IMF bullish on PHL banking sector

THE PHILIPPINE BANKING sector remains strong, the International Monetary Fund (IMF) said, but noted potential risks that need monitoring such as quickening loan growth and vulnerabilities in the real estate sector.

“Our view is that the Philippine banking sector is strong. It has strong capital, liquidity buffers and high profitability,” IMF Mission Chief Elif Arbatli Saxegaard said at a press briefing on Wednesday.

“Of course, there are always some pockets of vulnerabilities that we would advise the (central bank) to be vigilant about,” she added, noting that systemic risks within the financial system remain moderate.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the combined net income of the country’s banking industry rose by 4.08% to P190.21 billion as of end-June, while total resources of the Philippine financial system jumped by 10.5% to P32.1 trillion at the end of July.

“Of course, another factor in terms of bank profitability will be interest margins and what happens to them as interest rates are reduced. And that really will depend on how the reductions will be passed on to deposit and lending rates,” Ms. Saxegaard added.

BSP Governor Eli M. Remolona, Jr. has signaled possibly cutting rates by 50 basis points (bps) in the fourth quarter. The Monetary Board’s remaining meetings this year are on Oct. 16 and Dec. 19.

The recent cut in banks’ reserve requirement ratios (RRR) will also support bank profitability and, eventually, credit growth, Ms. Saxegaard said, as lenders will have more liquidity. The BSP last month said it will cut big banks’ RRR to 7% from 9.5% effective on Oct. 25.

“Having said that, continued vigilance is warranted against pockets of vulnerability in the real estate sector and the fast-growing consumer credit market,” she said.

“Adjusting macroprudential policy as credit picks up, including by moving towards a positive neutral level for the countercyclical capital buffer, will help preempt the buildup of vulnerabilities.”

For the property sector, there are some segments of the commercial real estate market where vacancy rates remain high, Ms. Saxegaard said.

“As you know, the real estate sector went through a big shift during the pandemic with the departure of the Philippine Offshore Gaming Operators (POGOs), and there are changes in the business outsourcing sector, [with the] work-from-home practices,” she said.

The IMF official added that the BSP must ensure “a strong pickup in credit remains healthy and is going to the healthy borrowers.”

“This is really to point out that the consumer credit market is coming from a low base, but it’s increasing very fast. It’s not a case where we see a huge vulnerability there, but we would like to be vigilant about the fast growth in that segment,” Ms. Saxegaard said.

“Right now, credit growth is more or less comparable to its pre-pandemic averages. So, you know, we don’t anticipate a huge pickup above those levels, but we do expect to see robust growth in credit, a healthy growth in credit.”

Bank lending rose by 10.4% year on year to P12.14 trillion in July, its fastest pace in 19 months, latest data from the central bank showed.

Meanwhile, the IMF said Philippine banks’ non-performing loans (NPL) remain manageable.

“That’s also what we’ve heard from the regulator and also from the banks. They’re currently at about 3.5%, so they do remain manageable,” IMF Representative to the Philippines Ragnar Gudmundsson said at the same briefing.

“There are segments where we see higher NPLs. For instance, the residential real estate market, the NPL level there is still above the pre-pandemic level at 7%, which is precisely one of the reasons why we’re saying that effective supervision and monitoring is important to address some potential vulnerabilities there,” Mr. Gudmundsson added.

Latest central bank data showed the banking industry’s gross NPL ratio went up to 3.58% in July from 3.51% in June and 3.43% a year ago. This was the highest bad loan ratio in 25 months or since 3.6% in June 2022.

‘GRAY LIST’
Meanwhile, the IMF also noted the country’s progress in its bid to exit the Financial Action Task Force’s (FATF) “gray list” of jurisdictions under increased monitoring for anti-money laundering risks.

The FATF in its June update kept the Philippines in its gray list for a third straight year or since June 2021.

“We would also like to note that important progress has been made in addressing anti-money laundering and combating the financing of terrorism (AML/CFT) issues, and the current momentum should be maintained to close the outstanding gaps in the AML/CFT framework and achieve prompt removal from the FATF gray list,” Ms. Saxegaard said.

Mr. Remolona earlier said the Philippines would likely exit the gray list by next year as it still needs to address remaining deficiencies identified by the FATF.

The country has acted on 15 out of 18 items recommended by the FATF. The remaining three action items include “demonstrating that supervisors are using AML/CFT controls to mitigate risks associated with casino junkets; applying cross-border measures to all main sea/airports including detection of false declarations of currency and confiscation action in line with risk; and demonstrating an increase in the prosecution of TF (terrorism financing) cases in line with risk.”

The FATF Plenary, the intergovernmental organization’s decision-making body, usually meets in February, June and October. — Luisa Maria Jacinta C. Jocson