International credit watcher Standard & Poor’s (S&P) Global Ratings said the Philippine banking system is healthy enough to ride out any potential risk it may face in the policy horizon, but warned this current stability may be shaken by unfilled gaps in the legislative and infrastructure area.
In its latest Philippine banking industry assessment, S&P classified the Philippine banking sector in the group “7” under its Banking Industry Country Risk Assessment (Bicra). The country’s ranking remained unchanged from S&P’s earlier assessment.
“Our bank criteria use our Bicra economic risk and industry risk scores to determine a bank’s anchor, the starting point in assigning an issuer credit rating,” S&P said.
Other countries in group 7 are Bahrain, Bulgaria, Costa Rica, Croatia, Hungary, Indonesia, Jordan, Morocco, Portugal and Slovenia.
“We believe the trend in economic risks facing financial institutions operating in the Philippines has become positive, based on improving credit fundamentals,” S&P said.
Among the positive developments mentioned in S&P’s report were the local banking regulations—which were broadly in line with international standards, with some even more stringent then global parameters.
Also, S&P cited the government-led Credit Information Corp. (CIC), whose full launch is scheduled for early 2018.
“We expect consumer lending quality to benefit if the authorities prepare well for the launch.
In particular, we believe the credit bureau will help improve transparency and availability of borrower information on the household sector, which forms a significant 18 percent of lending by the banking sector and has historically contributed materially to credit losses,” S&P said.
The country’s positive economic trend, S&P said, also bodes well for the local banking industry—one that is heavily biased toward corporate lending.
“Philippine banks predominantly lend to the corporate segment, particularly larger companies with long credit histories and a strong repayment track record. The corporate sector has healthy margins, good profitability and adequate interest coverage. We believe robust economic conditions will continue to support borrower repayment, and we expect credit losses from the corporate sector to remain low,” S&P said.
“If the abovementioned economic trend improvement materializes, we could revise our economic risk assessments to a stronger category of ‘6,’ it added.
However, S&P warned of the country’s low income level and inadequate infrastructure, which could hamper economic diversification and growth.
“The country’s weak payment culture and rule of law heighten credit risk,” S&P said.
“We consider that inadequate legislation and legal protection for supervisory staff could, however, compromise the regulator’s ability to implement prudential measures,” it added.
Also, S&P said any major hindrance in the implementation of the credit bureau, or a significant increase in credit pressures on the corporate or household sector, will stall or delay an improving trend in the Philippine banking system’s credit risk portfolio.