THE PHILIPPINE BANKING industry’s revenue prospects are seen to further improve this year amid strong lending growth and an expected delay in policy easing, Fitch Ratings said.
In a commentary, Fitch said that it revised its outlook on the Philippine banking sector to “improving” from “neutral.”
“We expect banks to be able to preserve their record-high net interest margins (NIM) for longer due to a delay in policy rate cuts,” it said. “This, coupled with a sustained rise in higher-yielding consumer lending and rollout of key infrastructure projects, is likely to buoy banks’ revenue prospects for the rest of 2024.”
The Monetary Board has kept its key policy rate steady at a 17-year high of 6.5% since October 2023. Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. previously signaled the first rate cut could be done as early as August.
Fitch expects the BSP to begin its policy easing cycle this year but noted that the “gradient of normalization is gentler than we previously forecast.”
“We believe the extension in higher interest rates will have a manageable impact on the sector’s asset quality given the resilient economy, with Fitch projecting GDP growth of 5.8% in 2024,” it said.
Fitch said higher interest rates will allow banks to maintain asset yields for most of the second semester.
“Meanwhile, the sustained expansion in higher-yielding unsecured lending should result in incrementally better NIM, which we now project to expand by about 7 basis points (bps) for the year, reversing from a 7-bp contraction previously,” Fitch said.
It said there is “upside potential” for the forecast if the BSP further cuts the banks’ deposit reserve requirements this year.
Mr. Remolona has also signaled that he is seeking to reduce the reserve requirement ratio to 5% from the current 9.5%.
The credit rater also said it expects Philippine banks’ loan growth and business volume to remain “healthy” this year. It raised its credit growth outlook to 11.5% from 9.8% previously amid a robust economic outlook.
Latest data from the central bank showed that bank lending grew by 9.6% to P11.91 trillion as of end-April from P10.87 trillion a year ago, its fastest pace of growth in 12 months. This was attributed to sustained credit card lending and increased loans to the construction and transportation sectors.
“Demand for credit card and unsecured personal lending is less sensitive to policy rate movements and we expect the implementation of more infrastructure projects with private-sector participation to further prop up loan growth in the coming months,” Fitch said.
Meanwhile, Fitch said asset quality risks are still manageable despite the elevated interest rate environment.
“The rising share of riskier consumer lending points to inherently higher credit risks on the banks’ loan portfolio, but the healthy economy and job market prospects should help to limit the increase in impairment on the banks’ consumer loan books in the near term,” it said.
“Most large corporates also continue to hold comfortable financial buffers over projected debt-servicing needs.”
The Philippine banking industry’s nonperforming loan ratio rose to 3.45% in April, its highest level in 11 months. Bad loans jumped by 12.3% to P480.648 billion from P427.881 billion a year earlier. — Luisa Maria Jacinta C. Jocson