Banks’ assets quality resilient, says Fitch

Higher interest rates brought about by the aggressive hikes delivered by the Bangko Sentral ng Pilipinas (BSP) are unlikely to significantly affect the asset quality of Philippine banks, according to Fitch Ratings.

In a report, Tamma Febrian and Willie Tanoto, directors for financial institutions and banks at Fitch, said Philippine banks’ asset quality risks are increasing due to the rising cost of living and higher interest rates.

However, Febrian and Tanoto said that any deterioration in credit quality is likely to be manageable due to adequate financial buffers of the main borrowers and the robustly growing economy.

They said that large corporate borrowers, which dominate the banking sector’s loan portfolio, are in relatively strong positions to weather higher financing costs.

Fitch said Philippine banks’ earnings buffers are more than sufficient to cover the expected increase in interest expenses for the vast majority of debt among listed corporates.

Latest data from the BSP showed that the earnings of Philippine banks jumped by 37.5 percent to an all-time high of P309 billion last year from P224.75 billion in 2021 on the back of higher interest income amid the aggressive rate hikes and higher trading gains as the economic recovery further gained traction.

“A protracted economic slowdown could result in lumpy impairments for many of the banks, given their high single borrowers’ concentration, but this is not our base case,” Febrian and Tanoto said.

The debt watcher said small businesses and consumer loans are more vulnerable, given their thinner buffers.

“Any weakening is likely also going to be manageable as we expect the job market to remain resilient in the near term,” they said.

To tame inflation and stabilize the peso, the BSP has so far raised key policy rates by 400 basis points since it started its interest rate liftoff in May last year. This brought the benchmark interest rate to a 16-year high of six percent from an all-time low of two percent.

Although Fitch sees banks’ asset-quality risks rising due to high inflation and rising interest rates, it sees the sector’s non-performing loan (NPL) ratio remaining steady at around 3.5 percent this year from 3.3 percent in 2022, as risks are largely offset by the adequate financial buffers of large corporate borrowers and a supportive economy.

It added that ample loan loss coverage of 167 to 180 percent also limits impairment risks at the rated privately owned banks.

“Corporates make up over three-quarters of Philippine banks’ loan portfolios despite the rapid expansion in retail lending prior to the COVID-19 pandemic. Corporate earnings remain resilient relative to debt service,” Fitch said.

The credit rating agency sees credit growth moderating to a range of seven to nine percent in this year and in 2024 as effects of rate hikes filter through the economy.

Bank lending grew at a robust pace of 11 percent last year, fueled by pent-up consumer demand and the resurgence in capital expenditures.