THE local banking industry will continue to benefit from robust economic growth of the Philippines, debt watchers Moody’s Investors Service and S&P Global Ratings said.
In a report, Moody’s said its outlook for the Philippine banking system remains “stable” for the next 12-18 months.
“Among other factors that will underpin the credit profiles of banks in the country, robust economic growth will continue to support asset quality at current strong levels,” Moody’s said.
The debt watcher projects the country’s gross domestic product (GDP) growth — which will remain among the highest in Asia — at six percent in 2019 and 6.2% in 2020, underpinned by “robust domestic consumption and an expansionary fiscal policy” despite the four-month delay in the enactment of the 2019 national budget.
“Private consumption, which contributed 68.5% of the country’s real GDP in 2018, will continue to be supported by the Philippines’ young population and remittances from Filipinos living overseas,” Moody’s said.
It added that easing inflation will “help improve consumers’ purchasing power.”
Latest data showed prices of basic goods and services grew 3.2% in May, a tad faster than the three percent tallied the previous month, driven by food and non-alcoholic beverage as well as water, electricity, gas and other fuel costs.
The easing inflation environment triggered the Bangko Sentral ng Pilipinas (BSP) to slash its benchmark rates by 25 basis points to a key rate of 4.5%.
However, the central bank opted to take a “prudent pause” in cutting rates to allow it to “observe and assess the impact of prior adjustments” such as the phased reduction in reserve requirement ratio (RRR) until July.
“We expect loan growth to recover to 13%-15% annually over the next 12-18 months as the Philippines’ central bank ends monetary tightening now that inflation is easing,” the debt watcher said.
Citing BSP data, Moody’s said year-on-year loan growth moderated to 11.9% in the first quarter of 2019, from 17.4% a year earlier.
Due to this rapid credit expansion, Moody’s expects the capitalization of local banks to “weaken moderately,” as consumption will continue to outpace generation.
However, shareholder support will prevent the significant deterioration of capital, as seen in the recent stock right offers (SRO) of big banks.
In 2018, Metropolitan Bank & Trust Co., Bank of the Philippine Islands, Rizal Commercial Banking Corp. and UnionBank of the Philippines, conducted SROs to support lending growth.
Philippine National Bank, meanwhile, is set to raise about P12 billion in July by offering 276.63 million common shares.
Moody’s expects profitability of banks to be stable as growth of net interest margins (NIM) offsets higher operating expenses due to investments in IT infrastructure and branch network.
“In addition, planned cuts in reserve requirement ratios for banks will help NIMs widen by enabling banks to deploy funds more efficiently,” the credit rater added.
BSP Governor Benjamin E. Diokno started slashing big banks’ RRR in May until it reaches 16% next month. He also vowed to bring the cash requirement to a single-digit percentage by the time he ends his term in 2023.
On the other hand, Moody’s said banks will maintain strong asset quality despite increases in interest rates, since “economic conditions are healthy and financial performance of Philippine corporates… remains strong.”
The debt watcher assigned a “Baa2” credit rating for the Philippines with a “stable” outlook, a notch above the minimum investment grade.
Meanwhile, in a separate statement, S&P kept its banking industry country risk assessment (BICRA) score to the local lending sector to group 5.
It mentioned that the economy’s strong growth trajectory, strong fiscal policies and an improving investment climate “provide sound growth opportunities for the country’s banks.”
Nikita Anand, S&P Global Ratings credit analyst, said the increase in non-performing loans will continue over the past few quarters.
“[H]igher interest rates will increase borrowers’ debt servicing burden,” Ms. Anand was quoted as saying. “Nevertheless, the increase in non-performing loans will overall be moderate and manageable for banks due to broadly supportive macroeconomic conditions.”
She added banks’ cost-to-deposit ratios will continue to climb as additional liquidity brought by the reduction in RRR will enable the lenders to grow.
The debt watcher upgraded the Philippines’ BICRA score by a notch to group 5 from group 6, citing “improvement in the institutional framework of the country’s banking system” with enactment of the law strengthening the central bank on Feb. 14. — Karl Angelo N. Vidal