Fitch lauds central bank regulations

MANILA, Philippines - Fitch Ratings said the progressive banking regulations adopted by the Bangko Sentral ng Pilipinas (BSP) continue to help the Philippines survive external headwinds.

In a special report titled Philippine Large Banks Peer Review: Strengthening operating environment supports banks’ ratings,” Fitch said regulation continues to strengthen with changes over the past couple of years focused on enhancing risk-management and related-party lending frameworks, and measures to forestall excessive real estate risk-taking.

“Recent initiatives include more robust guidelines on banks’ risk-management and related-party frameworks, and additional rules to temper real-estate risk-taking,” it said.

The debt watcher said family-owned conglomerates control major banks including BDO Unibank Inc. of retail and banking magnate Henry Sy, Ayala-led Bank of the Philippine Islands (BPI), and Metropolitan Bank & Trust Co. of taipan George SK Ty.

Fitch said checks and balances exist to counter potential conflicts of interest arising from conglomerate ownership of banks.

“These include rules requiring independent director representation, board responsibility for the governance of related-party transactions, limits on related-party exposures, and disclosure of related-party transactions and balances. Board-level related-party transaction committees, consisting of a majority of independent directors, must review all material related-party transactions and ensure they are conducted on an arms-length basis,” it added.

Fitch explained related-party balances are typically low among privately owned Philippine banks rated by the debt watcher with directors, officers, stockholders, and their related interests (DOSRI) loans below three percent.

The BSP’s Monetary Board earlier approved amendments to selectively ease restrictions on lending to DOSRI, affiliates, and other related parties to support financing of productive sectors particularly infrastructure projects.

The bank regulator also strengthened the oversight and control standards for managing related party transactions due to the unique landscape of the country’s financial industry composed of banks owned by conglomerates or small network of businesses owned by the same family group.

The real-estate sector has been a significant driver of economic growth over the past few years, and many conglomerate groups include property arms increasing the risk of contagion between conglomerates and the banking sector in the event of a property crash.

The BSP has launched the Residential Real Estate Price Index (RREPI) to help address concerns of a “bubble” in the country’s property sector brought about by the improving purchasing power of Filipinos.

However, Fitch said many of the conglomerates retain diversified industry exposures; corporate leverage is moderate; and cash flows are healthy, backed by robust profitability.

 “These factors improve the resilience of these conglomerates to sector-specific downturns. We also believe that the regulator’s counter-cyclical measures to stem excessive real-estate activity have helped reduce the risk of a property bubble in the Philippines,” it said.

Loan growth has been high amid strong economic growth in recent years with an average compound annual growth rate (CAGR) of 18 percent over 2010-2015 for the top three banks and large loan concentration is high.

“The risks from rapid growth and loan concentration are partly mitigated through loan-diversification by industry, improving risk-management frameworks, regulatory oversight and sound loss-absorption buffers stemming from high regulatory capital,” Fitch said.