Philippine banks’ operating environment is seen to be stable due to receding virus risks, a better business outlook and the economy’s continued recovery, which could lead to stronger demand for loans, Fitch Ratings said on Wednesday.
Fitch said in a report that the Philippine banking system’s operating environment score is now stable, up from negative previously, as the economy continues to rebound from the coronavirus pandemic’s impact.
“The Philippines’ GDP (gross domestic product) expanded by 8.3% year-on-year in 1Q22, following a rise of 5.7% in 2021. We expect the recovery momentum to be sustained, with growth of 6.0% in 2022 and 6.2% in 2023. The rebound in the economy should support loan demand and temper asset-quality risks that may arise from sectors still reeling from the pandemic,” the debt watcher said.
“Rising commodity prices, exacerbated by global geopolitical developments, are likely to fan inflation and dampen near-term consumer sentiment. Prolonged inflationary pressure could derail the recovery momentum and hurt loan demand and our asset-quality outlook; however, this is not our base case.”
Fitch said inflation could dent banks’ near-term growth opportunities as higher prices affect consumers’ purchasing powers. Still, it said it believes the economy and the banking second have “adequate capacity” to absorb the impact of higher prices.
“We expect loan growth to continue to accelerate and settle at a high single-digit level by end-2022. Household consumption loans, particularly credit cards and auto loans, have weighed on loan growth for the past year. Nevertheless, recent consumer expectation surveys indicate rising optimism, which may herald a modest recovery in consumer loan demand, albeit this is likely to be tempered by higher commodity prices,” the debt watcher said.
Fitch has a negative outlook on the issuer default ratings (IDR) of BDO Unibank, Inc., Bank of the Philippine Islands (BPI), Metropolitan Bank & Trust Co. (Metrobank), Land Bank of the Philippines (LANDBANK), and Development Bank of the Philippines (DBP), mirroring its outlook on the sovereign. The report released Wednesday discussed prospects for these three large private banks and two state-owned lenders.
Fitch said the three private banks have better business profile scores than the state-owned lenders as the former have a wider reach and competitive advantage because of their “entrenched” domestic franchises, and this allows them to attract higher-quality customers, as seen in their healthy asset quality.
As for these banks’ risk profiles, the credit rater said risk management and credit underwriting standards at BDO, BPI and Metrobank are stronger than at LANDBANK and DBP, based on credit-risk acceptance parameters and limits, asset quality through credit cycles and credit provisioning policies.
“Our assessment of the banks’ risk profiles considers their penchant for high credit growth. The banks’ loan books expanded by an average of 13%-20% a year over 2015-2019 and, following two years of subdued credit growth amid the difficult operating environment, we expect the private banks to again boost lending as business and consumer confidence improves. We expect loan growth to settle at 8%-10% for the private banks in 2022, before reverting to near pre-pandemic levels,” it said.
Meanwhile, the risk profiles of the state-owned banks are seen to “remain weighed down by their expanding pandemic-relief lending programs over the next 12-18 months, since less than 10% of approved funds were disbursed by end-2021. This is notwithstanding improving economic conditions, which should alleviate some of the debt servicing burden of weaker borrowers.”
ASSET QUALITY
As for asset quality, Fitch said the three private banks’ indicators have been stabilizing and this is expected to continue if the economy remains on track to recovery.
“Nevertheless, it will take time for the banks’ regulatory non-performing loan ratios to return to pre-pandemic levels, as some hard-hit sectors continue to reel from the lingering effects of the pandemic.”
Meanwhile, Fitch said the five lenders are seen to benefit from higher benchmark rates as the central bank has begun its tightening cycle.
However, their capital levels may soften in the coming years as they continue ramping up lending and, for state-owned banks, as they help disburse pandemic relief.
Meanwhile, Philippine banks are largely deposit-funded and Fitch said this is a “rating strength”.
“Funding costs reached a record low in 2021, reflecting lower interest rates and excess system liquidity. We expect the cost of funds to rise in 2022 in tandem with rising interest rates,” the debt watcher said.
With these five banks being systematically important, government support in case of a crisis is “highly probable”, Fitch added.