Will Philippine banks' rapid lending activities drain capital?

Funding will also tighten as banks ramp up credit extensions.

Banks in the Philippines which have been gradually stepping up lending activities in support of the government’s ongoing infrastructure drive are at risk of contracting capital ratios, according to Moody’s Investors Service.

“Capital ratios will decline due to fast loan growth, but the banks’ ability to raise external capital will limit capital erosion,” Moody’s said in a statement.

Also read: Philippine bank loans to small enterprises hit $10.12b in H1 

The Philippine shares second place ranking with Thailand as the ASEAN country with the highest Common Equity Tier 1 ratios at  14.7% as of September 2017, according to data from S&P Global Market Intelligence. Capitalisation provides a good level of protection against growing downside risks such as those brought about by US-China trade dispute.

“Consequently, the capital ratios of Philippine banks will remain among the highest in Asia and will continue to be a key credit strength,” the firm added.

Funding would also tighten due to rapid loan growth which is expected to settle in the mid-teens for the full year period, cautioned Moody’s. However, profitability will improve as a result of rising interest rates and the operating environment will remain largely supportive. 

“Because a large share of Philippine banks’ deposits comprise current and savings accounts, which tend to be relatively insensitive to changes in overall interest rates, funding costs will not rise as fast as lending rates even as term deposit rates will see a sharp increase. The result will be wider margins,” added Moody’s.