MANILA - Philippines banks will fare better than most of their Asian peers from the financial impact of the US Federal Reserve taper, according to Moody's Investors Service.
In a report, Moody's said relatively strong capital buffers, modest levels of problem loans, high recurrent profitability and low reliance on foreign funding underpin Philippine banks.
The credit rating firm said local lenders will continue to grow at rates of up to 15 percent annually over the coming years, as capital raising initiatives will allow them to do so without compromising their credit profiles and loss-absorbing buffers.
With the implementation of Basel 3, Philippine banks are required to maintain minimum common equity Tier 1 ratio of six percent and total capital adequacy ratio (CAR) of 10 percent, higher than the 4.5 percent and eight percent recommended by the Basel Committee.
Asian banks will continue to benefit from a supportive economic environment in the region, characterized by growing trade flows between Asia and the recovering economies of the US and Europe.
However, the banks could face rising debt burdens in some highly leveraged segments.
“There could also be potential corrections in asset prices, as US tapering progresses. These risks have been fueled by a long period of low interest rates and by speculative capital inflows into the region, before the expectation of and the subsequent reduction in the Fed’s stimulus program,” Moody's said.
Moody’s said interest rates will likely rise and capital flows should continue to reverse, as a result of tapering, which was signaled by the Fed in May last year but effectively started last December.
If banks’ domestic currencies fall substantially, Asean and Indian banks will see higher problem loans on their corporate and retail exposures, especially on foreign currency loans.
“Negative financial market adjustments would also lead to mark-to-market losses on the banks’ securities investments. Nevertheless, higher interest rates will support the banks’ net interest margins, which, to some extent, will mitigate their higher credit costs. Funding will not be a key risk, because Asean and Indian banks exhibit low levels of foreign currency borrowings," Moody's said.
Most banks operate with loan-to-deposit ratios of around 90 percent, with foreign currency borrowings accounting for less than two percent of liabilities.
Re-pricing risk
Moody’s said corporate borrowers in cyclical industries will see greater pressure on their debt repayment capacities, as these sectors are more sensitive to higher interest rates and slower economic growth. These include construction and real estate -- because of their long investment cycles -- metals and mining -- due to their export focus -- and capital-intensive industrial manufacturing.
Philippine banks, as well as those in Malaysia and Singapore, are particularly vulnerable to the performance of the real estate and construction sectors, Moody's said.
It noted that retail loans in the Philippines, Indonesia and India however are a small proportion of total loans and gross domestic product (GDP) due to low levels of penetration, particularly outside main city areas.
Asean and Indian banks’ real estate exposures and securities investments are also vulnerable to the potential impacts of Fed tapering on asset prices.
Moody’s cited banks in India and the Philippines as the most exposed to an increase in yields, as they hold around 25 percent of their assets in securities, mostly in government bonds.
“Such a substantial proportion of securities holdings is reflected in the large amount of unrealized gains both systems have reported since 2009, and which could reverse once interest rates start to rise," Moody's said.
Another consideration is that mark-to-market losses could prompt the banks to look for other avenues for profits, possibly through higher credit risk appetite, the rating firm said, adding that banks in India and the Philippines are more sensitive to re-pricing of securities.
Dependent on securities gains
Moody’s said banks in the Philippines, India and Thailand are more dependent on gains on securities.
The likely higher interest rates as a result of Fed tapering would support the banks’ net interest margins, which to some extent, will mitigate against the potential rise in credit costs.
Among Asean countries, bank margins were the highest in Indonesia at six percent. Margins in the Philippines, Thailand and Vietnam are also relatively high at three percent.
On the funding side, Asean and Indian banks are generally funded by local deposits and have limited cross-border borrowings and so refinancing risks are low.
Philippines banks' total credit stood t 40 percent of GDP as of September last year, and had ample funding with an average loan-to-deposit ratio of 59 percent.
While Moody's expects Philippine banks to remain well capitalized through 2015 even without raising further capital, it does expect some selective issuance by banks of Basel III-compliant securities in the next two years.
Source: Interaksyon
In a report, Moody's said relatively strong capital buffers, modest levels of problem loans, high recurrent profitability and low reliance on foreign funding underpin Philippine banks.
The credit rating firm said local lenders will continue to grow at rates of up to 15 percent annually over the coming years, as capital raising initiatives will allow them to do so without compromising their credit profiles and loss-absorbing buffers.
With the implementation of Basel 3, Philippine banks are required to maintain minimum common equity Tier 1 ratio of six percent and total capital adequacy ratio (CAR) of 10 percent, higher than the 4.5 percent and eight percent recommended by the Basel Committee.
Asian banks will continue to benefit from a supportive economic environment in the region, characterized by growing trade flows between Asia and the recovering economies of the US and Europe.
However, the banks could face rising debt burdens in some highly leveraged segments.
“There could also be potential corrections in asset prices, as US tapering progresses. These risks have been fueled by a long period of low interest rates and by speculative capital inflows into the region, before the expectation of and the subsequent reduction in the Fed’s stimulus program,” Moody's said.
Moody’s said interest rates will likely rise and capital flows should continue to reverse, as a result of tapering, which was signaled by the Fed in May last year but effectively started last December.
If banks’ domestic currencies fall substantially, Asean and Indian banks will see higher problem loans on their corporate and retail exposures, especially on foreign currency loans.
“Negative financial market adjustments would also lead to mark-to-market losses on the banks’ securities investments. Nevertheless, higher interest rates will support the banks’ net interest margins, which, to some extent, will mitigate their higher credit costs. Funding will not be a key risk, because Asean and Indian banks exhibit low levels of foreign currency borrowings," Moody's said.
Most banks operate with loan-to-deposit ratios of around 90 percent, with foreign currency borrowings accounting for less than two percent of liabilities.
Re-pricing risk
Moody’s said corporate borrowers in cyclical industries will see greater pressure on their debt repayment capacities, as these sectors are more sensitive to higher interest rates and slower economic growth. These include construction and real estate -- because of their long investment cycles -- metals and mining -- due to their export focus -- and capital-intensive industrial manufacturing.
Philippine banks, as well as those in Malaysia and Singapore, are particularly vulnerable to the performance of the real estate and construction sectors, Moody's said.
It noted that retail loans in the Philippines, Indonesia and India however are a small proportion of total loans and gross domestic product (GDP) due to low levels of penetration, particularly outside main city areas.
Asean and Indian banks’ real estate exposures and securities investments are also vulnerable to the potential impacts of Fed tapering on asset prices.
Moody’s cited banks in India and the Philippines as the most exposed to an increase in yields, as they hold around 25 percent of their assets in securities, mostly in government bonds.
“Such a substantial proportion of securities holdings is reflected in the large amount of unrealized gains both systems have reported since 2009, and which could reverse once interest rates start to rise," Moody's said.
Another consideration is that mark-to-market losses could prompt the banks to look for other avenues for profits, possibly through higher credit risk appetite, the rating firm said, adding that banks in India and the Philippines are more sensitive to re-pricing of securities.
Dependent on securities gains
Moody’s said banks in the Philippines, India and Thailand are more dependent on gains on securities.
The likely higher interest rates as a result of Fed tapering would support the banks’ net interest margins, which to some extent, will mitigate against the potential rise in credit costs.
Among Asean countries, bank margins were the highest in Indonesia at six percent. Margins in the Philippines, Thailand and Vietnam are also relatively high at three percent.
On the funding side, Asean and Indian banks are generally funded by local deposits and have limited cross-border borrowings and so refinancing risks are low.
Philippines banks' total credit stood t 40 percent of GDP as of September last year, and had ample funding with an average loan-to-deposit ratio of 59 percent.
While Moody's expects Philippine banks to remain well capitalized through 2015 even without raising further capital, it does expect some selective issuance by banks of Basel III-compliant securities in the next two years.
Source: Interaksyon
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