MANILA, March 25 (Xinhua) -- Despite their high earnings profile, Philippine banks are exposed to high credit losses because of lack of support from the government and a generally weak operating environment, ratings agency Moody's Investor Service said on Tuesday.

    In its first report on Philippine banks, Moody's said industry reforms undertaken since the Asian currency crisis have helped improve regulation and supervision but further improvements are needed, Philippine TV network GMA News reported.

    Moody's senior analyst Richard Lung said the industry's confidence can be further boosted by greater transparency, formalization of procedures and institutionalization of reforms.

    "Bank credit risk in the Philippines has been elevated by a difficult operating environment, a new and developing supervisory and regulatory framework, and low level of government support," Lung said.

    Philippine banks have historically faced little competition from the domestic capital markets or from non-bank financial institutions, Lung said.

    Despite the rapid expansion of the equities market especially last year, banks remain the main source of corporate financing particularly for small- and medium-sized companies that find it costlier to access the stock market for raising capital.

    As the dominant financial intermediaries, Lung said Philippine banks have developed strong earnings profiles, supported by the fact that most of the large banks have universal banking licenses.

    Universal banks are licensed to offer a wide range of financial services that increased their revenue flows.

    However, Lung said that because of problems in their operating environment, banks in the Philippines were exposed to potentially high credit losses similar to that experienced following the Asian financial crisis.

    "In addition to the moderately high volatility in the country's business cycles, credit losses have historically been exacerbated by weak governance," Lung said.

    "These challenges outweigh the benefits derived from the dominant role of banks within the financial system, and also help explain the low intrinsic financial strength and deposit ratings of the Moody's-rated Philippine banks," says Lung.

    However, Lung said that proposed legislation pending in Congress could correct some of the deficiencies in the supervisory framework.

    In considering external support factors, Lung said that based on Moody's assessment, the Philippines was considered to be a low-support country based on the relatively low importance of the banking sector relative to the size of the economy, the uneven history of past government interventions and limits on deposit insurance coverage.