Lower RRR to boost banks’ profit

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By Melissa Luz T. Lopez, Senior Reporter

REDUCED reserve requirements will help boost incomes of Philippine banks, Fitch Ratings said, even as it flagged that sustained rapid credit growth could lead to bigger problem loans incurred by players.

Six of the country’s major banks rated by Fitch would enjoy a bigger bottom lines thanks to robust economic growth and from the recent cut in bank reserves announced by the Bangko Sentral ng Pilipinas (BSP) and would support “buoyant” lending activities.

“We expect GDP (gross domestic product) and credit growth to stay strong in the near term. Banking system leverage has been rising steadily but remains moderate overall, and a healthy economy will support debt-servicing capacity,” the debt watcher said in a report published yesterday.

Buoyant domestic activity is seen to support further growth for its rated lenders, namely BDO Unibank, Inc., the Bank of the Philippine Islands, Metropolitan Bank & Trust Co., China Banking Corp., the Philippine National Bank, and the Rizal Commercial Banking Corp.

Fitch expects GDP growth at 6.8% for both 2018 and 2019, keeping the Philippines as one of the fastest-growing economies in the region.

“Healthy GDP growth and rising corporate and household incomes will continue to support the debt-servicing capacity of borrowers. However, sustained rapid credit growth warrants close monitoring as it can disguise the buildup of asset-quality risks,” the credit rater said.

“Fitch believes the current rate of credit growth in the Philippines raises banking-sector credit risks which may only become apparent towards the end of the current upswing.”

Fitch pointed out that credit growth has averaged 17% from 2012-2017, roughly twice the pace of GDP growth. Credit analysts flagged that the banks’ high borrower concentration and accelerated credit growth “could render them vulnerable to an economic correction.”

Bank lending grew by 18.3% in March, marking the slowest pace in over a year but still clocking in at double digits, according to central bank data.

The reduction of the reserve requirement ratio imposed on big banks to 19% provides another impetus for increased bank lending, the debt watcher said, but will also lift overall yields “as the mandatory reserves do not earn interest.”

Banks could also see a bigger share of non-performing loans as they hand out more credits to the consumer and small business segments, although Fitch Ratings said these risks will remain “manageable” over the near term as the financial firms enjoy favorable operating conditions and as banks observe risk management protocols.