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Fitch Solutions sees PHL loan growth rebounding on BSP rate cuts, inflation

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FITCH SOLUTIONS expects banks’ loans to grow faster this year following the Bangko Sentral ng Pilipinas’ (BSP) move to ease policy settings and on the back of consumer and corporate borrowings.

In a report released on Monday, the think tank said it sees banks’ credit growing by 13% this year and 15% in 2020, higher than its previous forecast of 11% and 12% for 2019 and 2020, respectively, published in 2018.

These compare to the actual 14.6% pace recorded in 2018.

Fitch Solutions said it sees loan growth rebounding after slower demand for loans seen earlier this year due to a weaker peso and the BSP’s successive rate hikes in 2018 triggered by record-high inflation, which hurt household confidence.

“At the same time, growing external demand weakness in recent quarters has also begun weighing on order activity. The resultant impact of higher borrowing rates and softening orders has contributed to weaker credit demand and thus slower credit supply growth, with loan growth coming in at 11.7% y-o-y in July 2019,” the think tank said.

“However, with monetary easing underway and a rebound in domestic confidence, we expect loan growth to improve over the coming quarters.”




The BSP has cut benchmark rates by 75 basis points (bp) thus far this year — announcing 25-bp cuts at its May 9, Aug. 8 and Sept. 26 policy meetings — to bring the interest rate on its overnight reverse repurchase facility to four percent, the overnight deposit rate to 3.5%, and the overnight lending rate to 4.5%.

These cuts partially dialled back a cumulative 175-bp increase implemented in 2018 as inflation spiked.

Fitch Solutions sees the BSP remaining dovish, penciling in another 25-bp cut in policy rates in the first quarter of 2020 and further reductions to banks’ reserve requirement ratios to boost credit supply.

“This informs our view for modest rebound in loan growth, peaking at around 15% in 2020. We do not currently anticipate the key policy rate to be reduced back to 3% in 2020, as it was during 2017, with the BSP only opting for aggressive easing in a more pronounced economic growth slowdown,” the think tank said.

The report noted that consumer borrowing is expected to improve further amid lower inflation, a stable peso, and better government spending.

“However, household consumer loans are a relatively small part of banks’ overall loan book — representing just 8.5% of the total as of June 2019 — and thus a rebound in lending will be heavily dependent on stronger borrowing from businesses,” Fitch Solutions said. “[W]ith domestic sentiment improving in 2019, we also see scope for lending for fixed capital investment or big ticket consumer goods to strengthen over the coming quarters.”

“More important will be the service, industry and retail trade sectors, which account for a greater share of credit demand and have all seen confidence strengthen in the third quarter,” Michael Langham, senior country risk analyst at Fitch Solutions, told BusinessWorld in an email.

“The focus on developing out the Universal Healthcare Act and 14.9% increase in budget allocation to the Department for Public Works and Healthcare in 2020 should ease pressure on Philippine workers to save and could boost the share of income used for consumption, which in turn could boost confidence to take on credit as well,” Mr. Langham added.

Fitch Solutions said primary downside risks to its forecast include a “more pronounced” slowdown in global growth and the ongoing trade tensions between the United States and China, as this could weigh on business sentiment and cause “a reversal in the domestic loan demand and Philippine banks to become more risk averse.”

Still, the think tank said banks’ capital buffers remain strong, with the industry’s capital adequacy ratio at 15.9% as of July. — Luz Wendy T. Noble

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