Moody’s Debt Rate for the Philippines

Moody’s Investors Service Tuesday changed to ‘Positive’ from ‘Stable’ its outlook on the Philippines’ banking system.

In a report dated Dec 18, 2012, the debt watcher attributed the improvement of the outlook to the resiliency of the domestic economy, banks’ diversified loan portfolio and income sources and continued improvement of the sector’s asset quality, capitalization and liquidity.

The change in the banking sector’s outlook was made on the same day that the debt watcher announced its upwardly revised upwards growth outlook for the economy to 6.3 percent for this year and 5.5 percent next year due to continued resiliency of the domestic economy.

These were previously at 5.2 and five percent for 2012 and 2013, respectively.

Moody’s said “domestic business activity and consumption will be supported by healthy corporate sector balance sheets, steady inflow of remittances from overseas Filipinos, a nascent but growing household credit market, and low interest rates.”

“The country’s improved political landscape will boost investor and consumer confidence and, in turn business conditions and economic growth dynamics,” it said.

On the other hand, the debt watcher projects credit grow to slow down to 11-13 percent annually in the next 12-18 months from the current 1projects credit grow to slow down to 11-13 percent annually in the next 12-18 months from actual 14 percent growths to date.

“This moderation, which we regard as healthy from a bank credit perspective, will arise mainly from new regulatory measures that tighten real estate lending and raise minimum capital requirements,” it said.

Banks are now increasing capitalization in preparation for the implementation of the stricter risk-based BASEL III in the country in Jan 1, 2014.

BASEL 3 is the latest modification developed by the Basel Committee on Banking Supervision, which was set forth of the Bank of International Settlement, “to strengthen the regulation, supervision and risk management of the banking sector.”

According to the BIS website BASEL III aims to: improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source; improve risk management and governance; strengthen banks’ transparency and disclosures.

The third modification in the BASEL rules targets to increase resilience of banks in periods of stress through bank-level regulations and through macro level by addressing risks that can build up across the banking sector.

The BCBS has outlined a staggered implementation of BASEL III from 2016 to 2018 but BSP’s policy-making Monetary Board (MB) has decided to implement it in full by January 2014 for universal and commercial banks (U/KBs) as it “recognizes the present strong capital position of the banking industry while providing for a reasonable transition period.”

For BASEL III, BSP has set a six percent minimum requirement for Common Equity Tier 1 (CET1) ratio and 7.5 percent minimum for total Tier 1 ratio, both of which are higher than the BIS’s requirement of 4.5 percent and six percent for CET1 and total Tier 1, respectively.

Moody’s said Philippines banks are “well-positioned” to meet this latest requirement.

“Even if the banks maintain their current asset growth and profitability levels over the next 12 months, seven of the eight rated banks would still maintain Tier 1 capital ratios of 10 percent or more at end-2014, allowing them to comfortably meet the new Tier 1 capital requirements, inclusive of the capital conservation buffer,” it said.

Similarly, banks’ profitability is expected to remain strong in the next 12-18 months amid higher expenses due to theirs expansion program and “mild pressure on net interest margins due mainly to the loans being re-priced faster than deposits on a low rate environment.”

Banks are expected to benefit from diversification in lending base and profit sources in line with falling deficiencies and the banks’ decision to tap the consumer and the small and medium enterprise sectors as well as the moves to increase cross-selling and fee-based services

The report also said that improvement in the government’s fiscal situation “will add to its capacity to extend support to the banks when necessary.”

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