Fitch expects PHL banks to stay resilient amid global headwinds

THE PHILIPPINE banking system is likely to remain resilient in 2023 despite headwinds stemming from higher borrowing costs and slowing global growth, Fitch Ratings said.

Fitch Asia-Pacific Financial Institutions Director Tamma Febrian said in an interview with BusinessWorld that their sectoral outlook for the Philippine banking sector is “neutral” for 2023. This is in line with its outlook for other markets in the region.

“Overall, I think the banking sector’s financial performance will continue to be relatively resilient next year, despite some of the headwinds in terms of interest rates and global external growth,” Mr. Febrian said.

“In terms of our expectations of profitability, we do see quite a bit of a positive momentum in terms of revenue growth for the banking sector next year, on the back of expansion in margins,” he said, adding that banks’ net margins will continue to expand this year. 

The net profit of banks operating in the country jumped by 44.8% to P244.875 billion from January to September compared with last year’s P169.09 billion, Bangko Sentral ng Pilipinas’ (BSP) data showed.

Meanwhile, loan growth is expected to slow next year due to higher interest rates, Mr. Febrian said. 

“We are expecting loan growth to be at around 6-6.5% next year on our base case scenario. This is lower than what we’re expecting this year, which is going to be around 9%, but it’s still going to be positive,” he said.

Outstanding loans by big banks, net of reverse repurchase placements with the central bank, jumped by 13.9% year on year in October to P10.56 trillion.

The October pace was the fastest in nearly four years or since the 15.3% expansion posted in January 2019

Meanwhile, the BSP Monetary Board has hiked borrowing costs by 300 basis points (bps) since May and is widely expected to raise interest rates by 50 bps at its last meeting for this year on Dec. 15.

On the other hand, Mr. Febrian said asset quality of Philippine banks will also remain broadly stable, and there might be room for improvement if interest rates would stabilize to a level lower than expected.

“I think Filipino borrowers have been quite used to a relatively elevated kind of interest rate environment. Take a look at just before the pandemic when it was around 4.25%. At that level, NPL (nonperforming loan) ratio was around 2%,” he said. “At the current moment, we are looking at an elevated inflation. So, I don’t think we’re going to reach a 2% (NPL ratio) anytime soon.”

“I think there is a degree of resilience in borrowers and especially among the corporate borrowers, which I think has a relatively healthy financial buffers to withstand any rise in interest rates in their interest repayments,” he said. “In short, I think any asset quality repercussions will likely be moderate at most in our base case expectation.”

Bad loans held by banks declined for a seventh straight month in September, bringing the NPL ratio to its lowest in 25 months, according to BSP data.

Philippine banks’ gross NPL ratio eased to 3.43% in September from 3.53% in August. It was the lowest in 25 months or since the 2.84% recorded in August 2020.    

Soured loans fell by 14.6% year on year to P415.225 billion in September.

BSP officials earlier said banks’ NPL ratio may peak at 8.2% in 2022. The ratio stood at 3.99% as of end-December 2021.

Meanwhile, headline inflation rose to 8% in November from 7.7% in October and 3.7% in November 2021. For the 11-month period, inflation averaged 5.6%, still lower than the BSP’s 5.8% full-year forecast. — Keisha B. Ta-asan