MANILA, Philippines — Affirming the “stable” rating outlook for Philippine banks, credit ratings agency Fitch Ratings said domestic banks show signs of expanding lending and fee-based activities this year, fueled by a five to six percent gross domestic product (GDP) rise this year and in 2012.

Fitch said its latest ratings outlook is supported by renewed economic activities – a continuation from 2010’s robust banking business – and manageable asset quality risk. “(The) asset quality should stay intact as large domestic corporates, which account for the majority of bank loans, should be able to cope with higher prices and funding costs in view of their modest leverage.”

In a statement Wednesday, the international ratings agency cautioned however, that the favorable economic environment may “continue to mask structural issues on the banks' balance sheets, including low coverage on foreclosed properties and deferred charges, and the operational challenges of an emerging market such as the Philippines.”

And while lending activities will likely continue on its 2010 gains, banks’ trading income will not be as positive as last year’s due to increasing interest rates. Local banks and traders already expect this, and have refocused plans on growing their respective banks’ core operations such as consumer loans.

Fitch rates several Philippine banks and based on its latest report, these banks have “satisfactory” capital health and liquid balance sheets. Additional equity infusions raised the industry’s core tier1 capital adequacy ratio (excluding hybrids and preference shares) to 12 percent in 2010 from 11 percent in 2009.

In the meantime, Fitch said monitored banks’ average loans/deposits ratio was stable at 60 percent. Based on central bank data as of the end of the first quarter, the loans/deposit ratio was at 66.06 percent.

“In Fitch's view, capital and liquidity buffers are crucial in helping banks preserve their credit profiles in the event of a renewed global downturn, given the fragile economic recovery globally,” it said. “Provisioning risks in a difficult environment may be significant, particularly for some low-rated banks, due to their concentrated loan books and foreclosed properties with low reserves (with 11 percent coverage on average at end-2010).”

Fitch said the lower provisioning risk may prove “positive” for select banks' ratings. “Conversely, faster-than-expected deterioration in asset quality that threatens solvency may lead to downward rating pressures, although Fitch believes this to be a remote prospect.”

original source: Manila Bulletin