BANKS in the Philippines and Southeast Asia could face pressure from growing asset quality risks due to higher interest rates, Fitch Ratings said.
Fitch said in a report dated Jan. 17 that it expects asset quality across banking systems in the Association of Southeast Asian Nations (ASEAN) region, including the Philippines, to weaken amid the policy tightening of central banks.
“The modest deterioration in ASEAN banking-sector asset quality that we expect over 2023 will largely reflect the lagged effect of rate hikes in 2022. Rates will likely rise further this year in all six key regional banking markets, aggravating the impact,” it said.
“Moreover, if asset-quality deterioration is greater than we expect, it could dampen profit growth or delay the post-pandemic rebuilding of capital buffers that we currently anticipate for some banks, for example, in the Philippines and Vietnam,” Fitch added.
The Bangko Sentral ng Pilipinas (BSP) raised rates by a total of 350 basis points (bps) last year to tame inflation and slow the peso’s decline. This brought the policy rate to a 14-year high of 5.5%.
BSP Governor Felipe M. Medalla last week also said they could hike borrowing costs by 25 or 50 bps at their first policy meeting for this year on Feb. 16.
Fitch said asset quality risks from higher interest rates will vary, as differences in the scale and pace of monetary tightening are one of the important factors in determining the likelihood of loan deterioration in these banking systems.
“We expect further, albeit mostly milder, rate hikes in all ASEAN markets in 2023. The Philippines is likely to remain a regional outlier in terms of the scale of its rate hikes, reflecting greater inflationary pressure in that economy compared with markets like Indonesia, Malaysia and Thailand. The impact of tightening could be more severe in banking systems where leverage has increased sharply in recent years,” it said.
“We expect system leverage to rise in Thailand and Vietnam in 2023. However, we expect it to fall in Malaysia, the Philippines and Singapore in 2023, which will continue the trend from 2022,” the credit rater added.
It said scenarios where adverse economic developments cause asset quality to deteriorate could also affect sovereign credit profiles, especially those with negative outlooks like the Philippines.
It added that any changes in a country’s credit ratings would affect the Issuer Default Ratings of banks, whose ratings are driven by expectations of sovereign support.
Fitch affirmed the Philippines’ “BBB” investment grade rating and kept its “negative” outlook in October 2022, amid concerns over the impact of rising interest rates, soaring inflation and slowing global demand on the economy’s recovery. — K.B. Ta-asan