PHILIPPINE BANKS, as well as those in emerging markets (EM) in the Asia-Pacific (APAC) region, are expected to see a stable operating environment, but could be more vulnerable to economic shocks compared to developing markets (DM) in the region, Fitch Ratings said.

The debt watcher in a report on Thursday gave the Philippines a “bb+/stable” operating environment score, with an implied operating score of “b” amid an improved sovereign rating.

“The higher scores in DMs reflect their greater resilience, supported by robust regulatory frameworks, typically higher sovereign ratings, and stronger economic fundamentals. In comparison, APAC EMs’ rapid growth and expanding financial inclusion present both opportunities and vulnerabilities for banks,” Fitch said.

Fitch added that economic and business growth in the region will be driven by a growing middle class and global trade diversification, but its operating environment scores for most emerging markets are unlikely to significantly improve in the near term.

Growing competition in emerging markets, including foreign entrants, will also affect EM banks’ risk management and controls, it said.

“We expect that improvements in emerging market operating environment scores will outpace those in developing markets, although emerging markets may remain more vulnerable to future shocks than developing markets, especially in markets where regulatory advancements lag peers,” Fitch said.

The credit rater said the operating environments of developing markets are typically more resilient to shocks amid their stronger regulatory frameworks, more sophisticated banking systems, and more robust economic foundations.

Their governments are also able to spend more to support the local economy, allowing them to recover from shocks faster compared with emerging markets.

The credit rater added that there is increasing pressure for financial inclusion among emerging markets in the region to provide a greater cushion for shocks.

Still, the operating environment scores of emerging markets in Asia have potential for upward revision in the medium- to long-term amid “brighter economic prospects,” Fitch said.

“Mitigation of banking system vulnerabilities, such as high credit growth or weak governance, through robust income growth and effective regulatory oversight would be positive for the operating environment scores,” it said.

“The positive adjustments for India, Indonesia, the Philippines and Vietnam reflect their solid economic growth prospects, which present better opportunities for banks to do business than what is captured by the modest GDP (gross domestic product) per capita level,” it added. 

However, the operating environment scores of emerging markets could be more volatile due to their sensitivity to global economic and financial stresses. — AMCS