Fitch Ratings downgrades outlook on Philippine banking sector to negative

Debt watcher Fitch Ratings has downgraded its outlook on the Philippines’ banking sector in light of the coronavirus disease 2019 (COVID-19) threat.

In its report, Fitch Ratings revised its outlook to the country’s banking sector for 2020 to “negative” from “stable” on the back of “rising asset-quality risks amid a deteriorating operating environment as a result of the global coronavirus outbreak.”

“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,” the debt watcher said.

“We expect pressure on net interest margins from the 50 (basis points) policy cut by the Bangko Sentral ng Pilipinas (BSP) on 19 March 2020, adding to the 25bp in February and 75bp in 2019,” Fitch Ratings said.

The debt watcher also expects more interest rate cuts in the next few months, “although further cuts in the reserve requirement - currently 14% - will offset the compression in yields to some degree.”

The BSP has earlier announced the reduction in the amount of cash banks are required to hold in reserve by 200 basis points, in efforts to calm financial markets and boost lending amid an enhanced community quarantine in Luzon.

“Lower revenue, in conjunction with slower credit growth, will weigh on banks' profitability this year,” Fitch Ratings said.

BSP, like many regulators in the region, is extending regulatory relief for banks with exposure to borrowers affected by COVID-19.

The debt watcher noted that banks with higher exposures to small and medium enterprises are more vulnerable to deterioration in asset quality.

“Those with outsized exposure to tourism and hospitality will also face extra pressures on asset quality, although this sector accounted for only around 2% of banking system loan exposure at end-2019,” it said.

Nevertheless, 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.

“We believe that Philippine banks have satisfactory loss-absorption and liquidity buffers to withstand moderate stresses in the system,” the debt watcher said.

“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.—AOL, GMA News