Moody’s downgrades outlook for Philippine banks to negative

MANILA, Philippines — Global credit rating agency Moody’s Investors Service has downgraded its outlook on Philippine banks to negative as the enhanced community quarantine in Luzon to prevent the further spread of the coronavirus disease 2019 (COVID-19) has raised asset risks and increased pressure on the profitability of major players.

In its latest banking system outlook update, the debt watcher said the COVID-19 outbreak poses unprecedented challenges.

“This reflects our expectation that a shutdown of the Luzon island, which includes Metro Manila, as a result of the coronavirus outbreak will negatively impact the near-term economic outlook for the Philippines, raising asset risks and increasing pressure on profitability for banks,” it said.

Moody’s said it expects a weaker operating environment for the banking sector as the virus outbreak would result in a material slowdown in economic growth in 2020.

“Large parts of the country are under a lockdown, which will severely constrict economic activity. The number of confirmed coronavirus cases is increasing, so restrictions on activity may remain in place for a prolonged period, further weakening the economic outlook,” Moody’s said.

The debt watcher also expects remittances to decline due to disruptions in the Middle East and the US, the two largest origins of remittances to the Philippines.

Furthermore, Moody’s warned asset quality of banks would deteriorate as economic growth slows sharply.

“Key asset risks stem from concentrated exposures to large domestic conglomerates. These business groups may withstand immediate disruptions but if the situation persists for a prolonged period, debt payment capacity of weaker companies will deteriorate materially,” the rating agency said.

It pointed out most conglomerates have significantly increased investment in the past few years, resulting in higher debt.

“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 said.

In addition, Moody’s said the quality of loans to small and medium-sized enterprises (SMEs) and retail borrowers would weaken because they have limited buffers against stress.

The debt watcher said profitability of Philippine banks would also weaken on higher credit costs amid weaker asset quality.

“Philippine banks’ credit costs have been among the lowest in Asia, benefiting from healthy economic conditions, and this has supported profitability despite low pre-provisioning profit as a percentage of assets compared to banks in other emerging markets in the region,” it added.

Moody’s said the industry’s net interest margins (NIM) would be supported by low reserve requirements but conversely lower interest rates would pressure NIM.

It noted, however, that the industry’s capital buffers would remain strong.

Earlier, Fitch Ratings also downgraded the outlook on Philippine banks to negative from stable as it expects the Bangko Sentral ng Pilipinas (BSP) to further cut interest rates in the next few months to cushion the impact of COVID-19.

The BSP’s Monetary Board has slashed benchmark rates by 150 basis points, almost reversing a tightening cycle that saw interest rates jump by 175 basis points in 2018 due to an inflation breach. It also reduced the reserve requirement ratio for banks by 200 basis points, freeing up P200 billion into the financial system.

The country’s banking industry is dominated by BDO Unibank, Metropolitan Bank & Trust Co., Land Bank of the Philippines, Bank of the Philippine Islands, Philippine National Bank, China Bank, Security Bank, Development Bank of the Philippines and Union Bank of the Philippines.