Fitch outlook on banking industry turns negative

By March 25, 2020Property News

FITCH RATINGS downgraded its outlook on the Philippine banking industry to “negative,” from “stable,” citing the growing fallout from the coronavirus disease 2019 (COVID-19) outbreak.
In a note sent to reporters on Tuesday, the global debt watcher said the outlook for the banking industry turned negative “in the face of rising asset-quality risks amid a deteriorating operating environment as a result of the global coronavirus outbreak.”
A negative outlook means that banks’ ratings might be downgraded in the short to medium-term or in about six months to two years.
“We also see pressure on revenue from declining interest rates and the resulting economic slowdown, as enhanced community quarantine on Luzon Island — which accounted for more than 70% of the nation’s output — dents business operations,” Fitch said.
“Lower revenue, in conjunction with slower credit growth, will weigh on banks’ profitability this year.”
The latest policy rate cut worth 50 basis points (bps) could put pressure on banks’ net interest margins (NIMs), Fitch added.
However, Fitch said that further reductions in the reserve requirement ratio (RRR) of banks could offset the yield compression up to a certain extent.
On Tuesday, the Bangko Sentral ng Pilipinas (BSP) slashed big lenders’ RRR by 200 basis points, effective March 30. The RRR for thrift and rural lenders was kept at its current levels of four percent and three percent, respectively, while those for non-bank financial institutions with quasi-banking functions was maintained at 14%.
In its note, Fitch Ratings outlined the BSP’s relief measures to cushion the impact of the pandemic on the banking industry, including increasing the single-borrower limit (SBL) to 30% from the initial 25%, the suspension of penalties for reserve deficiencies, as well as staggered booking of allowance for credit losses.
“Notwithstanding such measures, the weaker operating environment is still likely to exert pressure on loan quality, especially as the quality of recent rapid credit growth has not been tested over the course of an economic cycle,” Fitch said.
The debt watcher said that lenders that have higher exposure to small and medium-sized enterprises (SMEs) and tourism and hospitality sectors will face extra pressure on asset quality.
“The balance-sheet strength of large corporates, which make up the bulk of Philippine banking system loans, would for now help to cushion the impact on banks’ asset quality from a moderate slowdown in business operations,” Fitch said, but noted that “prolonged business disruptions could expose the banks to lumpy asset impairments.”
Fitch looked into the debt profile of listed companies to estimate the possible impact on banks’ asset quality.
“The proportion of ‘debt-at-risk’ — or those owned by non-financial corporates with interest coverage ratio of less than 1.2x — would only rise marginally from around 1% of total listed Philippine non-financial listed corporate debt at present if corporates earnings were to fall by 30%, but could jump to 57% assuming a uniformed 75% shock in listed non-financial corporates’ EBITDA, based on our estimates,” it said.
The default of big conglomerates will have “substantial repercussions on the banking system and the nation’s output, with total outstanding debt of listed non-financial corporates equivalent to around 35%-40% of GDP,” Fitch said.
Fitch said that Philippine banks are armed with enough loss-absorption and liquidity buffers to withstand moderate stresses in the system.
“Any negative rating implications, therefore, would depend largely on the extent the operating environment is likely to weaken and any material and sustained deterioration in asset quality, profitability and balance-sheet buffers,” it said.
Sought for comment, Fitch Ratings’ banking team clarified that they have not conducted a recent rating committee on Philippine banks.
The team noted that Issuer Default Ratings for the largest commercial banks including BDO Unibank, Inc., Metropolitan Bank & Trust Co., and Bank of the Philippine Islands were affirmed at “BBB-” as of October and November 2019.
Meanwhile, ratings of other lenders such as the Philippine National Bank and the China Banking Corp. were also affirmed at “BB+” late last year, “indicating that we have not taken into account recent developments into account.”
“The state-owned banks ratings (BBB/Positive) were revised this February, on account of revision in the sovereign rating outlook,” Fitch said.
Fitch placed the country’s credit rating at “BBB,” which is a notch above minimum investment grade, in December 2017. Meanwhile, it has upgraded its outlook for the country to “positive” from “stable” in February, which could mean that a rating upgrade could be kept or potentially upgraded. — Luz Wendy T. Noble