‘Little fallout’ expected from Hanjin bankruptcy
Credit to Author: MAYVELIN U. CARABALLO, TMT| Date: Tue, 15 Jan 2019 16:26:55 +0000
The Philippine financial system is unlikely to be shaken by the bankruptcy of a Subic-based shipbuilder, a Fitch unit said, although challenges should be expected overall given a possible economic slowdown.
“Our view at Fitch Solutions is that the loan default by the local shipbuilding unit of Korean conglomerate Hanjin, the biggest in the Philippines’ banking history, is not a systemic problem and is unlikely to threaten financial stability in the country in the near-term,” it said in a report released on Tuesday.
Subic-based Hanjin Heavy Industries and Construction Philippines (HHIC-Phil) which last Tuesday filed for corporate rehabilitation, reportedly owes Land Bank of the Philippines (Landbank),
BDO Unibank, Inc., Rizal Commercial Banking Corp. (RCBC), Metropolitan Bank & Trust Co. (Metrobank) and Bank of the Philippine Islands (BPI) around $412 million in addition to another $900 million to South Korean creditors.
“We expect little fallout for the banking system as a whole from the default due to three reasons. Firstly, there is little concentration risk,” the Fitch unit said.
It estimated that the exposure represented less than 1.25 percent of the total assets of RCBC, expected to be the worst hit, while the impact would be even smaller for least affected BDO, constituting just 0.11 percent of total assets.
Secondly, Fitch Solutions said all five banks had reportedly come together to take control of Hanjin’s assets in the Philippines, and also agreed that no single lender would unilaterally seek to take control.
“This should give the company some time to rehabilitate, and there has been precedent of lenders being able to recoup their losses after the period,” it noted.
“Even if in the event that the consortium of Philippine banks call for the forced sale of the Hanjin shipyard to strategic investors, the value of the company’s assets is said to outstrip its loan liabilities,” the Fitch unit added.
Lastly, it highlighted that Philippine banks as a whole had strong capital buffers and low non-performing loans (NPLs).
Gross NPLs as a share of total loans came in at 1.85 percent in November 2018, roughly stable over the past 12 months, while the NPL coverage ratio stood at 108.25 percent, indicating adequate loan-loss provisioning, Fitch Solutions pointed out.
It added that the capital adequacy ratio for the sector also stood at 15.36 percent in September 2018, far exceeding the regulatory requirement of 10 percent.
The Fitch unit’s assessment was in line with a recent statement by BSP Deputy Governor Diwa Guinigundo, who last week underscored that the five local banks’ exposure to Hanjin, relative to both total loans and total foreign currency deposit unit (FCDU) loans of the banking system, was “very negligible.”
Moody’s Investor Service, however, has warned that the affected banks could see their investment grade credit ratings fall given that their exposure to a Hanjin is credit negative.
Banks downplay impact
Share prices of the affected banks were mixed on Tuesday after plunging on Friday following news of Hanjin’s insolvency and then recovering some ground on Monday.
BPI gained 2.06 percent or P1.90 to P93.80 per share while BDO ended lower by 0.53 percent or P0.70 to P130.90. RCBC and Metrobank ended flat at P27.15 and P80.00 apiece, respectively.
State-owned Landbank is not listed.
Following Moody’s assessment, the four listed banks told the Philippine Stock Exchange that they could weather any potential losses from a Hanjin default.
BPI said that its $52-million exposure was about 0.20 percent of its total loan book.
“We have partially provisioned for this and additional provisions in 2019 is manageable,” it added.
BDO, meanwhile, said it did not expect a default to have a material effect in its business, operations and/or financial condition as Hanjin accounted for only 0.15 percent of the bank’s total loan portfolio “and as such is not considered a material amount.”
Metrobank also pointed out that its exposure was low relative to its total assets of P2.1 trillion, adding that it had adequate provisions did not see “any significant impact to our operations.”
RCBC — the bank with the largest exposure of $145 million — said the loan it provided Hanjin was only 1 percent of assets valued at P614 billion and less than 2 percent of P387 billion in total net loans.
“The bank’s net NPL of 1.2 percent as of September 2018 will increase as a result of this exposure and corresponding provisions will be made based on accounting standards and regulatory guidelines,” it added
“Even with this default, the bank’s capital adequacy ratio of 17.3 percent as of September 2018, remains very strong, well-above regulatory minimum and can still support medium term loan growth.”
Challenges ahead
Fitch Solutions, meanwhile, noted that the operating environment would likely become more challenging for the financial sector as it projected slower Philippine economic growth this year.
“We are forecasting real GDP (gross domestic product) growth in the Philippines to slow to 6.1 percent in 2019, from an estimated 6.2 percent in 2018, and down from 6.7 percent in 2017,” it said.
The forecast for this year, it should be pointed out, falls below the government’s official 7.0-8.0 percent target.
“We believe that the Philippine economy will struggle to reverse its waning growth momentum over the coming quarters owing to tighter monetary conditions, the potential for a re-escalation of global trade tensions, as well as a deteriorating business environment,” Fitch Solutions said.
GDP growth is currently running below the 6.5-6.9 goal for 2018 based on latest data, averaging 6.3 percent as of end-September following first to third quarter outturns of 6.6 percent, 6.2 percent and 6.1 percent, respectively.
Fourth quarter and full-year 2018 GDP figures are set to be released on January 24.
Growth in 2017 of 6.7 percent was near the lower end of the 6.5-7.5 percent target.
Lastly, the Fitch unit noted that “since President Rodrigo Duterte took office, the country’s ease of doing business has slipped from 99th position (out of 190), to 124 in 2018, while its corruption perception index ranking also fell to 111 (out of 180 countries) in the 2017 report, from 101 (out of 176) in the year before.”
Combined with rising interest rates both globally and domestically, as well as lower risk appetite, these factors will likely see investments slow over the coming quarters, it added.
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