S&P lifts rating of Philippine banking sector 

June 6, 2018

Standard & Poor’s Global Ratings (S&P) has upgraded the Philippine banking system’s rating by a notch, citing favorable economic environment that supports growth of banks, sound regulations, and improving industry fundamentals and trends.

With the upgrade, the Philippine banking sector is now classified under the stronger category of '6' from the previous ‘7’ (scores range from 1 to 10, with the latter reflecting the highest risk).

“High household consumption, investment, and exports (mainly of electronics, commodities, and services) continue to support economic activity. These strengths will likely be underpinned by strong household and company balance sheets, sound growth in jobs and income, inward remittance flows, and an adequately performing financial system,” S&P said in its latest Banking Industry Country Risk Assessment (BICRA) report on the Philippines released Tuesday.

It positively mentioned the Duterte administration’s Tax Reform for Acceleration and Inclusion (TRAIN) and infrastructure agenda, saying these would respectively help improve the government’s fiscal situation and overall economic performance, which in turn will provide a favorable operating environment for banks.

“The Philippine government is enacting increasingly effective fiscal policies, marked by improveme

nts to the quality of expenditures, still-limited fiscal deficits, and low levels of general government debt. At the same time, the economy continues to achieve consistently robust growth. In our view, the Philippines' institutional capacity has started to improve, as seen in its increasingly sustainable public finances,” the rating agency added.

S&P also cited the country’s strong external payments position, saying this “forms the cornerstone of [the Philippines’] credit strengths.”

With ample foreign exchange reserves, which amounts to about $80 billion, the Philippines is able to cushion the impact of external shocks and maintain a stable economic environment that is beneficial for businesses, including banks.

On the regulatory environment, S&P said banking regulations in the Philippines are at par with, and in some cases even more stringent than, international standards.

S&P added the risk of a credit-fueled asset bubble in the country is low.

“Pre-emptive prudential measures to control banks' real estate exposures have led to moderation of credit growth in this segment, which mitigates the build-up of economic imbalances. We expect that credit losses will remain low, supported by robust economic growth and healthy corporate balance sheets…” it added.

S&P also cited a host of other factors seen to have reduced credit risks in the Philippine banking sector. These include their low exposure to bad debts, with the non-performing loans ratio standing at a mere 1.7 percent as of end-2017, conservative underwriting standards and well established credit approval process of banks, as well as low exposure to foreign currency denominated debt.

Other favorable fundamentals that help maintain the soundness and stability of the Philippine banking system include continually rising deposits and other assets, as well as strong capitalization.  As of end-December 2017, capital adequacy ratio (CAR) was 15.0 percent, higher than BSP’s requirement of 10 percent and international standard of 8 .0 percent. DMS