OREANDA-NEWS. The strengthening operating environment for the Philippine banking sector supports the ratings of the nation's large banks, and helped to drive the upgrade of BDO Unibank, Inc. (BDO) - the largest - to investment-grade in April 2016. Fitch Ratings feels that the banks' healthy capitalisation, stable funding bases and liquid balance sheets also provide the capacity to expand their loan books as the economy grows.

Fitch expects Philippine economic growth to remain resilient despite softer external conditions, with robust domestic demand driving brisk mid - to high-teen loan growth over the next one to two years. We expect these factors to propel steady recurring revenue expansion for the three largest banks - Bank of the Philippine Islands, BDO and Metropolitan Bank & Trust Company.

Higher-yielding middle-market, SME and consumer loans are likely to rise at a faster rate than overall credit growth, in line with market demand and the banks' growth strategies. These segments tend to carry higher credit risk than the banks' traditional, large-corporate customer base, but we expect asset-quality to remain broadly benign amid supportive domestic conditions in the near term. Banks' loan-loss reserves, between 111%-175% of NPLs at end-2015, also provide a buffer against higher credit costs.

Philippine banking regulation continues to strengthen, with recent changes focused on enhancing risk-management and related-party lending frameworks, and measures to forestall excessive real-estate risk-taking. Close regulatory oversight, improving risk-management frameworks and sound loss-absorption buffers should help mitigate potential risks arising from sustained high credit growth - as well as long-standing structural issues such as banks' concentrated loan books and conglomerate ownership.