Loan growth to put pressure on banks’ capital

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ROBUST LOAN growth drove profits of Philippine banks higher in 2017, although this puts pressure on the lenders’ capitalization, Moody’s Investors Service said.

“Net profit at Philippine banks broadly increased in 2017 in line with our expectations on the back of strong loan volume growth,” Simon Chen, Moody’s vice-president and senior analyst, was quoted as saying in a report released on Thursday.

Although several domestic lenders recorded lower loan growth, the debt watcher said most banks posted high loan growth of 15-19% last year on the back of demand from consumers and local businesses under strong macroeconomic conditions.

“Retail loans continued to grow faster than corporate loans at many banks,” added Mr. Chen.

However, Moody’s said that as a result of rapid credit growth, capital ratios will remain under pressure.

“Banks’ internal capital generation is not sufficient to support the current pace of loan growth, limited by low cost efficiency,” Mr. Chen said, adding that lenders’ need to improve their information technology infrastructure will limit their cost efficiency.

Capital ratio measures a bank’s capability to absorb a reasonable amount of loss.

“Without external capital raising, capital ratios will remain under pressure in 2018 from loan growth outpacing increases in retained earnings.”

Early this year, Metropolitan Bank & Trust Co. (Metrobank), Bank of the Philippine Islands and Rizal Commercial Banking Corp. (RCBC) announced plans to raise additional capital through stock rights offerings, which will lift their common equity Tier 1 ratios by some 340 to 390 basis points.

Moody’s added that the adoption of new provisioning rules under the Philippine Financial Reporting Standards 9 will “reduce capital levels, though slightly, because banks will need to cover additional provisioning charges with retained earnings.”

Meanwhile, the asset quality of the local banks improved last year as several lenders reported declines in gross nonperforming loan (NPL) ratios.

Among Moody’s eight rated Philippine banks, Metrobank and RCBC reported higher NPL ratios, but the increases were smaller than 20 bps.

UnionBank of the Philippines had the highest NPL ratio primarily due to legacy problems. However, Moody’s noted that the lender successfully provisioned such loans.

Security Bank Corp. had the lowest NPL ratio, below industry average, since the bank was not active in lending in the past and only accelerated its loan business in 2016 after its strategic tie-up with Japanese lender Bank of Tokyo Mitsubishi UFJ, Ltd.

“However, real estate loans, which accounted for an average of 18% of gross loans at rated banks at the end of 2017, remain a risk to asset quality,” it added.

On the other hand, the debt watcher added that Philippine banks’ net interest margins (NIM), or the gap between their income and interest being paid, remained broadly stable.

“[The NIM of] some banks, including BDO Unibank, Inc., [Metrobank, RCBC and Security Bank improved] as a result of growth in loans in their overall asset pools,” Mr. Chen said in the report.

Moody’s added that the slow loan growth of some banks, which include China Banking Corp., coupled with increased funding costs led to narrower NIMs. — K.A.N. Vidal