PHL Banks Operating Environment Stable as Economy Recovers

The operating environment for banks in the Philippines is seen as stable due to lower virus risks, better business prospects and the continued recovery of the economy, which could lead to higher demand for loans, said Fitch Ratings Wednesday.

Fitch said in a report that the Philippine banking system’s operating environment score is now stable, up from the previous negative, as the economy continues to rebound from the impact of the coronavirus pandemic.

“Philippines GDP (gross domestic product) grew 8.3% year-on-year in 1Q22, following a 5.7% increase 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 mitigate asset quality risks that could arise from sectors still reeling from the pandemic,” said said the Debt Watcher.

“Rising commodity prices, exacerbated by global geopolitical developments, are expected to fuel inflation and weaken consumer confidence in the near term. Prolonged inflationary pressures could derail recovery momentum and hurt loan demand and our asset quality outlook; however, this is not our base case.

Fitch said inflation could reduce banks’ near-term growth opportunities as rising prices hurt consumers’ purchasing power. Still, he said he believed the economy and banking sector had “adequate capacity” to absorb the impact of higher prices.

“We expect loan growth to continue to accelerate and reach high single digits by the end of 2022. Household consumer loans, particularly credit cards and loans autos, have weighed on loan growth over the past year, but recent surveys of consumer expectations point to growing optimism, which could herald a modest recovery in consumer loan demand, even if this should be tempered by rising commodity prices,” the debt watcher said.

Fitch has a negative outlook on the issuer default ratings (IDRs) 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), reflecting its outlook on the sovereign. The report released Wednesday discusses the outlook for these three large private banks and two public lenders.

Fitch said all three private banks have better business profile scores than public lenders because the former have a broader reach and competitive advantage due to their “embedded” national franchises, allowing them to attract higher quality customers, as seen in the quality of their healthy assets.

Regarding the risk profiles of these banks, the credit assessor stated that the risk management and credit underwriting standards at BDO, BPI and Metrobank are stricter than at LANDBANK and DBP, based on the parameters and limits for accepting credit risk, asset quality throughout credit cycles and credit provisioning. Strategies.

“Our assessment of banks’ risk profiles takes into account their penchant for strong credit growth. Banks’ loan portfolios grew by an average of 13% to 20% per year over 2015-2019 and, after two years of moderate credit growth in a challenging operating environment, we expect private banks to grow lending again as business and consumer confidence improves. We expect loan growth to settle at 8%-10% for private banks in 2022, before returning to near pre-pandemic levels,” he said.

Meanwhile, public banks’ risk profiles are expected to “remain weighed down by their expanding pandemic relief lending programs over the next 12-18 months, as less than 10% of approved funds have been disbursed at the end of the day.” end of 2021. This despite improving economic conditions, which should ease some of the debt service burden on weaker borrowers.

On asset quality, Fitch said all three private banking indicators have stabilized and this should continue if the economy remains on track to recover.

“Nevertheless, it will take time for banks’ regulatory non-performing loan ratios to return to pre-pandemic levels, as some hard-hit sectors continue to suffer from the lingering effects of the pandemic.”

Meanwhile, Fitch said all five lenders should benefit from higher benchmark rates as the central bank began its tightening cycle.

However, their capital levels could weaken in the coming years as they continue to increase lending and, for state-owned banks, as they help disburse pandemic relief.

Meanwhile, Philippine banks are largely funded by deposits and Fitch said this was a “rating strength”.

“Costs of funds have reached an all-time high in 2021, reflecting lower interest rates and excess liquidity in the system. We expect the cost of funds to increase in 2022 as interest rates rise. ‘interest,’ said the Debt Watcher.

As these five banks are consistently large, government support in a crisis is “highly likely”, Fitch added.

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