of Southeast Asian banks.

“Southeast Asian banks are bracing for slower economic growth amid an uncertain external environment in 2012. Strong export dependency leaves the region susceptible to any external deterioration, especially the European debt crisis,” S&P said in one of its latest reports titled, “Southeast Asian Banks: Staying the Course amid a Challenging External Environment.”

Fortunately for the Philippines, S&P said, it is not as reliant on exports for economic growth as other emerging markets.

Domestic consumption accounts for as much as 70 percent of the Philippine economy.

S&P stressed, however, that the banking sector of the Philippines was not immune to the adverse effects of the euro zone crisis, but conceded that the impact would be less than that on its neighbors.

“We believe that the Philippine banking system is reasonably resilient to a slowdown in the developed markets. It is less affected by declining exports, compared with the other banking systems in the region,” S&P said.

The credit-rating firm said banks in the Philippines enjoy financial strength that can help it absorb shocks from unfavorable developments offshore.

Europe is one of the key export markets for many economies, including emerging markets in Asia.

Europe accounts for about 14 percent of export revenues of the Philippines.

The Bangko Sentral ng Pilipinas earlier expressed confidence that even if the euro zone debt crisis will drag on, the Philippine banking sector would not fail given its significant capital buffer.

The BSP said Philippine banks will likely remain profitable even as loan defaults rise as a result of exposure of corporate clients to the euro zone.

The average capital adequacy ratio (CAR) of universal and commercial banks in the Philippines stands at about 16 percent, which is above the minimum BSP requirement of 10 percent.

CAR, one of key indicators of financial health of banks, is the proportion of capital to computed risk exposure of assets of banks.

Combined net income of universal and commercial banks, meanwhile, amounted to P30.45 billion in the first quarter, up 41 percent year-on-year.