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PHL banks to weather lower rates, trade war

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PHILIPPINE BANKS will fare well despite the falling interest rate environment, which has been the trend in most Asian countries, according to Moody’s Investors Service.

In its report titled “Banks — Asia Pacific 2020 Outlook,” the ratings agency also noted that banks in the Asia-Pacific region may feel the strain from their exposure to China which has seen its economy slowing down, as well as the Asian giant’s continuing trade war with the United States.

“We expect profitability to remain stable for Philippine banks. While the lower interest rates are negative for margins, the impact will be offset by the lowering of reserve requirements,” Srikanth Vadlamani, vice-president and senior credit officer at Moody’s Investors Service said in an e-mail on Wednesday.

“Also, the easing liquidity conditions will benefit especially smaller banks, because they will see a greater lowering of funding costs,” Mr. Vadlamani said.

Local banks have already witnessed 400 basis points (bps) worth of reserve requirement ratio (RRR) reductions in 2019. This has put RRR for big banks at 14%, five percent for thrift banks, and three percent for rural banks.

The reserve ratio for non-bank financial institutions with quasi-banking functions has also been reduced to 14%.

Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno has pledged to decrease big banks’ reserve requirement to the single digit level by the end of his term in mid-2023, making it at par with neighboring countries’ ratios.

In the region, major headwinds are faced by Asia-Pacific banks arising from the 17-month long trade war from the world’s two biggest economies. Its spillover effects have dented economic activity, trade, and investor confidence in Asian countries, according to Moody’s.

The US and China are currently stuck on securing a phase one deal and on whether another round of about $160 billion worth of tariffs on Chinese goods will be applied by Dec. 15.

Despite this, Moody’s said the Philippines’ low exposure to China compared to other economies in the region will help banks weather external headwinds.

In its report, Moody’s cited that among those with the biggest exports to China as a percentage of their gross domestic product (GDP) are Hong Kong (54%), Australia (30%), Korea (25%), Taiwan (23%), New Zealand (22%) and Japan (19%). These are in industries such as commodities, trade, electronics, and machinery.

In the ASEAN region, Vietnam has the largest exports to China as a percentage of GDP at 15%. Meanwhile, Singapore, Indonesia, and Malaysia are at 14% while Thailand is at 13%.

Moody’s said the Philippines has the least exports to China as a percentage of GDP at 12%, with banks’ exposures mostly in the electronics sector. This, according to the ratings agency, is to the country’s advantage compared to its peers in the light of the ongoing trade war.

“Philippine banks will see the impact of the US-China trade war largely by way of second order effects, because they do not have a high exposure to sectors directly impacted by the trade tensions,” Mr. Vadlamani said.

“The main second order effect is through the slowing of economic growth, which will affect bank borrowers,” he added.

The Philippine economy expanded by 6.1% in the third quarter, growing faster than the 5.6% and 5.5% GDP growth logged in the first two quarters. This brought the average growth for the three quarters to 5.8%, which is still below the government’s minimum 2019 growth target of 6%.

Mr. Vadlamani said the country’s growth will remain “fairly robust” compared to neighboring states, thanks to the “high level of investments in capital expenditure by the private sector and government.”

“These investments should act as a buffer for the banking sector from the impact of the trade war,” he said. — Luz Wendy T. Noble





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