PHILIPPINE BANKS are likely to maintain generally stable credit fundamentals amid rising interest rates and choppy market conditions, Fitch said, even as it flagged concerns over a modest deterioration in asset quality and softening loan growth.
In a report sent on Wednesday, the global debt watcher said the credit profiles of domestic lenders should remain steady even as interest rates are rising.
“Interest rates are rising as domestic liquidity tightens, pointing to a less favorable environment for Philippine borrowers overall. Against this, we expect bank credit profiles to remain broadly steady — supported by resilient asset quality, acceptable profitability, stable funding and adequate capitalization,” Fitch said.
The credit rater expects the net interest margins (NIM) of major local banks to continue to climb until the yearend as this mostly improved in the first half of the year on the back of rising interest rates.
The Bangko Sentral ng Pilipinas (BSP) has raised its key policy rates by a cumulative 100 basis points (bp) since May to tame the elevated inflation brought by higher food and oil prices.
The BSP’s policy-setting Monetary Board is widely expected to raise benchmark rates by another 50 bps at its review today.
“Such action should continue to raise asset yields for the full year, and would not have been fully reflected in [first half] results,” Fitch said.
However, higher interest rates may temper banks’ loan growth as elevated inflation may dampen consumer demand.
“Any moderation is likely to be modest, however, as ongoing infrastructure spend and broadening growth beyond Manila should continue to drive economic activity,” Fitch noted, adding that credit growth is expected to “settle in the mid-teens for the full year.”
The debt watcher also flagged asset quality deterioration caused by higher borrowing costs, albeit modest as economic growth remains fairly supportive and the rise in borrowing rates is still moderate.
Larger monetary policy tightening continues to be a risk, although it is unlikely that the BSP would excessively hike rates even as it seeks to rein in inflation, it said.
Banks’ profitability in the first semester was generally lower brought by the weak capital markets and high cost growth. However, Fitch said the recovery in trading revenues will depend on market conditions, while investment in branches and information technology continue to push cost-to-income ratios.
Fitch added that Rizal Commercial Banking Corp., Security Bank Corp., China Banking Corp. as well as smaller banks are more susceptible to deposit competition due to higher loan-to-deposit ratios, lower current and savings account (CASA) ratios and generally weaker deposit franchise.
“Meanwhile, the three largest banks (BDO Unibank, Inc., Metropolitan Bank & Trust Co. and Bank of the Philippine Islands) should be relatively insulated due to their healthy CASA ratios of between 61-75%, and strong transaction account relationships,” the credit rater noted. — Karl Angelo N. Vidal