Philippines banking sector ‘improving’ – Fitch

MANILA, Philippines — Global credit watchdog Fitch Ratings has revised its outlook for the Philippine banking sector to ‘improving’ from ‘neutral’ as higher for longer interest rates could further boost banks’ rising net interest margins.

“Fitch Ratings has revised the Philippine banking sector outlook to improving from neutral as we expect banks to be able to preserve their record-high net interest margins (NIM) for longer due to a delay in policy rate cuts,” the debt watcher said in a report.

The credit rating agency said the Bangko Sentral ng Pilipinas (BSP) is still expected to start its monetary policy easing this year, but the pace would be “gentler” than what Fitch had previously anticipated.

Higher interest rates should also help Philippine banks maintain assets yields for the second half of the year.

“Meanwhile, the sustained expansion in higher-yielding unsecured lending should result in incrementally better NIM, which we now project to expand by about seven basis points for the year, reversing from a seven-basis-point contraction previously,” Fitch said.

There would also be upside potential if the BSP decides to further cut banks’ reserve requirements ratio (RRR) this year as BSP Governor Eli Remolona Jr. signaled in April that the target is to cut big banks’ RRR by 450 basis points to five percent from the current 9.5 percent level.

The debt watcher also raised its credit growth forecast for the Philippines this year to 11.5 percent from 9.8 percent previously, adding that robust consumer lending and implementation of key infrastructure projects would support banks’ revenue for this year.

“Demand for credit card and unsecured personal lending is less sensitive to policy rate movements and we expect the implementation of more infrastructure projects with private-sector participation to further prop up loan growth in the coming months,” Fitch said.

Loans released by big banks rose by 9.6 percent to P11.91 trillion as of end-April from P10.87 trillion disbursed in the same period in 2023, BSP data showed. Credit growth in April was the fastest in 12 months.

Higher interest rates will also have a manageable impact on the banking sector’s asset quality amid the resilient economy, which Fitch projects to grow by 5.8 percent in 2024 from 5.5 percent in 2023.

“We expect asset-quality ramifications from a higher interest rate environment to remain manageable,” the credit rating agency said.

Based on the latest central bank data, the banking sector’s total non-performing loan (NPL) ratio rose to 3.45 percent in April from 3.41 percent in March, the highest in eleven months.

Soured loans went up by 12.3 percent to P480.65 billion as of end-April from P427.88 billion in the same period last year.

“The rising share of riskier consumer lending points to inherently higher credit risks on the banks’ loan portfolio, but the healthy economy and job market prospects should help to limit the increase in impairment on the banks’ consumer loan books in the near term,” Fitch said.

Most large corporates would also continue to hold comfortable financial buffers over projected debt-servicing needs, it said.

In terms of profitability, the earnings of Philippine banks rose by 2.9 percent to P92.11 billion in the first quarter versus the P89.47 billion booked in the same period in 2023.

“The sustained earnings momentum will help most banks maintain adequate capital buffers. For Fitch-rated entities, this is also supportive of their Viability Ratings (VR), which reflect their standalone credit profiles,” Fitch said.

“Nevertheless, their Issuer Default Ratings are driven by our expectation of extraordinary sovereign support and are sensitive to movements in the sovereign rating rather than their VRs,” it added.