Moody’s has downgraded its rating outlook for Philippine banks from stable to negative, saying the global financial crisis would hurt their earnings and asset quality.

In its updated banking sector report for Asia and the Pacific, Moody's also downgraded its rating outlook for banks in Australia, Hong Kong, Taiwan, Mongolia and Cambodia.

"While the direct impact of the current global financial crisis on banks in Asia Pacific has been comparatively limited, these changes in the industry outlook reflect expectations that gathering economic headwinds from a global recession will increasingly test the resilience and strength of regional banking industries," said Jerry Chien, managing director for Moody's Financial Institutions Group in Asia Pacific.

"In terms of the macroeconomic outlook, Moody's central scenario for 2009-2010 has shifted to one of global healing, and in which the process of global de-leveraging and tight financial conditions depress emerging markets to below-trend growth and leads to economic stagnation," said Chien.

Chien predicts a more challenging operating environment for banks over the next 12 to 18 months, with the most significant threats to their credit worthiness coming from high inflation and a pronounced deceleration in growth and trade.

In the Philippines alone, Moody’s said banks would experience a slowdown in bank deposit and loan growth because the inflow of remittances would also weaken.

"Under our central scenario, remittances which have proved to be a key support for the nation’s economy are expected to be flat on the year, although there are downside risks in the event of global disintegration," the ratings agency said.

Banks also have already adopted a more cautious approach to lending and Moody’s said this would constrain growth in their interest income. Non-performing loans, especially from the high-end residential and commercial real estate sectors, are also expected to rise.

However, Moody’s said it was unlikely that Philippine banks would experience the difficulties of the financial crisis a decade ago, given the improvement in the financial health of most local corporations.

But Moody’s noted that banks would find it hard to maintain their asset quality.

"In light of the pressure on bank earnings and asset quality, the outlook for credit conditions in the Philippine banking system is negative," it said. "The outlook for individual bank foreign currency deposit ratings remains positive, reflecting the positive outlook on the country’s sovereign ratings."

Moody’s noted that while the country is less dependent on merchandise exports than some of its neighbors, it has less policy flexibility to cushion the impact of the global slowdown. 

"Export demand, especially for its electronics, has already begun to decline and foreign investment has also decelerated this year," Moody’s said.