Moody’s says Philippine banks’ capital ratios to remain under pressure

MANILA, Philippines — The capital ratios of banks operating in the Philippines will remain under pressure amid the strong growth in the banking industry’s asset expansion.

Simon Chen, vice president and senior analyst at Moody’s, said increases in retained earnings may not be sufficient to cover the banks’ rapid asset growth, against the backdrop of their low cost efficiency.

The debt watcher said the capitalization of most Philippine banks deteriorated last year as risk-weighted assets grew faster than internally generated capital.

BDO Unibank Inc. and China Banking Corp., both owned by retail and banking magnate Henry Sy, raised fresh equity last year by selling new shares to existing shareholders. BDO, the country’s largest lender raised P60 billion, while China Bank sold P15 billion worth of shares.

“Without external capital raising, capital ratios will remain under pressure in 2018 from loan growth outpacing increases in retained earnings,” Chen said.

This early several banks have announced plans to raise capital through stock rights offering (SRO). Metropolitan Bank & Trust Co. is raising P60 billion, followed by Ayala-led Bank of the Philippine Islands with P50 billion, and Rizal Commercial Banking Corp. with P15 billion.

Chen said internal capital generation of Philippine banks is not strong enough to support rapid credit growth.

Chen said operating costs of Philippine banks would increase further as banks need to improve their information technology (IT) infrastructure to keep pace with business growth and expand their distribution networks to pursue growth in consumer loans.

This, he added, would hinder improvements in banks’ cost efficiency.

Furthermore, Moody’s said credit costs would rise this year as banks adopt new provisioning rules under the Philippine Financial Reporting Standards 9 (PFRS 9).

Under the shift, banks with insufficient outstanding allowances to cover all losses need to cover their shortfalls by taking charges against retained earnings resulting in lower common equity tier 1 (CET1) ratios.