By Melissa Luz T. Lopez
PHILIPPINE BANKS’ debt ratings will remain “stable” over the coming year, propped up by an ample capital base and strong loan growth despite rising interest rates, Moody’s Investors Service said in a report on Monday.
The credit watcher kept its outlook on the domestic banking system at “stable” for the next 12-18 months, pointing out that the industry will remain solid despite slowing economic growth. The industry has kept its “stable” outlook from Moody’s since 2015.
“Favorable macroeconomic factors will underpin asset performance even as loans grow rapidly,” Moody’s said in its report.
“However, sharper-than-expected increases in interest rates and a heavy concentration of exposures to large conglomerates are key risks to asset quality.”
Moody’s said economic growth will remain “strong” at 6.3% in 2018, albeit slower than the 6.8% forecast given earlier this year and 2017’s actual 6.7%. In 2019, growth will ease further to 6.2% but will remain among the fastest in Asia.
The credit rater also flagged accelerating inflation as a risk to the banking sector as prices of widely used goods rose by 5.1% overall in the 10 months to October, versus the 2-4% full-year target range set by the Bangko Sentral ng Pilipinas for 2018.
Broken down, Moody’s gave a “stable” outlook for the local operating environment, asset quality, capital, as well as for government support, with the latter referring to the state’s capacity to bailout a big bank if needed.
Profitability and efficiency is seen “improving,” while funding and liquidity is said to be “deteriorating” as loan growth outstrips deposit expansion.
Moody’s noted that local banks continue to hold good asset quality given a modest share of problem debts to total loans, but added that rising rates and borrower concentration “pose risks” to the outlook.
Non-performing loans held by Philippine banks stood at P177.371 billion as of September, taking a 1.83% share of the P9.702-trillion total loan portfolio, according to latest Bangko Sentral ng Pilipinas (BSP) data. The share is lower compared to 1.91% ratio in September 2017, even as total lending rose by 15.6% year-on-year.
Meanwhile, benchmark borrowing rates in the Philippines have risen by 175 basis points (bp) after five consecutive increases by the central bank since May, which were done to rein in price expectations with inflation surging to nine-year highs this 2018.
“Higher rates can hurt asset quality in two ways. Firstly, if higher rates lead to a sharper-than-expected economic slowdown, some investment made over the past few years may become economically unviable as demand for the resultant products could be weaker than projected,” Moody’s explained in its report.
“Secondly, higher interest rates will hurt the debt-servicing abilities of borrowers, particularly corporates.”
At the same time, the credit rater said higher interest rates will bode well for lenders since this will drive net interest margins up and improve bank profits.
“Because a large share of Philippine banks’ deposits comprise current and savings accounts, which tend to be relatively insensitive to changes in overall interest rates, funding costs will not rise as fast as lending rates even as term deposit rates will see a sharp increase. The result will be wider margins,” Moody’s said.
Banks fully rely on their P12.404-trillion deposit base for lending activities, with the loans-to-deposits ratio at 78.21% in September.
BSP Deputy Governor Ma. Almasara Cyd N. Tuaño-Amador said last week that monetary authorities expect bank loans to continue to grow “at a healthy pace” and remain supportive of an expanding economy despite rising interest rates.
Lenders in the country will remain well-funded as they can raise additional capital to sustain with robust lending activity.
Banks have turned to the local debt market this year to raise fresh funding to support business expansions and in anticipation of higher regulatory standards, as the international Basel 3 framework takes effect in January next year.