The Philippine banking system is broadly healthy given its strong asset quality and capital adequacy, but regulators must keep a careful eye on banks’ rising exposure to the real estate sector, a study by The Economist Intelligence Unit (EIU) said.
Driven by healthy investor confidence, Philippine banks saw profits rise by 18.5 percent in 2013, its fastest pace in three years, the London-based think tank said in its assessment of the country’s banking industry.
However, it warned that while there is little sign of a housing bubble in the Philippines at present, the government will need to keep a careful eye on the pace of credit growth to the real estate sector.
According to the EIU, banks’ interest income (accounting for about 60 percent of total income) increased by 10.9 percent in 2013, as growth in lending quickened to 15.7 percent from 12.8 percent in 2012.
The think tank expects the rapid pace of domestic credit expansion to continue through 2014 and 2015, averaging 19.7 percent a year.
“The central bank maintains that current rates of domestic credit growth are in line with GDP [gross domestic product]growth and that—so far—inflation remains in check, although it is expected to pick up in 2014 compared with 2013,” the EIU said.
Remittances and credit default
It noted that a fall in workers’ remittances, which fund much of the country’s investment activity in the property sector, would see an increase in mortgage defaults.
“Often prefunded by overseas Filipino workers, defaults on housing loans could increase if remittances decline,” it said.
Nevertheless, the EIU said that with high rates of capitalization, the Philippines’ strong external position and prudent lending regulations should provide adequate protection for banks.
Banks BB rating retained
Meanwhile, the EIU kept the country’s banking sector risk rating at BB, citing the industry’s low loan/deposit ratio and bad loans ratio, but said these positive factors can be offset by stiffer competition and low commercial loans.
The think tank noted that the banking sector’s loan/deposit ratio is among the lowest in Asia, suggesting that Philippine banks have financed loans mainly by using deposits rather than through international wholesale borrowing (which remains difficult to roll over in an uncertain financial climate).
The EIU also noted that the proportion of non-performing loans at universal and commercial banks fell to the equivalent of 2.2 percent of the total loan portfolio in March 2014, from 2.4 percent in November 2013 and 2.8 percent in January 2013.
Tougher regional competition ahead
However, it foresees a struggling Philippine banking sector once the Association of Southeast Asian Nations further integrates.
“As the economies of the Association of South-East Asian Nations become more integrated, the banking sector in the Philippines may struggle to compete with the larger players in the region. More immediately, the country’s banks may face greater competition and a drop in profitability if a proposed law lifting most of the restrictions on foreign investment in the sector is enacted,” it stated.
It noted that low consumer loans by universal and commercial banks, which stood at just 11.6 percent of their total loan portfolio at end-December 2013, barely changed from 12.1 percent a year earlier.
“This partly reflects the fact that households are net savers, owing to uncertainty about the sustainability of the remittance inflows that they receive from Filipinos overseas,” it said.