By Keisha B. Ta-asan, Reporter
PHILIPPINE BANKS will continue to see improved profits this year, supported by better margins following the central bank’s rate hikes, according to Fitch Ratings.
“In the absence of a new shock in the economy, we expect banking sector profitability to continue to improve in 2023, helped by rising interest rate margins as banks continue to reprice their loans while funding costs are likely to remain controlled thanks to banks’ favorable funding structure,” Tamma Febrian, a director at Fitch Ratings’ Asia-Pacific Banking team, said in an e-mail interview with BusinessWorld.
Mr. Febrian said this would offset any rise in credit costs stemming from the vulnerable sectors.
“Capitalization levels are likely to remain steady, supported by sustained earnings growth that is broadly in line with credit growth,” he added.
Latest data from the Bangko Sentral ng Pilipinas (BSP) showed outstanding loans extended by universal and commercial banks climbed by 13.7% year on year to P10.64 trillion in November 2022.
As lending growth continued to pick up, M3 — the broadest measure of liquidity in an economy — expanded by 5.4% to P15.6 trillion in November.
However, rising inflation and higher interest rates, which may affect consumers’ purchasing power, could result in weaker asset quality for lenders, Mr. Febrian said.
Inflation averaged 5.8% in 2022, well-above the BSP’s 2-4% target range. The BSP expects inflation to average 4.5% this year, although BSP Governor Felipe M. Medalla has said this is expected to be below 4% by the third quarter and below 2% by early 2024.
The Monetary Board increased the overnight reverse repurchase rate by 350 basis points (bps) to 5.5% in 2022, although it is expected to continue tightening this year to curb inflation.
“Higher interest rates, coupled with rising cost of living and input costs, would generally weaken borrowers’ debt repayment capacity. Nevertheless, most large corporates in the country have significant financial buffers to withstand the rise in interest expense,” Mr. Febrian said.
He noted small- and medium-sized enterprises (SME) and consumers may feel the impact of higher rates more, given their thinner buffers, but any weakening in loan quality in these sectors will likely be contained as economic growth is expected to remain strong this year.
Fitch Ratings expects the Philippines to grow by 5.5% this year, slower than the 7.6% gross domestic product (GDP) growth in 2022. This forecast is also below the government’s 7-6% target.
“Loan demand is sensitive to interest rate movements. Pent-up consumer demand and capex (capital expenditure) have kept loan growth robust in the second half of 2022 despite the aggressive monetary policy tightening since May 2022,” he said.
“We expect demand to moderate in 2023 as effects of the rate hikes filter through to the economy. Our base case is for loan growth to settle at 6-7% in 2023, with some upside if the economic momentum turns out stronger than expected,” he added.
Despite rising borrowing costs, economic output grew by 7.2% in the fourth quarter of 2022.
Fitch Ratings also expects “fairly steady asset-quality performance” for the banking sector this year.
“We believe any deterioration in the vulnerable sectors (i.e. SME, consumer) are likely to be offset by continued recovery in the large corporates’ loan quality and the tourism sector. The latter has been a major drag on banks’ asset quality over the past two years, but tourism activity is expected to continue to rebound as China reopens its economy, which should cause credit pressures on these borrowers to ease,” Mr. Febrian said.
Based on data from the central bank, bad loans slipped by 0.9% to P408.097 billion in November from P411.632 billion in October. This brought the November nonperforming loan (NPL) ratio to 3.35%, which fell from 3.41% in October.
Loans are considered nonperforming once they remain unpaid for at least 90 days after the due date. They are deemed as risk assets as borrowers are unlikely to settle these loans.
“We see some upside to our outlook if the economy grows faster than expected or if banks aggressively write off NPLs, given the high loan-loss coverage of a number of the large banks in the country,” Mr. Febrian said, adding that asset quality may worsen if there is another economic shock or if rates rise significantly higher than the base case.
Fitch sees better profits for PHL banks this year
By Keisha B. Ta-asan, Reporter