Moody’s downgrades PHL banking sector outlook to negative

Debt watcher Moody’s Investors Service has downgraded its outlook to the Philippine banking system as the coronavirus disease 2019 (COVID-19) situation is seen to slow down the country’s economy.

“We have changed the outlook for the Philippine banking system to negative from stable,” Moody’s said in a report on Thursday.

“This reflects our expectation that a shutdown of the Luzon island, which includes Metro Manila, as a result of the coronavirus outbreak will negatively impact the near-term economic outlook for the Philippines, raising asset risks and increasing pressure on profitability for banks,” it said.

The debt watcher said the country’s operating environment is seen to weaken.

“The coronavirus outbreak will result in a material slowdown in economic growth in 2020. Large parts of the country are under a lockdown, which will severely constrict economic activity,” Moody’s said.

“The number of confirmed coronavirus cases is increasing, so restrictions on activity may remain in place for a prolonged period, further weakening the economic outlook. Further, remittances may decline due to disruptions in the Middle East and the United States, the two largest origins of remittances to the Philippines,” it said.

The weakening economy will result in the deterioration of banks’ asset quality.

“Key asset risks stem from concentrated exposures to large domestic conglomerates. These business groups may withstand immediate disruptions but if the situation persists for a prolonged period, debt payment capacity of weaker companies will deteriorate materially,” the debt watcher noted.

Also, most conglomerates have significantly increased investment in the past few years, which has resulted in growth in their debt.

“Because banks' loans are heavily concentrated on them, even a default by one of them will weaken asset quality in the overall banking system,” Moody’s said.

“In addition, the quality of loans to small and medium-sized enterprises (SMEs) and retail borrowers will weaken because they have limited buffers against stress,” it said.

The profitability of Philippine banks will also weaken due to deteriorated asset quality, according to Moody’s.

This as local lenders’ credit costs will increase as asset quality weakens.

“We expect the government to prioritize systemic stability and support for rated banks when needed,” Moody’s said.

“Reflecting this, we continue to incorporate a ‘very high’ level of government support in the ratings of the three largest banks and a ‘high’ level of support for smaller banks,” it said.—AOL, GMA News