Fitch flags emerging asset quality issues for Philippine banks amid credit growth

AMID A supportive economic environment in the Philippines, emerging asset quality issues may be hard to spot amid rapid credit growth, according to Fitch Ratings.

In a report entitled “What Investors Want to Know: Asia-Pacific Investment-Grade Banks” published on Nov. 29, the firm said the country, alongside Vietnam, may have asset quality problems “masked by high loan growth.”

“Asset quality metrics have deteriorated moderately recently, and we expect further normalization as loans season,” Fitch Ratings’ Asia-Pacific Banks team told ����ý in an e-mailed response on Wednesday.

“Nevertheless, we believe that the broadly supportive economic environment and easing interest rates should somewhat help mitigate downside risks and support borrowers’ debt servicing capacity in the near term,”

According to Fitch, a turn in the economic cycle could be a risk for banks as it could entail “higher credit costs and impairment…which could be lumpy in times of stress given the banks’ high concentration in large borrowers exposures.”

The ratings agency compared the local scenario to that of Malaysia which has more exposure to external developments and where the market also faces risks from “elevated household leverage and areas of excess property supply.”

Sought for comment, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort noted that the country indeed has a “relatively faster” loan growth in recent years which averaged “at around 15-17% and even close to +20% in 2018.”

“Faster expansion in banks’ loan portfolios may have led to a commensurate increase in NPLs (nonperforming loans) as well. Gross NPL ratio of Philippine banks has picked up to 1.66% as of September 2019, among the highest in 3 years, coming from a record low of 1.24% as of end-2017,” he said in an e-mail.

Mr. Ricafort also pointed out the “peculiar situation” of the country “with both inflation and interest rates reaching their peak by October 2018.”

“These partly caused the uptick in NPL ratio as well from the bottom in end-2017, as sharp increase in borrowing costs as seen in most of 2018 and even carried over in early 2019 tends to cause some pick up in NPL ratio, amid slower local and global economic growth largely due to the lingering US-China trade war,” Mr. Ricafort explained.

In October, inflation slowed to a three-year low of 0.8%. Meanwhile, key policy rates have been slashed by a total of 75 basis points (bps) this year, partially dialing back the 175 bps in rate hikes implemented by the Bangko Sentral ng Pilipinas (BSP) in 2018.

Policy rates currently stand at four percent for the overnight reverse repurchase facility, while the overnight deposit and lending rates are at 3.5% and 4.5%, respectively.

The Philippine Statistics Authority is set to report the November data inflation on Thursday. The BSP expects inflation to have fallen within 0.9-1.7% on the back of diminishing base effects and an uptick in electricity prices and meat substitutes due to the African Swine Fever that hit pork products.

Meanwhile, latest BSP data showed outstanding loans of universal banks expanded by 9.3% in October, a slower pace than the 10.5% seen in September.

Noting slowing loan growth in the Philippines, Mr. Ricafort said “growth in NPL ratio could be tempered as well with slower expansion in banks’ loan portfolios as well as the sharp reduction in borrowing/financing costs that ease the burden/strain especially on debt servicing by some borrowers.”

Meanwhile, UnionBank of the Philippines Inc. Chief Economist Ruben Carlo O. Asuncion said Fitch’s assessment of “asset quality problems” here may “not be entirely accurate, at least from an industry standpoint.”

This, as he cited the industry’s loan growth and capital adequacy ratio (CAR) which is at around 16%.

“Industry loan growth this year is expected around 13% and approximately 8.5% of which are house consumer loans that are higher in risk of default compared to other loan types in the overall industry portfolio,” Mr. Asuncion said in an e-mail.

According to Mr. Asuncion, credit growth in the country is seen to climb to around 15% by 2020 on the back of the impact of the recent expansionary stance of the central bank.

“Note also that the industry’s CAR is at about 16%, which is at a very healthy clip, and it seems that the central bank has been on its toes and has diligently monitored the Philippine banking industry and its corresponding lending activities even as the economy continues to expand and grow,” he explained. — Luz Wendy T. Noble