Philippine banks remain stable but risks are rising on the back of expected higher interest rates, a Fitch Group unit said in declaring a neutral view of the industry.
BMI Research, in a report released on Thursday, said bank lending could grow by 14 percent per year until 2019 given healthy risk appetite.
Gross domestic product growth, meanwhile, is expected to stay above 6 percent over the medium term, thanks to favorable demographic trends, a strong public investment drive that will help address an acute infrastructure deficit, and deepening economic cooperation with China and Japan that should be supportive of trade and investment.
Year-to-date growth, at 6.7 percent, has kept the country on track to hit the 6.5-7.5 percent target for 2017. For 2018 until 2022, the official goal is growth of 7-8 percent.
After reaching multi-year highs in July 2017, both banking asset and credit growth slowed in subsequent months, coming in at 12.4 percent and 16 percent in November, respectively.
“This was in line with our view for loan growth to normalize from a high base and we expect this trend to continue as interest rates are likely to rise over the coming quarters as the BSP tightens its monetary policy stance over the course of 2018,” BMI said.
Asset quality in the banking sector has also improved considerably over the past few years, with the gross non-performing loan (NPL) ratio falling to just 1.9 percent in November from over 3 percent in 2013.
However, BMI believes that this is likely as good as it will get as higher interest rates are expected to weigh on household income, corporate profitability and possibly asset prices.
Meanwhile, sustained periods of high credit growth generally precede future asset quality deterioration as the quality of lending is often lax when sentiment is upbeat.
“Our core view is for the gross NPLs ratio to stabilize at around 2 percent over the coming quarters,” it said.
Overall, BMI said that it was holding a “neutral view on the Philippines banking sector.”
“On one hand, Philippine banks will likely continue to benefit from the robust macroeconomic backdrop, which should be broadly supportive of loan growth, profitability, and asset quality. On the other hand, as the Bangko Sentral Ng Pilipinas (BSP) gradually unwinds its ultra-supportive monetary policy over the coming quarters, rising interest rates act as a damper on some of these performance metrics,” it added.
“We note that the current record-low interest rate environment and upbeat economic growth expectations have resulted in a sharp rise in leverage, and malinvestment have started to accumulate in the economy. If left unchecked, this pose downside risks to financial stability, even though Philippine banks generally boast healthy capital buffers.
While Philippine banks are generally well capitalized — the industry-wide capital adequacy ratio was at 15.5 percent as of end-June 2017 versus the regulatory requirement of 10 percent — downside risks to financial stability are rising as record-low interest rates have likely led to an increase in speculative and unproductive investments.
“Already, we have seen the strong economic sentiment and low interest rate environment since 2010 lead to heavy lending by commercial and universal banks to the real estate sector, with the outstanding loan exposure doubling from P866.6 billion in March 2014 to P1,709.9 billion in September 2017,” it said.
Citing a report by Fitch Ratings, BMI said that buoyant projections for property demand had also resulted in excess supply in some sub-segments and that an increasing number of corporates and conglomerates had ventured into property development.
“This raises contagion risk in the event of a real estate downturn and the concentrated loan portfolios could exacerbate the situation,” it said.