MANILA, Philippines - The Hongkong and Shanghai Banking Corp. (HSBC) said the Philippine banking system remains one of the strongest in the 10-member Asean with credit growth seen strengthenings in the next few years.
HSBC economist Frederic Neumann said Philippine banks possess excess liquidity with robust consumer demand growth while property prices continue to pick up steam.
“The Philippines is in a bucket of its own,” Neumann said in a recent report.
Liquid assets as a share of deposits have also increased, which implies that banks also have ample buffers – not to mention the robust external fundamentals on the sovereign side.
The Bangko Sentral ng Pilipinas (BSP) is currently the only central bank in Asia expected to hike rates next year. It has also implemented some macro-prudential measures to prevent asset bubbles.
“We don’t really worry about bank-related liquidity in the Philippines as banks are in better shape from a loan-to-deposit ratio (LDR) perspective,” the HSBC economist said.
The country is also in the process of further opening up the financial sector to foreign banks.
Last month, the Philippine government passed a law allowing foreign banks to operate in the country and to acquire up to 100 percent of a local lender from the previous ownership ceiling of 60 percent.
This move is in line with increased services integration with Asean under the Asean Economic Community (AEC), which is expected to come into force in end-2015.
Neumann said the increased foreign financial presence is quite timely, and provides an additional conduit for Japanese bank lending to flow into the Philippines to increase liquidity.
The global financial institution pointed out that LDRs have increased sharply in recent years in most Asean markets, and that the high-level of liquidity are likewise becoming tighter.
“These raise two immediate challenges,” Neumann said.
It means that high credit growth could lead to slow overall demand, and that it could render local financial systems more vulnerable to volatility in global markets and a sudden rise in funding costs.
In most of the Asean, deposit growth has slowed down thus constraining loan growth.
A low LDR generally signifies that a bank has excess deposits to deploy, and because deposits are relatively cheap and stable funding source, loan growth is easier to sustain.
When LDRs rise above 100, a bank can turn to wholesale or interbank markets to top up its funds. But this is risky and drives up the cost of funding. As a result, bank lending slows or at least becomes more sensitive to potential shocks.
Thailand has the highest LDR in the Asean while Singapore has a robust wholesale market as well as deep non-bank corporate and interbank lending channels.