PHILIPPINE BANKS may see slower credit growth next year due to the impact of higher interest rates, S&P Global Ratings said.
In a report dated Nov. 17, S&P Global Ratings Primary Credit Analyst Nikita Anand said credit is expected to expand by 5-7% in the Philippines in 2023, slower than the 7-9% growth this year.
“This is because of our expectation of a 300-basis-point (bp) rise in policy rates in 2022. Given loan yields will rise with a lag, the full effect of the rate increase will be felt in 2023,” she said.
The Bangko Sentral ng Pilipinas (BSP) last week raised its benchmark rate by 75 bps to 5% — the highest in nearly 14 years.
Since May, the BSP has hiked rates by 300 bps to tame inflation and prevent the peso from further depreciating against the US dollar.
Ms. Anand said high inflation and interest rates will be downside risks for the Philippine economy “because they could dampen credit demand and affect highly indebted and lower-rated borrowers.”
S&P forecasts 6.3% gross domestic product (GDP) growth for the Philippines this year, slightly below the 6.5-7.5% government target.
It sees an average Philippine growth of 6.1% for the next three years, also below the government’s 6.5-8% goal.
Ms. Anand said interest rates may start to normalize in the next two years.
“We forecast policy rates could decrease by a total of 150 bps in 2023 and 2024 as inflationary pressures recede. However, if inflation persists and rates remain high, this could increase default risks for some leveraged and low-income borrowers,” she said.
Ms. Anand said large corporations are expected to remain resilient, which would reduce the impact on the banking sector’s asset quality. She noted banks will be able to absorb a “modest” rise in nonperforming loans (NPLs) from consumers and small businesses.
The banking sector’s credit losses are also seen to continue to decline next year.
“This is because most pandemic-related weak loans have either been recognized or restructured… If interest rates rise sharply and sustainably, this could also lead to higher defaults from the consumer and small to midsize enterprise segments. Banks’ disposal of NPLs to asset-management companies could bring down the level of weak loans visible in the system,” Ms. Anand said.
The banking industry’s NPLs dropped 14.6% year on year to P415.225 billion in September from P486.362 in the same month last year, , based on the latest data from the Bangko Sentral ng Pilipinas.
This brought the systemwide NPL ratio to 3.43% in September, easing from 3.53% in August, and 4.44% in September 2021. The September NPL ratio was the lowest in 25 months or since the 2.84% recorded in August 2020. — KBT