A STRONG economy and ongoing structural reforms are beneficial to Philippine banks, according to BMI Research, prompting the Fitch Group company to keep a positive growth outlook on the industry in light of healthy capitalization and liquidity profiles.
Bank lending may grow by 17 percent this year, not far from an estimated 18 percent in 2016, according to BMI, betting on the Philippines to remain one of the fastest growing economies in the region.
It is forecasting real gross domestic product (GDP) to grow by 6.3 percent, underpinned by an improved business environment, positive demographics and expansionary fiscal plans driving investment and output.
As measured by the GDP, the economy grew at a revised 6.9 percent in 2016. The government has set a GDP growth target of 6.5 percent to 7.5 percent this year.
Efforts by President Rodrigo Duterte to improve bilateral relations with China and Japan will help boost trade and investment with the two economic powerhouses in the region, “further reinforcing our positive view on the economy,” according to BMI.
“This should help to drive credit demand as both households and businesses assume leverage against a backdrop of profitable opportunities and relatively low existing indebtedness,” it said.
Asset quality across the banking sector is expected to remain stable and low as corporate earnings and asset valuations typically correlate positively with strong economic growth.
“In other words, we see limited scope for further improvements, but do not expect deterioration. On one hand, increasing loan exposure to consumers and small-medium enterprises (SME)—as banks deepen their penetration and search for engine of growth—may result in non-performing loan (NPL) ratio rising gradually,” BMI said.
As the medium-sized banks continue to develop their risk-management tools and resolve existing problem assets with the support of higher asset prices, there will be lower NPLs on record, BMI said. Gross NPLs have been on a broad downtrend since January 2013, declining from 3.5 percent to 2 percent in February 2017.
One of the key strengths of the banking sector is high capital buffers that should provide sufficient defense against moderate credit shocks and unexpected losses, it said.
The capital-to-asset ratio is at 12.1 percent as of February 2017, and the latest available data on capital adequacy ratio on a solo basis—excluding subsidiaries—stood at 15.6 percent as of end-September 2016.
“We expect the industry to maintain healthy buffers amid active supervision by the central bank and given that many of the leading banks have the ability to raise fresh capital due to strong financial backing from large conglomerates,” BMI noted.
The banking sector’s loan-to-deposit ratio is among the lowest in Asia, suggesting that Philippine banks have financed loans largely by using deposits rather than international wholesale funding.
This reduces refinancing risks as external borrowing tends to be difficult to roll over in times of uncertainty, according to BMI. It also lowers asset-liability mismatch risk from monetary tightening in the US and currency movements.
Although the banking sector as a whole is on a sound footing, it has a long tail with over 600 banks as of end-2016, with the largest 10 banks accounting for over 70 percent of total assets, BMI noted.
“The high degree of fragmentation also comes with uneven risk distribution where performance indicators are skewed towards dominant banks in the industry,” it said.
“That said, the government has been encouraging consolidation in the industry, which we believe will help to reduce the regulatory burden on the central bank and improve financial intermediation processes in the country,” it added.
The entry of well-managed foreign banks will likely provide further impetus for consolidation as domestic banks gear up for more competition from abroad, and could potentially enable knowledge transfers from overseas and improve risk management, according to BMI.
Earlier this month, the Bangko Sentral ng Pilipinas signed a final agreement with the Bank Negara Malaysia on the entry of qualified Association of Southeast Asian Nations (Asean) banks, in line with the Asean Banking Integration Framework, and a letter of intent with the Bank of Thailand to begin similar discussions.