Liquidity to come from foreign banks full entry, BoJ stimulus – HSBC
Credit growth in the Philippines may receive strong support from the opening up of the country’s financial sector to foreign banks and the positive impact of Japan’s monetary stimulus on the Association of Southeast Asian Nations (Asean), HSBC said in a report.
“Credit growth may stay strong in the Philippines over the next year. In addition to the BoJ [Bank of Japan], the country is also in the process of further opening up the financial sector to foreign banks,” the report said.
In the report, HSBC explained that following the quantitative easing program of the United States Federal Reserve, the next “best friend” of Asean liquidity is the Bank of Japan.
HSBC was referring to liquidity expected to flow into the region from the BOJ’s decision to raise its asset-buying program in the region to 80 trillion yen a year from 60 trillion to 70 trillion yen previously.
“The link between the BoJ’s monetary easing and the liquidity flow to Asean has been abundantly clear in the past. This is, in part, what is motivating a more dovish tone by central banks in the region, in spite of high household debt and the prospect of Fed tightening next year,” it said.
“In a nutshell, Japanese bank liquidity is yet another factor that should keep local financial systems relatively stable, especially over the course of the next 1 to 2 years,” the bank said.
‘Sustained vigilance needed’
On the other hand, HSBC stressed that the passing of a law allowing foreign banks to operate in the Philippines and to acquire up to 100 percent of a local bank from the previous 60 percent, will also help expand liquidity in the system.
These developments may require sustained vigilance from the central bank, it said.
“The increased foreign financial presence is quite timely, and provides an additional conduit for Japanese bank lending to flow into the Philippines to increase liquidity, which will give the BSP good reason to be vigilant,” it added.
HSBC said there is clearly excess liquidity in the Philippine financial system at present, with robust consumer demand growth and property prices continuing to pick up steam.
It noted the Bangko Sentral ng Pilipinas (BSP) is currently the only central bank in Asia that is expected to hike rates next year, and it has implemented some macro-prudential measures to prevent asset bubbles.
Despite this, HSBC said that local banks remain stable in terms of loan-to-deposit ratios (LDR) and assets.
“Accordingly, we don’t really worry about bank-related liquidity in the Philippines as banks are in better shape from an LDR perspective,” it said.
The banking giant explained that LDRs are a good measure of banks’ robustness and their capacity to extend loans as low LDR signifies that a bank has excess deposits to deploy, and because deposits are a relatively cheap and stable funding source, loan growth is easier to sustain.
“Meanwhile, liquid assets as a share of deposits have also increased, which implies that banks also have ample buffers—not to mention the robust external fundamentals on the sovereign side,” it concluded.