MOODY’S INVESTORS Service lowered its outlook on the Philippine banking industry to “negative” from “stable,” with the Luzon lockdown meant to arrest the spread of the coronavirus disease 2019 (COVID-19) seen to take its toll on banks’ assets and profitability.

Despite this, Moody’s said local banks’ strong capital buffers will help them weather this storm amid profit risks and slower loan growth.

“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,” Moody’s said in a report on Thursday.

A negative outlook means lenders’ credit ratings might be downgraded in the short to medium term or in about six months to two years.

Moody’s said major asset risks could emerge from banks’s exposure to local conglomerates as well as weaker and smaller companies.

“These business groups [conglomerates] may withstand immediate disruptions but if the situation persists for a prolonged period, debt payment capacity of weaker companies will deteriorate materially,” Moody’s said.

The ratings agency said even one default from conglomerates could trigger weaker asset quality given that these firms have significantly increased their investments through bank loans.

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

In a domino effect, following the possible weakening in asset quality, Moody’s said credit cost could also rise from current levels — which are among the lowest in Asia due to stable economic conditions.

Moody’s also said monetary policy moves will have an impact on lenders’ net interest margins (NIM).

“Net interest margins will be supported by low reserve requirements but conversely lower interest rates will pressure NIM,” it said.

Moody’s said Philippine banks’ stable capitalization will be their saving grace from risks posed by the virus outbreak.

“Rated Philippine banks are comfortably capitalized, with an average Common Equity Tier 1 capital ratio of 13.7% as of the end of 2019,” Moody’s said.

“However, any material downgrade of credit ratings of borrowers would increase the capital that banks need to set aside for those exposures, which would erode capitalization,” it added.

The global debt watcher also said they expect the government to focus on “systemic stability and support for rated banks when needed.”

In its March 19 policy meeting, the Bangko Sentral ng Pilipinas (BSP) slashed key policy rates by 50 basis points (bps), reducing the overnight reverse repurchase, lending and deposit rates to 3.25%, 3.75%, and 2.75%, respectively, to help boost activity amid a projected slowdown due to the continued spread of COVID-19.

Meanwhile, the central bank also announced a 200-bp cut in reserve requirement ratio (RRR) of universal and commercial banks to 12% which will take effect on April 3. This is meant to boost liquidity in the financial system during the pandemic.

BSP Governor Benjamin E. Diokno has been authorized by the Monetary Board to cut banks’ and non-banks’ RRR by a total of 400 bps this year. The central bank said it will evaluate reductions to the RRR of other BSP-supervised financial institutions, including thrift and rural lenders with current reserve ratios of four percent and three percent, respectively.

The BSP has also granted banks several relief measures in view of the pandemic’s impact on their operations, including increasing the single-borrower limit to 30% from 25%, the suspension of penalties for reserve deficiencies, as well as the staggered booking of allowance for credit losses.

In March, Fitch Ratings also downgraded its outlook for the country’s banking industry to “negative” from “stable,” also citing rising asset risks due to the worsening fallout from the pandemic.

The month-long lockdown has caused the temporary shutdown of most businesses, only sparing those related to essential goods and services including groceries, pharmacies, hospitals, and banks, among others. — Luz Wendy T. Noble