Credit growth in the Philippines to flirt within the 13%-15% range

Philippine banks poised for a 'positive outlook'.

In a release, Moody's Investors Service says that it is maintaining its positive outlook on the Philippine banking system for the next 12 to 18 months, as it has been since December 2012.

"The positive outlook is in line with our expectation that GDP growth in the Philippines, which we expect will remain one of the strongest among emerging-market economies over the next 12-18 months," says Simon Chen, a Moody's Assistant Vice President and Analyst.

"In that context, credit growth is likely to be in the range of 13%-15% on an annual basis, while asset quality will be supported by the robsut economy and relatively low retail credit penetration" adds Chen.

Moody's conclusions were contained in its just-released "Banking System Outlook: Philippines," which expresses Moody's expectation of how bank creditworthiness will evolve in this system over the next 12-18 months. The report is co-authored by Chen and Shaoyong Beh, an Associate Analyst.

Moody's report says that the positive outlook for the banking system is based on an asessment of five factors: operating environment - positive; asset quality and capital - stable; funding and liquidity - stable; profitability and efficiency - stable; and systemic support -- positive.

The report points out that the Philippine government's preliminary forecast after the powerful Typhoon Haiyan hit the Philippines' Eastern Visayas region early last month, is that the storm should lower GDP growth this year by 0.3-0.8 percentage point. In contrast, the country's GDP rose 7.4% year-on-year in the first nine months of 2013.

Moody's report also says the system's level of non-performing assets should remain stable, after dramatic improvements in recent years, while provision coverage continues to rise.

In addition, despite strong loan growth in recent years, household indebtedness and corporate leverage remain low, with total system credit to GDP at about 40%, and on a slightly declining trend.

"We expect the Philippines' robust economy and low interest rates to continue being supportive of borrowers' ability to service debt. In addition, the low interest rate environment should result in the banks focusing on growing higher-yielding segments like small- and medium-sized enterprises and retail," says Chen.

Moody's also says the banks are likely to open more branches next year, once restrictions on doing so in certain areas of Metro Manila are lifted in mid-2014. Moody's points out that the restrictions were intended to encourage banks to set up operations in rural areas and to limit the banking system's concentration in Metro Manila.

On capitalization, Moody's report says the banks continue to be well-positioned to meet the new Basel III requirements coming into effect on 1 January 2014.

Moody's further notes that the banks are likely to maintain liquidity profiles that are among the strongest of banks globally, given that they are fully funded by customer deposits, reducing the need to borrow from the wholesale market. Moreover, the system's loan-to-deposit ratio is low, at 59% at end-September 2013. The banks have also maintained a large proportion (40%) of total assets in liquid assets such as cash and local government securities.

Foreign-currency liquidity is also strong, with a loan-to-deposit ratio of 38% at end-September.

"The banks' core profitability should remain robust, as continued healthy loan growth offsets mild pressure on net interest margins," says Chen.

Moody's report also notes that the government's improved fiscal strength will add to its ability to extend support to the banks when necessary. On average, Moody's rated banks in the Philippines receive 1-2 notches of uplift in their average long-term deposit ratings of Baa3 from their standalone credit ratings.

The positive outlook on the Philippine banking system is consistent with Moody's positive outlook on the Philippine government's Baa3 rating.

Moody's rates seven banks in the Philippines. These seven commercial banks accounted for 63% of total banking system assets at end-June 2013. Of the seven, six rank among the top 10 banks in the country by market share of total assets.