THE Philippine banking industry will remain “stable” for the next 12 to 18 months as the country’s economic recovery will support the sector, Moody’s Investors Service said on Wednesday.

The global debt watcher, however, warned that the lagged impact of policy rate hikes by the Bangko Sentral ng Pilipinas (BSP) is a key risk to economic growth.

In a report dated March 1, Moody’s said it has a “stable” outlook for the Philippine banking sector, in line with expectations across most of Asia-Pacific.

A “stable” outlook means Moody’s assessment of rated local lenders would likely be steady in the next 12 to 18 months. Moody’s currently rates eight lenders in the country, accounting for about 67% of the sector’s total assets as of end-September 2022.

“We maintain a ‘stable’ outlook for the Philippines’ banking system. The country’s economic recovery will support banks’ operating environment and limit growth in problem loans,” Moody’s said.

It said the operating environment of Philippine banks will benefit from the country’s strong gross domestic product (GDP), which is seen to grow by 6.2% annually in 2023-2024 as pandemic-related restrictions further ease.

“While this marks a slowdown from 7.6% in 2022, the Philippines’ growth rate will remain one of the highest in Asia, supported by strong growth in domestic consumption. The lagged impact of rate hikes, as well as subdued capital investment by the private sector are key risks to the country’s economic growth,” Moody’s said.

The BSP raised its benchmark interest rate by 50 bps at its first policy meeting of the year, bringing the key rate to 6%, the highest in nearly 16 years.

It has increased interest rates by a total of 400 bps since May 2022 to tame inflation, which rose to 8.7% in January, the quickest since November 2008.

“While rises in interest rates will enable banks to raise rates on loans with floating rates, this will be offset by increases in demand for term deposits that offer higher rates than savings deposits,” Moody’s said.

“Further, increased competition for funding amid reduced liquidity as a result of monetary tightening will drive up term deposit costs more than increases in lending rates,” it said.

As a result, Philippine banks’ net interest margins will be broadly stable this year and loan loss provisions, which declined in 2022, will remain high at current levels, it added.

Banks’ asset quality will also be steady this year after improving in 2022, Moody’s said.

“The quality of loans to large conglomerates, among which bank loans are heavily concentrated, will be stable as their revenue and earnings improve in line with economic growth. Large borrowers should be able to absorb a moderate increase in interest rates,” it said.

“The quality of retail loans and loans to small and medium-sized enterprises, which deteriorated significantly during the pandemic, is showing signs of stabilization.”

However, rapid growth in retail loans and rising borrowing costs will likely lead to greater asset risks, but banks will have sufficient buffers against loan losses provided by high levels of loan loss provisions, Moody’s said.

Funding conditions will also be stable, it added.

“Banks’ loan-to-deposit ratios will gradually rise to pre-pandemic levels as loan growth accelerates as a result of the economic recovery and deposit growth slows amid tighter liquidity,” the debt watcher said.   

“However, banks will still have sufficient deposits to cover loan growth. Further, we expect the central bank to remain proactive in providing liquidity to the system to prevent any near-term liquidity stress that can result from a sudden change in economic conditions.”

The credit rater expects the government to prioritize systemic stability and provide strong support for banks when needed.

Banks in the Philippines and 12 other economies got a “stable” outlook. Bangladesh, China, and Pakistan received a “negative” outlook.

The Philippines holds a “Baa2” sovereign rating — a notch above minimum investment grade — with a “stable” outlook from Moody’s, which was affirmed in September last year. — Keisha B. Ta-asan