S&P sees slower credit loss for Philippine banks

S&P GLOBAL RATINGS has forecast credit loss for banks in the Philippines to decline in 2023 due to a positive outlook on the country’s gross domestic product (GDP).

In a report released on Wednesday, the credit rating agency said credit costs will decline to 0.4-0.6% of gross loans next year while credit growth will ease to 5-7% from 7-9% this year.

The key driver for the slowdown in credit loss is the country’s stable macroeconomic conditions, S&P said, as it estimates a 6.3% GDP growth this year and a 6.1% average growth forecast in the next three years.

However, high inflation and interest rates may bring risks as they can dampen credit demand and affect highly indebted and lower-rated borrowers, the agency noted.

It said the banking sector’s good capital position and provisioning could cushion against a moderate rise in credit stress from higher inflation and interest rates, helping banks maintain good buffers.

Meanwhile, the slow credit growth, which will be felt next year, is attributed to the rise in policy rates in 2022.

The Bangko Sentral ng Pilipinas (BSP) has raised interest rates by 300 basis points this year to curb inflation, which is running near 14-year highs, and to support the peso, which has lagged and was underpinned by aggressive US monetary tightening. The local currency reached a record low of P59 against the dollar in October.

The agency gave the Philippines a banking industry country risk assessment (BICRA) of 5 out of 10, with 1 being the lowest risk and 10 being the highest.

According to the report, a BICRA analysis for a country covers all rated and unrated financial institutions that take deposits, extend credit, or engage in both activities. The BICRA methodology has two main analytical components, namely economic risk and industry risk.

S&P rated Philippine banks to be “stable” in economic and industry risks. They scored “very high” in economic resilience, “low” in economic imbalances, “high” in credit risk in the economy, “high” in institutional framework, “intermediate” in competitive dynamics, and “intermediate” in systemwide funding.

S&P sees a steady decline in the nonperforming loan (NPL) ratio to 3.2% by the end of next year, which would lead to a 3.2% growth in assets.

The decline was credited to the restructuring of weak, pandemic-related loans. Further disposal of NPLs by banks will also bring down the level of weak loans visible in the system, the agency said.

It noted that this could also lead to higher defaults from consumers and small to midsize enterprises if interest rates rise sharply and sustainably.

S&P’s other forecasts include a 1.3% average return on average assets due to higher margins from policy rate hikes and expected lower credit costs. — Aaron Michael C. Sy