PHL lenders’ growth outlook ‘positive’

THE PHILIPPINE banking sector is likely to remain on solid footing this year, with loans expected to post a double-digit expansion as the economy sustains its growth momentum with a boost from increased foreign trade, analysts at BMI Research said.

“We believe that the growth outlook for the Philippine banking sector remains positive, and there are few risks to financial stability over the medium term. Some of the key factors supporting our constructive view include a strong economic growth outlook, healthy capitalization and liquidity profiles, and ongoing positive structural reforms,” the Fitch unit said in an April 12 report.

BMI forecasts loan growth at 17% this year, with strong credit demand seen from the retail and corporate segments as it rides on upbeat gross domestic product (GDP) expansion.

If realized, this would sustain a 16.6% rise in bank lending in 2016, where total credits amounted to P7.612 trillion from P6.527 trillion a year prior. Philippine GDP grew by an upward-revised 6.9% in 2016, well within the government’s 6-7% target.

BMI Research said growth could slide to 6.3% this year, lower than the state’s 6-5-7.5% goal but is enough to keep the country as one of the fastest-growing economies in Asia on the back of an improved business environment, positive demographics, and the government’s aggressive fiscal spending plans.

In particular, the analysts pointed out that warmer diplomatic ties with China and Japan will unlock more trade and investments for the local economy: “This should help to drive credit demand as both households and businesses assume leverage against a backdrop of profitable opportunities and relatively low existing indebtedness.”

Approved loans also remain financed largely through bank deposits, which minimizes refinancing risks at a time of heightened uncertainty in the global financial markets. Total loans accounted for 72.45% of the P10.507-trillion deposits held by Philippine lenders in 2016, according to data from the Bangko Sentral ng Pilipinas (BSP).

Central bank officials have said that the local financial system remains awash with liquidity despite the 20% reserve requirement imposed on big lenders, which pushed the BSP to introduce weekly term deposit auctions since June to better manage money supply.

Despite the increasing loan portfolios, Philippine banks are broadly seen to keep its good asset quality, with sustained efforts for risk management despite rising exposures to risky borrowers like retail clients and small-scale businesses.

Non-performing loans held by banks dropped to a 1.89% share in 2016 at P144.158 billion in debts left unpaid at least a month past due date, according to central bank data. The share of bad loans has been on a yearly decline despite the strong appetite for loans.

Corporate earnings and rising asset valuations will also help keep bank profiles steady, and is supported by ample capital buffers, BMI Research added.

Local banks cumulatively posted a 15.59% capital adequacy ratio as of end September based on BSP data, which is well above the 10% regulatory standard.

However, BMI flagged the “uneven risk distribution” in the local banking system, with over 70% of industry assets managed by the country’s biggest lenders.

On the other hand, the research firm welcomed the entry of more foreign banks to the Philippines, saying it would inspire consolidation among local lenders to beef up amid increased competition.

Earlier this month, the BSP finalized bilateral discussions to allow three Malaysian banks to enter the country and started talks for a similar deal with the Bank of Thailand, as the country closer to regional banking integration. Nine new foreign banks have set up shop in the Philippines over the past two years, following the signing of a law that allowed the entry of more offshore lenders in 2014.