MANILA, November 19, 2004 (STAR) Weak loan growth and over $10 billion in non-performing assets are weighing on the Philippine banking sector, credit rating agency Standard and Poorís (S&P) said yesterday.

S&P said in a report the Philippine banking sector could be heading for tougher times as considerable levels of bad debts weigh heavily on asset quality.

"Although the countryís economic growth remains on track, the Philippine banking system is weakly capitalized by international standards, and remains saddled with bad debts.

"Any unexpected deterioration in economic and industry conditions could strain the system severely," S&P credit analyst WeeKiat Sim said in the report.

He added that any ratings upgrade for Philippine banks will depend on the speed with which they address asset quality concerns and improve risk management practices.

The report, "Philippine Banking Industry Stable but Struggling Under Bad Debt Burden" said the banking sector remains shackled by large levels of non-performing assets (NPAs), with regulatory distressed assets of P601.5 billion as of March 2004.

The study, however, acknowledged that under the Special Purpose Vehicle Act of 2002, which provides incentives to banks to get rid of their problem loans, some banks are managing to off-load some of their debt.

From January to August 2004, successful transactions under the Act amounted to about 4.5 billion pesos.

In addition, the central bank is reviewing a further 44.5 billion pesos worth of transactions. Although SP expects asset quality to continue improving, a proposal to extend the deadline of the Act by another two years from April 2005 could slow down the pace of bad asset disposals.

SPís report said another challenge facing Philippine banks is weak loan growth, due in part to the reluctance of banks to lend for fear of aggravating their asset quality.

The patchy economic recovery in the Philippines has not provided sufficient opportunities for credit growth, and anaemic loans demand has led to intense competition in the overcrowded banking sector, the report said.

In 2003, bank loans grew a modest 3.7 percent.

"Due to high levels of NPAs, some banks may be hard-pressed to reflect better asset quality ratios through more aggressive loan growth. As a result, this could hurt the credit quality of their loans if rigorous credit assessments are not conducted.

"Given these concerns, it is imperative that the senior management of banks implement effective risk management systems and good corporate governance measures," Sim said.

Reported by: Sol Jose Vanzi

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