The Philippines’ biggest banks may expect to post steady recurring revenue growth going forward as they continue to operate in a stable economic environment, strengthened further by sustained remittance flows and positive post-election consumer and business sentiment, debt watcher Fitch Ratings said in a report released Friday.
The credit ratings agency cited BDO Unibank Inc. (BDO), Metropolitan Bank & Trust Co. (Metrobank), and Bank of the Philippine Islands (BPI) as the three largest banks that will benefit from the country’s resilient economy.
Fitch expects Philippine economic growth to remain resilient despite softer external conditions, with robust domestic demand driving brisk mid- to high-teen loan growth over the next one to two years.
“We forecast real GDP growth of 6.2 percent in both 2016 and 2017, and expect domestic consumption and fixed-capital investment–the two major engines of Philippine economic growth–to stay resilient, backed by sustained remittance flows and supportive post-election consumer and business sentiment,” it said.
These factors are expected to propel steady recurring revenue expansion for the three largest banks, it added.
Fitch credits strong economic conditions for the high loan increase across the Philippine banking system, with an expansion in the compound annual growth rate (CAGR) recorded at about 18 percent over 2010-2015 for the three banks, compared with the industry average of about 16 percent.
“We believe loan growth has been supported by healthy corporate profitability and improving household incomes,” it said.
Bank credit in proportion to GDP has risen from about 30 percent at end-2010, but the increase has not been much at 39.3 percent as of end-2015. However it compares well with the ‘BBB’ median of 57.6 percent, it explained.
Bank credit to households expanded at a CAGR of about 18 percent over 2010-2015 but remains low as a proportion of GDP at about 8 percent.
“These moderate credit/GDP ratios suggest an ample runway for further credit expansion in support of economic activity, and we expect loan growth in the mid- to high-teens over the next one to two years—assuming broad economic policy continuity,” the credit watcher said.
Looking ahead, Fitch said lending to higher-yielding middle-market, small and medium enterprise (SME) and consumers is likely to increase at a faster rate than overall credit growth, in line with market demand and the banks’ growth strategies.
“These segments tend to carry higher credit risk than the banks’ traditional, large-corporate customer base, but we expect asset-quality to remain broadly benign amid supportive domestic conditions in the near term,” it said.
Fitch also noted banks’ loan-loss reserves of 111 percent to 175 percent of nonperforming loans at end-2015 also provide a buffer against higher credit costs.
The banks’ healthy capitalization, stable funding bases, and liquid balance sheets provide capacity to expand their loan books as the economy grows.
“Core capital ratios are high relative to international peers, and underpin an ability to absorb losses in times of stress. All three banks’ common equity Tier 1 (CET1) ratios comfortably exceed the local minimum,” it said.
The credit rating agency added that banks have been able to raise capital when needed to back strong balance-sheet growth.
It also said banks’ stable deposit-funded balance sheets stem from their large local franchises.
The bulk of their deposits are current and savings accounts (CASA); and balance sheets are liquid, with loan/deposit ratios of about 65 percent to 75 percent.
These healthy conditions helped to drive the upgrade of BDO, the largest bank in the country, to investment-grade in April 2016, Fitch said.
It also said Philippine banking regulation continues to strengthen, noting recent changes focused on enhancing risk-management and related-party lending frameworks, and measures to forestall excessive real-estate risk-taking.
“Close regulatory oversight, improving risk-management frameworks, and sound loss-absorption buffers should help mitigate potential risks arising from sustained high credit growth–as well as long-standing structural issues such as banks’ concentrated loan books and conglomerate ownership,” it said.