Support to come from domestic demand – BMI
The Philippine banking sector should stay on a sustainable footing amid near-term challenges, a Fitch-owned research firm said, with support primarily coming from domestic demand.
The upbeat outlook, BMI Asia analyst Chan Jin Lai said, “owes to our expectations for domestic demand conditions to remain supportive of sustained loan growth, continued bank balance sheet strength and macro-prudential measures implemented by the BSP (Bangko Sentral ng Pilipinas) that will eventually pay off over the long term in terms of safeguarding financial stability in the Philippines.”
Tighter central bank measures, conversely, will also turn out to be a challenge, Chan noted, along with a broad regional slowdown that has affected trade and stronger competition arising from more foreign banks entering the country.
Still, BMI expects loan growth to remain robust, hitting an average 12 percent per annum over 2016 to 2019 but down from an estimated 15 percent in 2015.
Remittance inflows are also expected to remain one of the major factors behind firm domestic demand, helping to sustain credit growth momentum.
Remittances were up 4.8 percent year-on-year to $14.16 billion in the first seven months of 2015. BMI is forecasting inflows to increase by an average 4 percent per year until 2024.
Ongoing reform measures by the government, such as moves to reduce corruption and streamline the process for starting a business, have helped improve the overall business environment. This has made it more conducive for foreign direct investments and greater private sector participation, BMI said, thereby increasing credit demand for investment purposes.
“Further informing our constructive stance for the banking sector is its robust balance sheet that will help buffer banks against shocks to the economy,” Chan also said.
He noted that at around 15 percent, the banking sector’s capital adequacy ratio far exceeded Basel III standards.
Amid rapid loan growth, non-performing loans as a share of the total have stayed tepid, coming in at just 1.9 percent in July 2015. This, BMI said, reflects prudent lending by domestic banks.
“The close supervision of the banking system by the Philippine central bank will also help to further strengthen the quality of bank balance sheets,” Chan said.
The BSP raised the minimum capital requirement for the banking sector last year. For instance, commercial banks with more than 10 branches have to maintain a capital base ranging from P4 billion to P10 billion, up from P2 billion previously.
Chan also noted central bank measures “to ensure that domestic banks maintain a sustainable real estate loan portfolio on their books,” with loans to the property market as a share of the total capped at 20 percent.
“That said, that limit had been breached in June 2015, with real estate loans as a share of the total coming in at 20.5 percent, suggesting that tighter rules to curb lending to the property market could well be on the cards over the coming quarters,” he said.