Moody’s sees little risk of problem loans despite rising rates

THERE SHOULD BE little risk of problem loans even as interest rates rise further, a global credit rater said, noting that policy adjustments can be expected to temper credit growth.
Simon Chen, senior analyst at Moody’s Investors Service, said Philippine banks will continue to thrive in the wake of back-to-back policy rate increases from the Bangko Sentral ng Pilipinas (BSP) and rising global yields.
“We do think that the rate increases will be gradual and modest, and so the adjustment to higher interest rates for households and corporates will be manageable,” Mr. Chen said in a media briefing at the Makati Shangri-la hotel yesterday.
“We do not think there will be significant asset quality pressures.”
Moody’s continues to hold a “stable” outlook for the Philippine banking system as it sees macroeconomic conditions remaining robust — hence, enabling loan growth to continue.
Benchmark borrowing rates have risen by a total of 50 basis points following tightening moves by the BSP’s Monetary Board in May and June, at a time the United States Federal Reserve has also raised rates.
While this means it will be costlier to borrow money, it will also result in bigger interest margins for banks.
“We do think when interest rates go up, that’s when banks will benefit with wider interest margins,” Mr. Chen explained.
“Underpinning our view for wider interest rate margins is we see banks are going more actively with the retail loan portfolio which are higher-yielding.”

To add, Moody’s senior credit officer Christian de Guzman pointed out that the BSP’s rate hikes should help temper currently rapid bank lending growth, which in turn “alleviates” concerns that the economy may be overheating.
Bank lending grew by 19.9% as of end-April, sustaining double-digit increases seen over the past few years.
“We do see that there is going to be a tightening in financial conditions… There are perhaps upside pressures that they (BSP) may be likely to raise rates further. I’m hesitant to say that they are behind the curve,” Mr. De Guzman said, noting that there may be a narrowing space for central banks to “deviate” from the Fed’s moves.
Another source of optimism is the sustained level of dollar reserves, which Moody’s said provides comfort in the face of global financial uncertainties even as the country’s current account has reversed to a narrow deficit.
A market-determined exchange rate regime is also “positive” for the country’s external position, Mr. De Guzman added.
Moody’s expects three rate hikes from the Fed this year and another three increases by 2019.
Southeast Asian economies, including the Philippines, are unlikely to be “vulnerable” to a higher interest rate regime.
Any succeeding rate adjustment from the BSP is likely to remain data-driven and will not result in a bigger stock of soured debts.
Non-performing debts held by big banks had a 1.32% share against total loans as of end-April, according to BSP data.
Meanwhile, Mr. Chen said banks can also draw returns from a digitization push that will help them capture a bigger market. He noted that while near-term gains from increased efficiency in using digital channels will be “muted,” the longer-term benefits should be substantial. — Melissa Luz T. Lopez