Moody’s revises PH banking outlook

CREDIT ratings agency Moody’s Investors Service has revised its outlook for the Philippines’ banking system to stable from negative.

“We have changed the Philippines’ banking system outlook to stable from negative to reflect our expectations that a mild economic recovery will support the operating environment for banks,” said Moody’s in its analysis on Tuesday.

The debt rater estimates the Philippine economy to recover at 7 percent this year.

“However, a resurgence in infection rates and a reinstatement of some social-distancing measures will slow the economic recovery in first half of 2021,” it added.

Moody’s likewise said asset risks remain high because of a prolonged curtailment of business activity, a high unemployment rate and weak consumer sentiment.

“Ongoing social-distancing measures, though less restrictive than in 2020, amid a high unemployment rate and weak consumer sentiment will continue to weigh on the debt repayment capacity of retail borrowers and some small- and medium-sized enterprises,” it added.

Large corporate groups’ debt repayment capacity, which Moody’s said, deteriorated materially in the previous year, remains a key source of systemic risk because banks’ loans are heavily concentrated on them.

Moreover, Moody’s said Philippine banks will maintain sufficient capital buffers as internal capital generation will keep pace with capital consumption, with credit growth likely to remain below prepandemic levels.

“However, any material downgrades of internal ratings of borrowers would increase the capital that banks need to set aside for those exposures, which would reduce their capital ratios,” said Moody’s.

Moody’s also sees credit costs to decrease as banks already set aside significant amounts of loan-loss provisions in 2020 in anticipation of growth in problem loans, although it is expecting these costs will remain high because of lingering asset risks.

“Loan yields will decline as banks reprice their loans at lower rates amid abundant liquidity and weak credit demand. A combination of these factors will keep banks’ profitability at 2020 levels,” it said.

Moody’s said funding conditions will remain favorable since the system is largely deposit funded, and risks to the stability of banks’ deposit bases are low.

“Further, the central bank has been proactive in providing liquidity to the system to prevent any near-term liquidity stress that can result from a sudden change in economic conditions,” Moody’s said.

Also, the debt watcher said it is unlikely for the government adopt a bail-in regime in the next 12 to 18 months as it will prioritize systemic stability and support for rated banks when needed.