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Fitch: Pockets of Bank Risk Arising in Strong Philippine Economy
November 28, 2017 / 8:50 AM / 15 days ago

Fitch: Pockets of Bank Risk Arising in Strong Philippine Economy

(The following statement was released by the rating agency) SINGAPORE, November 28 (Fitch) Philippines banks continue to benefit from the strength of the economy, which is likely to remain among the fastest-growing in Asia-Pacific over the next few years. This should form a supportive backdrop for banking-sector profitability and asset quality, which helps drive our stable sector outlook for the Philippine banks. However, upbeat expectations have also driven a rise in leverage, and created pockets of risk for banks that could widen if risk appetite goes unchecked. Ongoing regulatory efforts to curb credit excesses could help temper risks to the system. Fitch upgraded a number of Philippines banks in 2014-2016, to reflect progressive economic development and the banking system's gradually improving risk and regulatory frameworks and credit fundamentals. We believe long-term prospects remain strong, but retain our measured view of Philippines bank ratings, taking into account cyclical and structural risks. Strong economic sentiment in recent years has led to rapid credit growth - around 20% yoy in September 2017 - and significant investment into real estate. Buoyant projections for property demand have resulted in supply excesses in some sub-segments. More corporates and conglomerates have ventured into property development, raising contagion risks in the event of a downturn, and Philippine banks' concentrated loan portfolios could heighten the risks in such a scenario. Meanwhile, data gaps still limit efforts to monitor and quantify credit exposures. Sustained periods of above-average credit growth are generally one leading indicator of future credit deterioration in banking systems. That said, a systemic deterioration in the Philippines is not our base case in the near term - especially if the banks can moderate growth and uphold credit standards. Gearing has risen, but most large corporates do not appear excessively leveraged. This includes most major developers, many of which have survived through previous cycles. The strong economic backdrop should help to support debt-servicing capacity and provide room for more leveraged companies to strengthen their balance sheets, if necessary. We believe the banking regulator remains vigilant against excessive risk-taking, and banks' risk and credit-provisioning frameworks continue to improve on the back of regulatory and accounting changes. The banks themselves have adequate liquidity in general, and prudent regulatory loss-absorption buffers with a system CET1 ratio of 14.2% at end-June 2017. The Philippine sovereign rating is 'BBB-'/Positive. Meanwhile, the three largest banks - the Bank of the Philippine Islands, BDO Unibank, Inc. and Metropolitan Bank & Trust Company, which each hold around 12%-18% of system assets - are rated at 'BBB-'/Stable/'bbb-'. Rated privately owned mid-tier banks - those with market shares of around 3%-5% of assets - are one notch below. The ratings incorporate systemic strengths, as well as cyclical and structural risks. Our ratings also reflect the relative strengths of the top-three Philippine banks. These include their stronger funding franchises and more diversified earnings profiles. They have generally leveraged their greater scale to invest in improved distribution, product capability and risk management, which should continue to support their overall profiles. Many mid-sized banks have also invested considerably in branches and ancillary businesses in the last few years. This is positive for their franchise strength, but the resulting benefits may only accrue gradually. Some of these banks have also expanded their loan portfolios significantly faster than the top-three banks in a bid to gain scale - at an average of around 25%-30% per year in 2012-2016. Fitch views such rapid growth with caution, as the quality of recent lending is yet to be tested. Contact: Elaine Koh Director Financial Institutions +65 6796 7239 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Tamma Febrian Associate Director Financial Institutions +65 6796 7237 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. 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