INTERNATIONAL credit watcher Moody’s Investors Service announced on Tuesday that they have reverted their assigned outlook to the Philippine banking sector back to “stable” from “negative.”
In an outlook note, Moody’s said the main basis of their action reflects their expectations that a “mild economic recovery” will support the operating environment for Philippine banks. The ratings agency, however, warned that asset risks remain high because of a “prolonged curtailment” of business activity, high unemployment rate and weak consumer sentiment.
A Moody’s rating outlook is an opinion regarding the likely direction of a rating over the medium term. Having a negative outlook means that the rated system will likely face a downgrade, while a stable outlook means that the current rating will hold barring unforeseen circumstances.
Moody’s acknowledges that the resurgence in infection rates in the country, which led to the re-imposition of stricter movement and travel restrictions, will slow the economic recovery in the first half of 2021.
However, even with a gradual recovery, banks’ operating environment is still expected to be stable.
The credit watcher particularly cited sufficient capital buffers, stable profitability and favorable funding conditions as positive support to the Philippine banking system’s outlook.
“Internal capital generation will keep pace with capital consumption, with credit growth likely to remain below pre-pandemic levels. As a result, rated Philippine banks will maintain sufficient capital buffers,” Moody’s said.
“Credit costs will decrease as banks already set aside significant amounts of loan-loss provisions in 2020 in anticipation of growth in problem loans. Still, they will remain high because of lingering asset risks. On the other hand, trading income is likely to decline as markets turn less volatile. A combination of these factors will keep banks’ profitability at 2020 levels,” the credit watcher added.
Since the local banking system is largely funded by deposits, Moody’s said the risks to the stability of these 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. The weak credit demand will also help banks maintain ample liquidity buffer,” Moody’s said.
What the credit watcher expressed concern about, is the local banking system’s asset risks, which remains high. Moody’s forecasts nonperforming loans of the local banking system to increase in 2021 as loan moratoriums expired at the end of 2020.
“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,” Moody’s said.
“Large corporate groups’ debt repayment capacity deteriorated materially in 2020 and remains a key source of systemic risk because banks’ loans are heavily concentrated on them,” it added.