S&P maintains risk assessment on Philippine banks

Low income level, limited legal protection

MANILA, Philippines - S&P Global Ratings has maintained its risk assessment on the Philippine banking industry amid heightened credit risks due to low-income level and limited legal protection to the Bangko Sentral ng Pilipinas (BSP).

The debt watcher retained the Bank Industry Credit Risk Assessment (BICRA) score for the Philippines at ‘7’ with ‘1’ being the highest assessment and ‘10’ being the lowest.

“The Philippines’ low income level and limited legal protection to the regulator heighten credit risks,” S&P said in its latest research update on the Philippines.

It pointed out the Philippine is expected to remain a net external creditor position demonstrated by its net external debt averaging about -16 percent for the period 2016 to 2019.

External liquidity is also expected to remain sound 67 percent on average over the period.

“We do not envisage a marked deterioration in the Philippines’ external financing from a shift in foreign direct investments or portfolio equity investments, or from a reduction in disbursements from donors,” it said.

Other factors that mitigate risks associated with the Philippines’ international liabilities include a very low reliance on external savings by its bank and company sectors, as well as the low and mainly long-term nature of the government’s external borrowings.

S&P said Philippine banks benefit from being mainly deposit funded, with high liquidity and limited linkages to global markets.

According to S&P, the strengthened oversight of the financial sector by the Bangko Sentral ng Pilipinas (BSP) combined with modest growth in private sector debt and real estate prices have also contributed to improved system stability in recent years.

“We regard the BSP’s ability to support sustainable economic growth while attenuating economic or financial shocks to be broadly neutral to our ratings. This reflects the central bank’s sound record in keeping inflation low and its history of independence,” it said.

The rating agency cited the central bank’s new monetary policy measures including the shift to the new interest rate corridor, supported by implementing term deposit auctions, reforms to the reverse repo auction mechanism, and the issuance of central bank bills would improve the effectiveness of monetary policy transmission.

S&P affirmed the country’s credit rating at ‘BBB’ or one notch above minimum investment grade on a stable outlook.

However, it said a higher rating is unlikely over a two-year period amid the lower middle-income economy as well as the diminished policy stability and predictability under the Duterte administration.