Moody’s turns 'negative' on Philippine banks
MANILA, Philippines — Following its competitor, Moody’s Investors Service downgraded its outlook for Philippine banks this year as a freeze in business because of the coronavirus disease-2019 (COVID-19) outbreak and Luzon lockdown impact on lender profits.
From “positive,” Moody’s lowered its rating for local banks to “negative,” saying that the inevitable economic slump due to the global pandemic will deteriorate lenders’ asset quality, similar to the assessment of Fitch Ratings given last week.
“Philippine banks’ credit costs will increase as asset quality weakens,” the debt watcher said in a report.
Losses will mainly emanate from the likelihood that loans incurred by small- and medium enterprises and retailers, whose operations were stopped during the Luzon lockdown, will end up getting unpaid. Since loans and the interests they carry is a source of bank liquidity, unpaid loans can damage banks’ balance sheets, particularly if the borrower that defaulted involved large firms over which lenders are heavily exposed.
“Most conglomerates have significantly increased investment in the past few years, which has resulted in growth in their debt,” Moody’s explained.
“Because banks' loans are heavily concentrated on them, even a default by one of them will weaken asset quality in the overall banking system,” it added.
While banks “comfortably capitalized,” Moody’s also pointed out that a downgrade on a company that is running bank debts, which means a lower capacity to pay, can materially impact bank stability. This, in turn, should prompt lenders to set aside more buffer funds to keep their healthy standing.
On Wednesday, local banks said they are open to extending the moratorium in loans they extended to borrowers affected by the month-long community quarantine in Luzon targeted at stemming the spread of coronavirus.
This was after the implementing rules of Republic Act 11469 was issued by the finance department, which stipulates that the grace period will have to be extended the moment the quarantine is lengthened beyond April 12.
Chuchi Fonacier, central bank deputy governor, said banks are in a stable footing to give their clients more reprieve. “They have enough buffer since they built up such during the normal times, meaning before the quarantine,” she said in a text message.
That said, Moody’s is optimistic the government will not let its banks fall under is the situation deteriorates. “We expect the government to prioritize systemic stability and support for rated banks when needed,” Moody’s said.
“Reflecting this, we continue to incorporate a ‘very high’ level of government support in the ratings of the three largest banks and a ‘high’ level of support for smaller banks,” it added.
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