BMI keeps positive view on PH banks

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Fitch Group unit sees 15% loan growth until 2019
The dynamics of Philippine banks remain healthy according to BMI Research, prompting the Fitch Group unit to keep a positive outlook on the industry.

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Bank lending could grow by 15 percent every year until 2019, BMI said, as the Philippine economy was likely to maintain its robust growth.

Gross domestic product (GDP) growth is expected to hit 6.2 percent per year, thanks to strong demographic trends that will support savings, increased productivity because of continued business and tax reforms, and strong government initiatives to invest in infrastructure.

The Philippine economy grew by 6.5 percent in the second quarter, picking up from the 6.4 percent recorded in the first three months of the year but down from 7.1 a year earlier.

Year to date growth, at 6.4 percent, remains below the official 2017 goal of 6.5 percent and 7.5 percent. For 2018 until 2022, the target is 7 percent to 8 percent.

“Deepening economic cooperation with China and Japan due to President Rodrigo Duterte’s pragmatic foreign policy will also provide a tailwind for investment and trade,” the Fitch unit added.

Despite rapid loan growth, meanwhile, gross non-performing loan (NPL) ratios among Philippine banks have been on a broad downtrend since 2013 and appear to have stabilized at around 2 percent.

“With the economy on a solid footing, we expect this to be supportive of corporate profitability which will in turn have a positive effect on asset quality and profitability of banks over the coming quarters,” BMI said.

Philippine banks are also generally well-funded with the overall capital adequacy ratio standing at 15.5 percent as of end-June, above the regulatory requirement of 10 percent under Basel III standards.

Although systemic domestic banks or D-SIBs will face higher capital adequacy requirements over the coming quarters with the phasing-in of higher loss absorbency requirements, BMI said it believed that most of Philippines’ big banks would be able to comply.

Full implementation is expected by January 2019 following a January 2017 start.

“Depending on the classifications of each bank, D-SIBs will need additional 1.5 to 2.5 percent of common equity tier 1 capital over the current 6 percent, but we do not expect this to limit the ability of banks to meet credit demand over the coming quarters,” it said.

BMI added that the banking sector’s liquidity level remained ample despite loan growth outpacing deposit growth, resulting in the loan-to-deposit ratio hovering above 72 percent since October 2016 — a level last seen in 2013.

“This indicates that Philippine banks have financed loans largely by using deposits rather than through international wholesale funding,” it said.

As such, even if global liquidity conditions tighten in the coming quarters due to a rise in global interest rates, BMI said this would not pose much of a constraint for Philippine lenders.

“Furthermore, this suggests low risk of asset-liability mismatch arising from currency fluctuations,” it said.

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