The Philippine banking system will weather the impact of external shocks because it remains well capitalized, profitable, well managed and very liquid, global debt watcher Moody’s Investors Service said in a report over the weekend.
“The banking system is virtually immune to contagion from external shocks. It is largely deposit-funded—aided in part by the steady flow of remittances—and exhibits a lack of dependence on external funding and low exposure to the export sector,” Moody’s said.
“Even foreign currency lending is fully backed by onshore sources of foreign currency financing, primarily deposits. The banking system is a source of credit strength to the sovereign in two ways: the lack of contingent risks to the government’s balance sheet; and as a stable source of financing for government debt,” it said.
It said the domestic banking system had carried a positive outlook since December 2012. Since then, several Philippine banks have received upgrades and the average standalone credit rating for Moody’s-rated banks—which together comprise 70 percent of system loans as of end-2014—had risen to investment grade.
The banking system’s total assets as of June 2015 accounted for about 86 percent of the gross domestic product, with total loans accounting for 53 percent.
The Philippine banking system is small relative to other rated Asean countries—with the exception of Indonesia—and large Baa-rated emerging market peers, such as Brazil, India, South Africa and Turkey.
Moody’s also backed the recent move of the Bangko Sentral ng Pilipinas to proactively manage risks on a systemic level in response to some evidence of a run-up in real estate prices through the introduction of an array of preemptive macro-prudential measures in 2014.
“These measures, including a cap on individual banks’ total loans to the real estate sector, have contributed to a slowing in overall credit growth in recent quarters. Nevertheless, credit growth remains high, but not excessive, reflecting the continued robustness of domestic demand,” Moody’s said.
It said stringent oversight by the Bangko Sentral was reflected by the manner by which it adopted international regulatory standards, such as requiring all the country’s universal and commercial banks to comply with the capital adequacy standards under Basel III by the beginning of 2014—without a phase-in period.
“It also set capital ratios more conservatively than those called for by international standards, even calling for an additional capital conservation buffer above the regulatory minimum,” it said.
Banks continued to dominate the domestic financial sector, with universal and commercial banks accounting for 90 percent of total banks’ assets. In terms of the number of head offices and branches/agencies, non-banks financial intermediaries have a wider physical network than banks, consisting mainly of pawnshops.