Strong economic growth seen to boost PHL banks this year

PHILIPPINE BANKS may remain robust this year amid strong economic conditions that could drive double-digit loan growth, S&P Global Ratings said.

“Philippine banks are well placed to ride the country’s robust economic growth in 2024,” S& P Global Ratings credit analyst Nikita Anand said in a statement on Tuesday. “We believe improving macroeconomic conditions will offer good growth opportunities along with stable asset quality.”

The debt watcher expects loan growth of 10-12% this year, driven by a pickup in corporate demand, from its estimated 5-6% expansion in 2023.

Meanwhile, it sees Philippine gross domestic product ( GDP) expanding by 6% this year and next, faster than its 5.2% forecast for 2023.

“Higher economic growth, along with lower inflation and interest rates, will support credit demand,” S&P said.

“S& P Global Ratings also believes earnings are likely to normalize with lower asset yields, given our expectation of policy rate cuts in the second half of the year,” the debt watcher added.

The Bangko Sentral ng Pilipinas ( BSP) hiked borrowing costs by 450 basis points ( bps) from May 2022 to October 2023, bringing the policy rate to a 16-year high of 6.5%.

It is widely expected to begin cutting rates this year, especially once the US Federal Reserve eases its own policy stance.

Even as loans are expected to grow, credit losses are expected to be at just 0.5%- 0.7% of gross loans this year, S& P said.

“We forecast a manageable deterioration in the nonperforming loan ( NPL) ratio to 3.5% from 3.4% as of end- November 2023 because of rapid growth in riskier segments such as credit card loans and other unsecured consumer loans in the past two years,” the debt watcher said.

Consumer NPLs may rise, but risks “should stay contained, given the Philippines’ low household leverage of 10% of GDP and stable employment conditions,” Ms. Anand added.

The digital banking sector’s asset quality is expected “stay significantly weaker” than the entire banking industry due to their large consumer loan portfolios, S&P said.

“This reflects their heavy exposure to unsecured consumer loans and the largely untested credit profile of their target customers. We expect these banks to continue making losses because of very weak asset quality and high costs,” it said.

Some 64.8% of the loans of digital banks as of Nov. 30, 2023 were consumer loans, BSP data showed.

Elevated inflation and interest rates could also affect households’ and small firms’ ability to repay their loans, S&P said.

“The sector’s good capital position ( 15.5% Tier 1 ratio) and provisioning should help absorb higher asset quality risks,” it said.

Meanwhile, return on average assets “could normalize to a long-term average of 1.2%-1.3% over the next two years after peaking at about 1.4% in 2023,” S&P said.

“This is because net interest margins will decline in line with policy rate normalization. Lower operating expenses and an increasing share of unsecured retail loans could provide an upside to our profitability forecast,” it said.

“In our view, banks will continue to invest in digital capabilities to drive efficiency. The banking sector’s cost-to-income ratio has declined sustainably to 55%-57% as of end-2023 from 64%-65% as of end-2016, thanks to rapid digitalization of banking services,” S&P said.

Philippine banks’ funding is also expected to remain healthy, with the sector’s loan- to- deposit ratio projected to be at 70-75%, with low-cost current and savings account deposits making up about 70% of total deposits, the debt watcher said.

“Whereas the deterioration in metrics has been more pronounced for regional peers, there’s only been a small decline from the 2021 peak for Philippine banks,” it said.

“We have not seen irrational deposit pricing in response to the high rates offered by new digital banks. These banks’ operations are nascent and reflect initial struggles, with a market share of just 0.4% of sector deposits,” S&P added.