HIGHER interest rates pose the biggest risk for banks, S&P Global Ratings said, but will be “manageable” as both corporate and retail borrowers are able to absorb higher borrowing costs.
In a webcast, the credit rater said Philippine lenders can keep up with rising interest rates, even as this could put pressure on loan growth as well as revenues.
“There is a risk of rising interest rates, but it’s a manageable risk at this point in time,” Nikita Anand, associate at S&P’s financial institutions ratings, said in a webcast on Wednesday afternoon.
Policy rates have risen by 175 basis points (bp) after five straight rate hikes by the central bank, which were done to rein in price expectations as inflation surged beyond the 2-4% target set for 2018. Central bank officials have said they will remain watchful and will act as need to keep prices stable.
“A prolonged further rise in interest rates will push some of the highly indebted borrowers to the fringe and will reduce their debt servicing capacity, and that could lead to higher credit costs,” Ms. Anand added. “But again, the credit costs and NPLs (non-performing loans) in the Philippines have been extremely low in the last several years.”
The debt watcher said there is little cause for concern given relatively low debt exposures compared to other Southeast Asian countries. Still, some lenders could see a higher share of soured loan as borrowing costs rise, but will remain at a tolerable level.
Corporate credit lines should continue to keep banks afloat, with “cash-rich” conglomerates still taking up bulk of total loan portfolios, she added. Meanwhile, the household sector can still afford to keep up with higher interest rates as they hold more disposable income from the lowering of personal taxes coupled with a steady stream of dollar remittances.
However, Ms. Anand noted that loan growth may soften in the coming months to low double-digit levels, following a trend annual increase of 17-18% over the last few years.
“It will be interesting to see if banks can pass on the higher cost of borrowings to the borrowers,” she added, noting that this will boost interest margins and support stronger bottom lines.
Across the region, banks are seeing declining income growth due to a deceleration in lending activities.
“Slower loan growth, higher interest rates and competition disruption especially in fintech (financial technology) and payments scheme have caused revenue pressure for these banking systems,” said S&P director Ivan Tan.
Instead, lenders have turned to “cost control” to preserve profitability, as they are losing fee-based incomes to fintech counterparts.
But higher interest rates aren’t all bad for banks, Mr. Tan said. He noted that for every 25-bp increase in borrowing rates, around 5-10 bps “will translate into higher interest rate margins” for lenders. A strong capital base also ensures resilience.
“We have continued to maintain a stable outlook on ASEAN banking systems that we rate. We think despite the external turmoil and trade war and potential new accounting standards coming in, they are entering this challenging period with a position of strength,” Mr. Tan said.
Moody’s Investors Service also kept its “stable” outlook for Philippine banks earlier this week, as players will continue to benefit from favorable macroeconomic factors of the domestic economy.
RATE HIKES DONE FOR NOW
But Bank of the Philippine Islands (BPI) said the Bangko Sentral ng Pilipinas (BSP) is expected to hold policy rates steady during its December meeting as monthly inflation is seen to decelerate, adding the regulator has space to start cutting the reserve requirements of lenders.
In an economic briefing, BPI Chief Economist Emilio S. Neri Jr. projected that the central bank will hold off on further tightening moves at its policy meeting next month as monthly price increase will “start decelerating.”
“This is expected through 2019. [Inflation prints] will be much lower than the 6.7% that we saw for both [September and October],” Mr. Neri told reporters on Thursday.
Inflation steadied at 6.7% in October, matching the previous month’s print which was a nine-year high. Month-on-month inflation likewise eased to 0.3% last month from 0.9% in September.
Mr. Neri projected that inflation will start to decelerate as global oil prices could rise more modestly next year than in 2018.
“The WTI (West Texas Intermediate) crude went up by 40% in peso terms, which is the highest in 10 years. We don’t see this happening in 2019. There could be an increase…but it will not be as large and therefore should allow inflation to head back to targets by next year.”
Inflation is expected to settle at 3.5%, back within the 2-4% target band and lower than the 4.3% previous estimate.
However, the economist noted it is “premature” for the BSP to cut its policy rates — which currently stand at a 4.25-5.25% range — anytime next year.
“We don’t think the BSP will be cutting rates unless inflation prints below 2%, which we think is somewhat unlikely,” he said.
Still, Mr. Neri said the central bank has enough policy space to continue reducing its reserve requirements for commercial lenders, which is currently at 18%.
“We therefore believe that the policy move of the BSP after last Nov. 15 would be a resumption of cuts in reserve requirements at least two percentage points in 2019. More likely than not, this is expected in the middle of next year.”
Earlier this year, the central bank trimmed lenders’ reserve requirement by a cumulative two percentage points to deepen the local debt market.
“Once it’s very clear that we’re within target, we believe BSP will take the initiative to reduce the very repressive 18% reserve requirement,” BPI said.
Mr. Neri added that keeping the reserve requirement at its current level is “repressive” amid tighter capital adequacy compliance under the international Basel 3 standards.
The economist also noted that the BSP may take advantage of the entrance of the oil market into bear territory to replenish international reserves.
“More so that the Philippines continues to have a capital goods or investment backlog and that continued growth in imports in the coming years or quarters will require the Bangko Sentral to have a more comfortable amount of reserves.”
Dollar reserves slipped to a fresh seven-year low of $74.773 billion in October from the $80.419 billion booked a year ago, as the central bank defended the peso and as the government paid maturing foreign debt. — Melissa Luz T. Lopez and Karl Angelo N. Vidal