THE COUNTRY’S biggest banks will show “greater resilience” despite changing operating conditions compared to their mid-sized peers, Fitch Ratings, Inc. said in a report on Thursday.

According to the debt watcher’s first semester report card on Philippine banks released yesterday, BDO Unibank, Inc., Metropolitan Bank & Trust Co. (Metrobank), and Bank of the Philippine Islands (BPI) are expected to fare better than smaller banks as operating conditions for financial institutions in the country change as they are backed by stronger franchises, generally less aggressive risk appetite and higher profitability.

“Net interest margin (NIM) trends have diverged between the three large Philippine banks — BPI, BDO and Metrobank — and their rated mid-sized peers CBC (China Banking Corp.), PNB (Philippine National Bank) and RCBC (Rizal Commercial Banking Corp.). This follows higher domestic interest rates and tighter liquidity conditions over the past year,” the report said.

The report noted that the big three banks saw higher NIMs in the first half compared to their performance in the same period last year, pushing stronger net interest income growth.

In the case of the mid-sized banks however, including China Bank, PNB, RCBC, the Development Bank of the Philippines, and the Land Bank of the Philippines (LANDBANK), Fitch Ratings observed that their NIMs were generally more compressed during the same period.

“We believe this trend highlights the differences in the banks’ franchises within a highly competitive banking environment, where 46 universal and commercial banks vied for market share as of July 2019.”

“Most banks…reported steady or better net profitability regardless of NIM performance. This was helped in some cases by a rebound in trading gains, which can be volatile,” the debt watcher added.

Fitch said banks faced tighter liquidity in the first semester, with lending rates also expected to have peaked already as the central bank continues to ease monetary policy and amid competition.

“We expect some re-acceleration as public spending picks up, which should ease domestic liquidity conditions. Market interest rates have declined in recent months and gradual cuts to reserve requirements (200 basis points in 2019 so far) should be slightly positive for system liquidity and NIM,” the debt watcher said.

“Banks’ continued shift towards higher-margin SME (small and medium enterprises) and consumer loans should provide a slight tailwind for NIM over the medium term, but this will also come with greater risk,” Fitch added.

Meanwhile, Fitch noted that the default of Hanjin Heavy Industries and Construction Philippines (HHIC-Phil) was a one-off as it had “only a minimal effect on the affected banks’ NPL (nonperforming loan) ratios, aside from RCBC.”

On Jan. 8, the South Korean shipbuilder filed for a corporate rehabilitation before an Olongapo court, leaving some $412 million in outstanding loans from BDO, Metrobank, LANDBANK, BPI and RCBC in limbo.

“Loan quality may be tested by global growth headwinds and higher domestic interest rates in the near term, despite some policy-rate easing in recent months. However, we expect any asset-quality deterioration to be modest as GDP (gross domestic product) growth remains fairly health and less exposed to global trade uncertainties.”

“We expect credit and GDP growth to improve in 2H19 as election-related drags on public spending in 1H19 dissipate. However, the US-China trade dispute poses downside risks with potential implications for asset quality and profitability.”

The report likewise noted that the capital adequacy of Fitch’s rated local banks were better in the first half of the year, thanks to steady internal capital generation and lower loan growth which clocked in at 10% year-on-year as of end-June from a 15% finish in 2018.

“We expect capital ratios to decline gradually as loan growth re-accelerates and outpaces internal capital generation in the medium term,” the ratings agency said in the report.

Meanwhile, Fitch believes local lenders’ asset quality will remain healthy despite the heightened watch on Philippine offshore gaming operators (POGOs), which may affect the property sector.

“Increased scrutiny from the Chinese authorities on offshore gaming operators…may have knock-on effects for domestic property demand,” the debt watcher said, with POGOs cornering about 30% of Manila’s office space from 2017-2018.

“Any impact on banks’ asset quality is likely to be indirect. We understand that most major property developers have placed internal limits on their direct exposure to such operators in light of the potential policy risk,” Fitch said. — L.W.T. Noble