RP banks strong enough to withstand crisis' effects, Fitch says

Most Philippine banks are strong enough to withstand effects of the global downturn, international credit rating agency Fitch Ratings Ltd. said in a statement datelined Singapore.

This explains why the New York and London-headquartered agency kept a stable outlook on most banks’ credit ratings, even with weak macroeconomic indicators, the agency added.

“Banks’ loss absorption capacity would likely remain adequate and [their] financial strength largely intact,” the ratings agency said.

On the average, the 11 Philippine banks Fitch rated using a “fairly-stressed” scenario remained capable of producing “reasonable earnings and capital cushions to absorb higher losses in the current challenging environment.”

Assumptions in the hypothetical scenario include a non-performing loan ratio of 10.5 percent at the end-2010 (compared to 4.5 percent at end-2008), a 40 percent increase banks’ existing foreclosed properties (compared to 14 percent as of end-2008), and upfront loss recognition instead of amortizing disposal of non-performing assets over a ten-year period.

Under the stress test, the 11 rated Philippine banks “have a credit cost tolerance (the extent to which pre-provision profits can absorb rising credit costs expressed as a percentage of gross loans) of about 300bp, and their core Tier 1 ratio hypothetically declines to 9 percent from its reported level of 11 percent at end-2008,” Fitch said.

While one or two banks have been identified to have “a slightly lower credit cost tolerance” under its stress tests, Fitch emphasized that these credit costs “depict that of a stressed scenario, and therefore should not be construed as a forecast for 2009/2010.”

“In any event, the need for the Philippine authorities to inject capital directly into the banks – as seen in some other developed countries –appears remote at this juncture, and on balance, most Philippine banks seemingly have the resilience to negotiate the current downturn satisfactorily,” the ratings agency said.

Despite “extremely challenging macroeconomic conditions,” domestic banks also “appear adequate to fully absorb costs associated with the deteriorating quality of their assets.”

However, banks’ earnings may be lower this year than last, the ratings agency added.

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