Debt watcher Moody’s Investors Service said the robust loan growth lifted the earnings of Philippine banks last year but it would weigh on their capitalization this year.
Moody’s said in a report the capitalization of most Philippine banks deteriorated in 2017 as risk-weighted assets grew faster than internally generated capital.
“Without external capital raising, capital ratios will remain under pressure in 2018 from loan growth, outpacing increases in retained earnings,” Moody’s said.
“Currently, internal capital generation at Philippine banks is not strong enough to support rapid credit growth. The system’s pre-provision income more than covers anticipated credit losses but is insufficient for banks to sustain current capital levels given large increases in risk-weighted assets,” Moody’s said.
Moody’s said a key factor limiting improvements in profitability and internal capital generation was banks’ weak cost efficiency. It said operating costs would increase further as banks needed to improve IT infrastructure to keep pace with business growth.
Moody’s said the adoption of Philippine Financial Reporting Standards 9, the local equivalent of IFRS, would also result in reductions in capital ratios at some banks.