BMI Research expects asset quality among Philippine commercial banks to stabilize and perhaps even improve over the coming quarters supported by a robust economy, healthy capitalization and liquidity profiles, and the likelihood of further consolidation.
In terms of assets, the sector grew by 13.2 percent on average year-on-year in the first four months of 2017, marking the fastest pace of expansion since the fourth quarter of 2014, BMI Research, a Fitch Group company reported on Wednesday.
The acceleration in asset growth was mainly driven by the loan segment against the backdrop of strong economic growth and improvement in risk appetite, the company said.
“The Philippine economy expanded by 6.4 percent year-on-year in real terms in first-quarter 2017, and although this marks a slowdown from the full-year revised growth figure of 6.9 percent in 2016 due to unfavorable base effects from the election spending in first-half 2016, we maintain a fairly constructive view on the country’s growth prospects over the medium term,” BMI Research said.
It is forecasting gross domestic product (GDP) growth in the Philippines at 6.3 percent in 2017 and 6.1 percent in 2018, driven by higher private and public sector investment, as well as deepening economic cooperation and engagement with China and Japan which will help boost trade.
As measured by the GDP, the economy grew by 6.9 percent in 2016. The government targeted to grow the economy by 6.5 percent to 7.5 percent this year.
The country has made notable progress in improving its business environment and boosting the transparency of its public procurement under the former Aquino administration, all of which will continue to improve the efficiency of resource allocation, BMI Research noted.
“Combined with low real interest rates domestically, 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.
BMI Research maintained its forecast for loan growth at 17 percent in 2017 from 17.3 percent in 2016.
Its constructive view on the Philippine economy has been confirmed by improving corporate profitability, which would have a positive impact on asset quality and profitability of banks over the coming quarters, it pointed out.
“This should see asset quality stabilize and perhaps even improve over the coming quarters,” it said.
One of the key strengths of Philippine commercial banks is high capital buffers which should safeguard financial stability in the event of moderate credit shocks and unexpected losses, according to BMI Research.
“Although the capital adequacy ratio (CAR) of commercial banks was reported at 14.4 percent on a solo basis as of end-2016, down from 15.4 percent in the previous quarter, we note that this was due to the acceleration in credit growth and is not a huge concern,” it said.
The sector’s loan-to-deposit ratio of 70.8 percent is also among the lowest in Asia, suggesting that Philippine banks have financed loans largely by using deposits rather than through international wholesale funding.
This reduces refinancing risk in the banking system as external borrowing tends to be difficult to roll over in times of uncertainty or rising global interest rates. It also lowers asset-liability mismatch risk arising from currency fluctuations, BMI Research noted.
It said there is an ongoing consolidation process in the industry at large as reflected by the number of banking institutions in the country which dropped to 602 as of end-2016, from 632 in 2015.
“Given that the banking industry as a whole has a long tail, of which the 10 largest banks (most of which are commercial banks) account for over 70 percent of total assets, we expect this process to continue as Philippine banks need to scale up to prepare for regional competition under the Asean [Association of Southeast Asian Nations] Banking Integration Framework,” it said.
BMI Research believes that further consolidation should aid financial intermediation processes and allow commercial banks to expand their reach to the more remote areas of the country by acquiring their smaller rural bank counterparts.