REUTERS

MOODY’S Investors Service on Tuesday upgraded its outlook for the Philippine banking industry to “stable” on expectations of an improvement in the operating environment amid a “mild economic recovery.”

The global debt watcher, however, warned that risks to banks’ asset quality remain as borrowers’ ability to pay is still hampered by the prolonged disruption of business activities, weak consumer sentiment, and the unemployment scenario.

“We have changed the Philippines’ banking system outlook to stable from negative to reflect our expectations that a mild economic recovery will support the operating environment for banks,” Moody’s said in a note on Tuesday.

A stable outlook means Moody’s assessment of rated local lenders would likely be steady in the next 12 to 18 months. Moody’s currently rates 10 lenders in the country, including universal, commercial and government-owned banks.

The ratings agency revised the sector’s outlook to “negative” in April 2020, with the country then at the height of a lockdown expected to negatively impact lenders’ profitability and asset quality.

Moody’s on Tuesday cautioned that banks’ asset quality will remain challenged this year due to continued pileup in bad loans as the pandemic has affected both debt servicing capacity of consumers and businesses.

It noted that retail borrowers and small businesses, in particular, are affected worse by the pandemic due to social distancing measures, the high unemployment rate, and weak consumer sentiment.

“Large corporate groups’ debt repayment capacity deteriorated materially in 2020 and remains a key source of systemic risk because banks’ loans are heavily concentrated on them,” it said.

Banks’ gross nonperforming loans surged 80% to P431.266 billion in February from P239.902 billion a year earlier, based on preliminary data from the Bangko Sentral ng Pilipinas (BSP). This brought the ratio to 4.08%, the highest since the 4.09% in October 2009.

The debt watcher, meanwhile, said it remains optimistic that the economy will bounce back within this year, backed by the lifting of restriction measures and fiscal support that could translate to improving consumer spending and investment. Moody’s in January said it expects the country’s gross domestic product to grow by 7%, within the government’s 6.5% to 7.5% target.

“However, a resurgence in infection rates and a reinstatement of some social-distancing measures will slow the economic recovery in first half of 2021,” it said.

The credit rater added that the local banking industry’s capital buffers will remain sufficient, noting that the sector’s average common equity Tier 1 capital ratio stood at 15.5% as of end-2020.

Moody’s said it expects capital generation to keep pace with expenditures amid a likely credit growth slump, but warned that material downgrades to individual lender ratings may push banks to increase their buffers for their exposures, which could then bring down capital ratios.

The debt watcher also warned that banks’ trading income could go down due to less volatility in the market.

Meanwhile, credit yields are seen declining, with banks quoting loans at lower rates amid abundant liquidity and weak demand. This, together with already significant amounts set aside for loan loss provisions last year, could mean stable profitability, Moody’s said.

It also expects favorable funding conditions to continue as the system remains heavily financed by deposits.

“Further, the central bank has been proactive in providing liquidity to the system to prevent any near-term liquidity stress that can result from a sudden change in economic conditions. The weak credit demand will also help banks maintain ample liquidity buffer,” it said.

BSP Governor Benjamin E. Diokno has said the central bank has infused some P2 trillion in liquidity into the financial system through its policy support amid the pandemic.

Moody’s also expects government policy to remain supportive of the banking industry as systemic stability remains important to the central bank, noting the government is “unlikely to adopt a bail-in regime in the next 12-18 months.”

The debt watcher last month said the virus surge and the reimposed lockdown that has since ended in Metro Manila and surrounding provinces is “credit negative” and could put economic recovery at risk. It affirmed its Baa2 sovereign rating with a stable outlook for the Philippines in July last year. — L.W.T. Noble