PH banks to face low liquidity risks amid tightening financial conditions

Banks in the Philippines and the Asia-Pacific region face low liquidity risks despite declining funding conditions, Moody’s Investors Service said.

The impact of liquidity tightening will be limited for banks in the region amid their stable deposits, Moody’s Investors Service said in a report on Tuesday.

“The risk of a liquidity crunch is still relatively low for most banks in Asia-Pacific (APAC) because stable deposits from diverse customers underpin their funding, and they hold ample liquid assets,” it said.

Financial institutions around the world are facing several challenges and uncertainties, Moody’s said, including tighter monetary policy, outflows of excess liquidity built up during the and increased risk aversion among investors because of the recent US banking turmoil.

Local currency deposits will continue to be Asia-Pacific banks’ primary funding source, indicating that their reliance on confidence-sensitive wholesale funding will be limited, it said.

Banks’ deposits are well diversified, meaning that fund withdrawals by a customer group are unlikely to weaken lenders’ entire deposit bases, Moody’s added. Banks in the region also hold appropriate amounts of liquid assets to weather liquidity stress.

“Large proportions of APAC banks’ liquid assets are cash and held-for-trading (HFT) or available-for-sale (AFS) government securities,” Moody’s said.

HFT is a category of investment portfolio maintained by banks with the intention to trade in securities by taking advantage of the short-term price or interest rate movements.

Securities holdings
“For banking systems with large holdings of held-to-maturity (HTM) securities, we assess the risk of banks being forced to realize mark-to-market losses is low because they have adequate liquidity and access to central banks’ repurchase agreement (repo) facilities,” it added.

Moody’s said that banks in Bangladesh, China, India, Mongolia, the Philippines, and Taiwan, hold sizeable volumes of HTM securities. 

“They are carried at amortization costs, without reflecting their current market values, unless a bank decides to sell them. Hence, a sale of HTM securities could lead to a large loss if their current market values are substantially lower than their acquisition costs,” it said.

“Yet we do not expect losses to be significant because increases in interest rates in APAC have been less significant and less rapid than to those in the US,” the debt watcher added. 

The Bangko Sentral ng Pilipinas (BSP) has raised interest rates by 425 basis points (bps) since May 2022, bringing the key rate to 6.25% and becoming one of the most aggressive central banks in the region.

Meanwhile, the US Federal Reserve hiked borrowing costs by 500 bps since March last year, bringing the Fed funds rate to 5-5.25%. — By Keisha B. Ta-asan