THE COUNTRY’S big banks will continue to see improved profitability for the rest of the year on better margins following the central bank’s tightening, Fitch Ratings said.

“The solid financial performance of the Philippines’ large banks in 1H22 reflects continued improvement in loan demand, with system loan growth reaching the fastest pace since the onset of the COVID-19 pandemic at 9.1% year on year,” the debt watcher said in a report written by Fitch Asia-Pacific Financial Institutions Directors Willie Tanoto and Tamma Febrian dated Aug. 25.

“We expect credit growth to taper in 2H22 as demand is curbed by inflation and a 175-bp (basis point) year-to-date increase in the policy rate. However, banks’ earnings should be supported by wider lending margins as variable rate loans are repriced. We have maintained our improving outlook on the banking sector against the backdrop of rising returns,” Fitch said.

Philippine banks’ improving profitability is positive for their standalone credit profiles, the debt watcher said. Still, this does not strengthen their issuer default ratings, as this is sensitive to changes in the sovereign’s “BBB” rating, which has a “negative” outlook.

Fitch said banks’ interest margins and profits have yet to reflect most of the Bangko Sentral ng Pilipinas’ (BSP) rate increases as it began to tighten only in May.

“Further improvement, nevertheless, may be tempered by rising loan competition, especially within the corporate sector that remains the dominant segment of the banks’ loan portfolio, as the banks’ risk appetite returns,” it said.

Funding costs also remain low amid high levels of liquidity in the system, which will support banks’ loan growth, Fitch said.

It said it expects banks’ capital levels, which have declined due to faster loan growth and revaluation losses on banks’ bond holdings, to remain steady “as stronger profits lead to capital accretion.”

However, rising inflation, which may affect consumers’ purchasing power and, in turn, the economy’s recovery, could result in weaker asset quality for lenders.

“Non-mortgage consumer lending is among the most vulnerable to impairments, but we expect the rated large private banks to weather incremental weakness in loan quality relatively well, helped by their loan loss coverage ratios of 138%-196%,” the debt watcher added.

Latest BSP data showed outstanding loans by big banks, net of reverse repurchase placements with the central bank, rose by 12% in June to P10.19 trillion in the same month last year.

As lending growth continued to pick up, M3 — the broadest measure of liquidity in an economy — expanded by 6.9% to P15.4 trillion in June. — K.B. Ta-asan