Banks show improved asset quality

MANILA, Philippines - Leading indicators point to an improving asset quality for Philippine banks, debt watcher Moody’s Investors Service said yesterday.

In its Leading Indicators of Asset Quality for Banks in Asia Pacific report, Moody’s identified country-specific indicators to assess the domestic banking industry’s asset quality trends, with soured loans as the main reference.

“The Philippines is a fast-growing economy that has entered a structural shift to higher growth, accompanied by low inflation,” Moody’s said.

“Its robust economic performance has been supported by strong local business activity and consumption, reinforced by improved fiscal spending. Its external payments position is strong, bolstered by remittance inflows from overseas Filipinos and services exports, particularly from the business process outsourcing sector,” Moody’s said.

Moody’s identified four leading indicators for the country, all of which point to an improving asset quality for banks: remittance inflows, the business confidence index, the manufacturing value of the production index, and imports of capital goods.

“Remittance inflows from overseas Filipinos have been a key factor supporting strong domestic consumption and demand for consumer credit, particularly in residential mortgages. The continuation of strong remittance inflows will support the debt-servicing capability of the retail sector,” Moody’s explained.

Remittances amounted up to $20.605 billion as of November last year, latest data from the central bank showed. The strong inflows of remittances are expected to continue in early 2014 following recent natural calamities that destroyed homes and displaced thousands of families.

The business confidence index, meanwhile, indicate the sentiment of businesses for the operating environment.

“Strong business confidence signals optimism around domestic business and revenue growth, which in turn, will support good asset quality metrics for the corporate and SME (small and medium enterprise) sectors,” Moody’s said.

Growth in imports, which indicate a pick-up in capital investment and economic activity, are also seen to contribute to an improving asset quality for banks.

“These imports will likely remain strong, driven by the strong momentum of domestic economic growth and business activity, which will in turn, support business and the revenue of the corporate and SME sectors,” Moody’s said.

Moody’s pointed out the leading indicators only form part of what makes up the debt watcher’s views on asset quality trends.