Philippine banks to remain strong – BMI

PHILIPPINE BANKS are broadly expected to remain strong this year, BMI Research said, but could see a bigger share of problem loans as interest rates keep rising.

Analysts at the Fitch Group unit said the Philippine banking system will remain “stable” through 2018 backed by ample capital buffers against a robust economic backdrop, but noted that an expected pickup in interest rates may affect lending activities.

“[ W]e believe that the Bangko Sentral ng Pilipinas ( BSP) will likely gradually unwind its loose monetary policy stance over the coming quarters as global interest rates and domestic inflation continue to rise. This will likely weigh on loan growth to some extent, while credit stress could start to rise, and eat into the profitability of banks over the coming quarters,” BMI analysts said in a report published this week.

BMI is expecting two rate hikes from the central bank in order to contain the impact of inflation and maintain price stability, amid expectations that the pace of price increases will quicken further in the coming months.

Inflation has averaged 3.8% during the first quarter under the 2012 base year, according to the Philippine Statistics Authority. This settles close to the high end of the BSP’s 2- 4% target range, with central bank officials saying that they remain watchful of price dynamics in order to arrive at a “measured” policy response.

Higher policy rates would mean that market rates will also rise, driving up loan costs for borrowers.

“This should see banks adjust their lending rates higher, leading to a slowdown in loan demand. A higher interest rate environment could in turn see credit risk increase in the medium term as it impacts borrowers’ cash flow and ability to service debt, while also weighing on the value of collateral supporting the loan,” the research firm said, noting that credit growth will also decelerate from current levels.

Higher interest rates could likewise turn more loans sour, but unlikely to reach an alarming level relative to total bank credit.

“We expect the NPL ( nonperforming loan) ratio to remain fairly low at under 2% in 2018 given that it is a lagging indicator. Meanwhile, the economy remains on a solid footing, which should be broadly supportive of borrowers’ credit profile, albeit rising interest rates could see a gradual deterioration in asset quality beyond the near-term,” BMI said.

The Fitch unit expects the Philippine economy to expand by 6.3% this year – still “impressive” compared to regional peers albeit slower than the 6.7% growth in 2017 and below the government’s 7-8% goal. The growth will be driven by a young workforce, a strong public infrastructure drive, and “deepening” economic ties with China, BMI said.