Philippine banking industry on solid ground despite risks

PHILIPPINE banks can be expected to keep solid footing this year despite “rising” credit risks as interest rates pick up and robust loan growth continues, analysts at BMI Research said.

“We expect the performance of Philippine banks to remain supported by the robust macroeconomic backdrop, but this will be somewhat offset by rising interest rates over the coming quarters,” the Fitch Group unit said in a note yesterday.

“Although banks are well-capitalized, we note that downside risks to financial stability are rising.”

BMI said local players will continue to benefit from the country’s robust macroeconomic backdrop, with upbeat economic activity to support loan growth, bottom lines and asset quality.

Philippine gross domestic product expanded by 6.7% in the nine months to September, well within the government’s 6.5-7.5% target that keeps the country among Asia’s fastest-growing economies.

The state is looking to boost infrastructure spending that, in turn, will spur GDP expansion faster to 7-8% annually starting this year up to 2022, when President Rodrigo R. Duterte ends his six-year term.

“We note that the current record-low interest rate environment and upbeat economic growth expectations have resulted in a sharp rise in leverage, and malinvestment have started to accumulate in the economy,” BMI said.

“If left unchecked, this poses downside risks to financial stability, even though Philippine banks generally boast healthy capital buffers.”

Benchmark borrowing and lending rates stand at 2.5% for overnight deposit, 3.0% for overnight reverse repurchase and 3.5% for overnight lending, with the Bangko Sentral ng Pilipinas (BSP) seeing no need to adjust policy settings as of its December review in the face of manageable inflation and upbeat domestic demand.

The Monetary Board’s decision to leave rates unchanged last month came in the wake of 2017’s third rate hike in the United States that placed upward pressure on global yields.

Central bank officials have said that they do not have to match the Fed’s tightening moves as they come, with Philippine developments remaining their key consideration for policy adjustments.

BMI expects bank lending growth to clock 15% this year, coming from a 17% estimate for 2017. Credit growth is expected to remain brisk, with the research unit pencilling a 13% annual pick-up in lending from 2019 to 2022.

Bank lending expanded by 19.2% in November, the slowest pace since June 2017.

This brought outstanding loans granted by banks to P6.961 trillion, according to central bank data.

“[S]ustained periods of high credit growth generally precede future asset quality deterioration as the quality of lending is often lax when sentiment is upbeat,” BMI warned, adding it expects the central bank to “gradually unwind” supportive interest rates this year.

The amount of bad loans held by local banks may also increase slightly from 1.9% as of end-November to around two percent over the coming quarters, with the Fitch research unit pointing out “heavy lending” towards the volatile property sector.

Total loans even doubled to P1.71 trillion as of end-September from P866.6 billion three years ago.

BSP officials have constantly downplayed overheating concerns raised by economists, and policy makers said strong lending simply supports increased production activities as the economy keeps growing. — Melissa Luz T. Lopez