Fitch flags risk from more Fed tightening

FURTHER tightening by the United States Federal Reserve will likely hurt Philippine banks as this puts pressure on local yields, Fitch Ratings said, leading to a bigger share of problem loans as borrowing costs rise.

In a report, Fitch said the Philippines had “medium” vulnerability to additional rate hikes by the Fed given some exposure to foreign currency debt, as well as credit- related risks as rising global yields spur domestic interest rates higher.

“Sharply higher local rates would weigh on banks’ credit quality, particularly in light of high levels of credit growth,” the debt watcher said in a report published on Friday.

Bank lending grew by 18.3% in March, marking the slowest pace in over a year but still sustaining a double-digit expansion, according to central bank data.

Despite this, soured debts accounted for just 1.31% of the P8- trillion loans by universal and commercial banks as of endMarch.

Stephen Schwartz, head of sovereign ratings for Asia Pacific at Fitch, previously flagged overheating risks amid rapid economic activity, citing faster inflation and a current account deficit. He added that market rates will also mirror the uptick in global yields.

“We would expect over time pressure on interest rates to be in the upward direction in the Philippines as in other countries in the region,” Mr. Schwartz said, noting that Fitch expects three more rate hikes from the Fed this year and another three in 2019.

The Fed introduced a rate hike back in March as policy makers saw the US economy gaining strength and inflation rising “in the coming months.”

Back home, the Bangko Sentral ng Pilipinas (BSP) opted to raise benchmark rates by 25 basis points during the May 10 meeting of its Monetary Board, its first rate hike since September 2014 as domestic inflation continues to trend above BSP’s 2-4% target.

The increase in prices of widely used goods clocked 4.5% in April — the fastest in more than five years — bringing the year-todate pace to 4.1%. The BSP now sees full-year inflation at 4.6%.

Apart from credit-related risks, Fitch also flagged “moderate” impact of the Fed’s rate adjustments via the foreign currency exposures on bank balance sheets, saying that “repricing mismatches” would mean higher debt servicing costs for local players.

This comes at a time big banks have been building capital through debt sales to local and foreign investors in order to meet higher regulatory standards and manage their debt stock.

Higher US rates would also trigger capital outflows, although their impact on domestic liquidity is expected to be “low.”

Still, Fitch sees local banks well-armed to withstand potential headwinds.

“Aggregate private-sector leverage remains moderate and favorable economic fundamentals support debt- servicing ability,” the credit rater said, adding that steady remittance inflows and a low loan- to- deposit ratio among Philippine banks can mitigate the impact of portfolio outflows.

Prudential guidelines set by the BSP to manage such risks also provide security that banks are well-equipped to stand resilient against Fed-related shocks, Fitch added.

The Philippines currently holds a “BBB” rating — one notch above minimum investment grade status — with a “stable” outlook from Fitch, following an upgrade back in December.

Fitch expects the Philippine economy to grow by 6.8% this year, faster than 2017’s 6.7% although short of the state’s 7-8% goal.