DIGITAL TRANSFORMATION
However, Fitch’s Mr. Krustins said risks remain despite the slowdown in November inflation, citing elevated inflation expectations, supplyside price pressures, and potential secondround effects from higher minimum wages and transport fares.
The BSP’s risk-adjusted inflation forecast for 2023 stood at 6% this year, 4.2% for 2024 and 3.4% for 2025.
The BSP also maintained its average inflation baseline forecasts at 6% for 2023, 3.7% for 2024, and 3.2% for 2025.
Mr. Valdepeñas said some of the key risks to the Philippine economy next year would be geopolitical uncertainties, higher interest rates that may lead to sluggish growth, and climate-environment worries.
“A key challenge for the (banking) industry in 2024 would be maintaining profitability with a prolonged higher rates environment and market volatility while navigating through the credit cycle,” he said.
He said the Philippine banking industry has so far done well in an environment of higher interest rates.
Banks have seen increased revenues and profits this year due to higher net interest margins, while also better managing their credit portfolios.
The banking industry’s cumulative net income rose by 10.4% to P270.352 billion as of end-September from P244.876 billion last year, based on the latest central bank data.
As of end-September, banks’ net interest income jumped by 20.4% to P663.24 billion from P550.666 billion last year.
The Philippine banking industry wrote off P457.88 million worth of bad debts in the nine-month period, 80.1% lower than P2.3 billion a year ago.
Banks have also spent a lot of resource on digitization and technology to remain competitive, Mr. Valdepeñas said.
“A competitive landscape is always good as it leads to better outcomes for clients, for the business community and for the broader economy,” he said.
Meanwhile, Mr. Roces said banks had to adapt when the BSP aggressively tightened monetary policy to tame inflation.
“High interest rates typically lead to more expensive loans, dampening borrowing enthusiasm, and slowing down loan growth. However, this also provides an opportunity for banks to achieve higher net interest margins,” he said.
“The industry has had to enhance its risk management practices, with a more prudent credit risk assessment to mitigate the risks. In addition, banks have been adjusting their investment portfolios,” he said.
However, stubborn inf lation remains a significant concern as it could prompt the BSP to keep interest rates higher for longer, which could continue to hurt consumer spending and investments.
“The global economic environment also poses a risk, especially if a slowdown affects sectors reliant on exports and foreign investments. Domestic and regional political stability is crucial for maintaining investor confidence and economic stability,” Mr. Roces said.
The increased adoption of digital technology in the banking sector also requires a “substantial investment” in cybersecurity and digital infrastructure.
The BSP has been proactive in promoting digital transformation in the financial sector. The BSP aims to convert 50% of retail payments into digital form and expand financial inclusion.
The BSP has said it is working closely with the industry to introduce new digital payment streams and facilitate the growth of financial technology (fintech) businesses engaged in e-commerce.
“Overall, the banking industry faces evolution in 2024, primarily centered around adapting to the digital revolution. This involves enhancing digital platforms and services, offering innovative products, and focusing on personalized customer services,” Mr. Roces said.
Banks and financial institutions need to manage market volatility and enhance strategies such as asset diversification and strengthened liquidity management, he said.
“The prolonged period of volatility and uncertainty has also changed the competitive landscape, with increased competition from fintech and digital banking platforms. Banks are now more focused than ever on improving customer experience and service efficiency,” he added.