Low income level, infrastructure bottlenecks hound PHL banks – S&P

Standard & Poor’s Ratings Services has classified the Philippine banking sector in group “7” under the debt-watcher’s Banking Industry Country Risk Assessment (BICRA) criteria, citing the low income level and infrastructure bottlenecks that hound the Southeast Asian country.

Other countries in the group include Indonesia, Portugal, Iceland, and Ireland.

“Our assessment of economic risk in the Philippines reflects the country’s low income level and infrastructure bottlenecks that constrain growth prospects,” S&P said in statement introducing its latest Banking Industry Country Risk Assessment on Philippines published on Thursday.

“Relaxed underwriting standards and a developing institutional and governance framework heighten credit risk. We believe the risk of imbalances in the economy has not increased materially despite a pickup in credit growth and property prices in the past two years,” the global debt-watcher said.

Still, S&P considers the economic risk trend for the Philippines as stable, saying “… the risk of economic imbalances, such as in the property market, can be contained.

“While the credit quality of banks operating in the Philippines is improving, we feel poor transparency, weak corporate governance, and inefficient legal infrastructure may limit any material reduction in credit risk,” the debt-watcher said.

“In addition, credit risk in the system may increase if acceleration in property prices or credit growth is prolonged,” S&P said.

Risk appetite

On the industry’s risk, S&P noted the regulatory standards in the Philippines are broadly in line with international standards – and in some instances more stringent.

“However, inadequate legislation and legal protection for supervisory staff weaken the regulator’s ability to implement prudent measures. The government’s attempts to amend the legislation have so far been protracted,” the debt-watcher said.

“The Philippine banking industry’s risk appetite is generally restrained, and banking products are straightforward. A high level of stable customer deposits supports banks’ funding profiles although banks have few funding alternatives,” it added.

S&P also views the industry risk trend of Philippine banks as stable, and believes the well-established domestic franchise will continue to help domestic banks to sustain a strong, stable, and diversified customer deposit profile.

“However, the pace of deposit growth may continue to be moderate this year as real returns on bank deposits continue to be negative and lower than those on other investment avenues,” it said.

It also expects the risk appetite of banks to remain manageable because they mainly offer simple and traditional products.

“The country’s recent liberalization of foreign banks’ entry into the market may further intensify competition among domestic banks,” S&P said.