‘Banks sound but risk overheating’

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Fitch also warns of overinvestment in real estate

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Philippine banks have shown considerable improvement in asset quality over recent years, but while Fitch Ratings acknowledged the industry’s sound balance sheet, it also warned of risks the banks faced amid brisk economic activity and high loan growth.

The credit ratings agency pointed out potential risks of overheating and over-investment in real estate as banks focus on consumer lending.

“The banks’ shift in focus to the consumer-lending segment may lead to higher NPL [nonperforming loan]formation,” Fitch said, although it added, “but we expect the broadly steady operating environment to continue to support their overall asset quality in the near term.”

For the near term, Fitch expects gross domestic product (GDP) growth to remain resilient on strong domestic activity despite potential external headwinds on overseas remittances and business process outsourcing (BPO).

“We believe overseas remittances and BPO activity–two key drivers of domestic demand–should remain steady,” it said.

It also saw the shift in global trade policies as posing a potential threat to these activities, the BPO industry in particular, but it added that any significant deviation from such threats is unlikely for now.

“A commitment to economic policy stability and higher infrastructure investment under President Rodrigo Duterte–who took office in mid-2016–is positive for further economic expansion, and the authorities retain sufficient room to support economic growth, if needed,” it said.

Credit demand should stay upbeat against this backdrop, the debt watcher said, but pointed out that this places greater demand on operating frameworks as banks expand.

“Bank lending has grown rapidly amid a favorable economic and interest-rate environment over the last few years,” it said.

The compounded growth rate of loans at about 16 percent over 2011-2016 has been roughly double the nominal GDP growth rate, Fitch noted.

“Overheating and over-investment will remain a risk amid persistent high loan growth, particularly since real-estate activity has been a significant source of credit growth over the last five years,” it said.

The ongoing moderation in the residential property market, particularly in densely populated Metro Manila, is seen helping curb unrestrained growth in the sector.

“The slowdown may hurt smaller, more concentrated developers, while we understand that larger, more diversified players would be able to shift their activities to areas with stronger demand,” Fitch said.

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