Domestic banks strong enough to face fresh crisis

BY D. C. J. JIAO, Reporter

Domestic banks strong enough to face fresh crisis

PHILIPPINE BANKS are strong enough to weather a fresh global downturn that could arise from financial instability in Europe and the United States, Fitch Ratings yesterday said.

“Banks here have reasonable defensive capacity to negotiate downturns,” Fitch senior director Ambreesh Srivastava told reporters
Recent upgrades for local banks, he noted, were based on their “standalone performance,” unlike those in economies such as China, Japan and the United States who get sovereign support.

Fitch raised the credit scores of Ayala-led Bank of the Philippine Islands (BPI) and state-run Development Bank of the Philippines (DBP) last month on the back of an upgrade of the country’s sovereign rating to BB+, which is one notch below investment grade.

BPI and DBP’s support rating floors were also revised upward to BB from BB- along with those of Banco de Oro Unibank Inc., Metropolitan Bank & Trust Co. and Land Bank of the Philippines.

“The banks have strengthened their balance sheets. There is also a stable composition of deposits,” Mr. Srivastava said.

Philippine banks are also well-capitalized, he said, noting that the core Tier 1 capital adequacy ratio (CAR) rose to 12% last year from 11% in 2009, exceeding the central bank’s 10% minimum.

Basel 3, which sets additional capitalization requirements for banks, “won’t be as onerous” for Philippine banks, Mr. Srivastava added.
Fitch also conducted stress tests for the country’s banks and their performance was judged as “fairly satisfactory for the rating segment”. Any economic downturn would likely see only a moderation in the performance of banks, he said.

Fitch, however, noted a “concentration risk” as 70% of banks’ loans were to large and medium firms. Nonperforming loans could “spike” should “a few accounts turn bad together,” it said, although sufficient capitalization can mitigate these risks.

Fitch, which gave Philippine banks a “stable” outlook for the second half of the year and for 2012, identified stronger franchises and sustained good asset quality as triggers for a possible upgrade.

Aggressive expansion due to rapid loan growth and acquisitions, weakened capital positions and deterioration in asset quality could drag down the credit rating of local banks. These risks, however, “appear low at this stage,” Fitch said.

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