Banks’ net interest margins seen to expand as rates rise

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By Karl Angelo N. Vidal

PHILIPPINE BANKS are expected to expand their net interest margins (NIM) in 2019 as market interest rates rise, Fitch Ratings said, noting that pressures on asset quality, fee income and operating expenses will be modest.

In a report sent on Tuesday, the global debt watcher assigned a “stable” outlook on the local banking sector as it expects lenders’ NIMs to grow further next year.

“We expect banks’ NIMs to continue to expand in 2019 as market interest rates rise, helping to maintain stable returns in the face of modest pressure on asset quality, fee income and operating expenses,” Fitch said in the report.

The local banks’ rating profiles, on the other hand, should remain steady on the back of “banks’ satisfactory risk controls, adequate loss-absorption buffers, and generally stable funding and liquidity profiles.”

The net interest margin measures the difference between the bank’s interest income and the amount of interest it pays to its clients. A higher NIM means the bank has efficiently invested its funds.

To better capture the NIM benefits from higher interest rates, Fitch said banks should strengthen their focus on asset and liability pricing amid tighter yet still sound liquidity.

However, the credit rater noted that downside risks to the industry’s growth and asset quality for next year are most likely to stem from “higher-than-expected interest rates and inflation.”

The Bangko Sentral ng Pilipinas has raised its interest rates by a cumulative 175 basis points since May — with the latest tightening done last month — to arrest inflation and price expectations.

Inflation stood at 6.7% in October and September, a nine-year high. The November print is expected to slow as oil prices went down and food supply stabilized.

Fitch noted that economic growth “should remain supportive” as it sees the country’s gross domestic product growth to remain among the highest in the Asia-Pacific region.

The country’s growth as well as credit demand will be supported by the government’s ongoing infrastructure push and steady remittance inflows, the debt watcher said.

“This will help support asset quality, and we expect credit costs to rise only modestly despite the challenge posed by higher interest rates,” Fitch added.

On the funding side, Fitch said Philippine banks will remain largely reliant with deposits. However, it noted that more banks will issue more peso-denominated term-debt issuance from the programs filed this year, which will supplement the dollar papers issued in recent years.

A number of banks have been tapping the capital markets in recent months as they raised funds ahead of tighter risk management measures that will take effect on Jan. 1, 2019 under the international Basel 3 framework.

The central bank recently allowed lenders to raise funds with greater ease through corporate debt papers as new regulations do away with having to secure approval from them.

The Philippines currently holds a “BBB” credit rating from Fitch with a “stable” outlook, a notch above minimum investment grade. This matches the rating given by major credit raters Moody’s Investors Service and S&P Global Ratings.

Fitch affirmed the credit rating of the Philippines in July amid strong growth prospects.