EARNINGS of Philippine lenders will likely peak this year before growth moderates in 2024 and 2025 amid the Philippine central bank’s expected policy easing.
“The (banking) sector’s return on average assets could normalize to a long-term average of 1.2-1.4% over the next two years after peaking at about 1.5% in 2023. This is because net interest margins (NIM) will decline in line with policy rate normalization,” Nikita Anand, an analyst from S&P Global Ratings, told BusinessWorld in an e-mail.
Fitch Ratings Asia-Pacific Financial Institutions Director Tamma Febrian said the Philippine banking sector’s profit growth in 2024 would likely slow when the Bangko Sentral ng Pilipinas (BSP) starts to cut borrowing costs amid easing inflationary pressures.
“We are factoring a moderate compression in NIM in 2024, but margins may narrow by more than we expect if policy rates were to decline faster or sooner than our projection, since loans tend to reprice more quickly than deposits under keen competitive pressures,” he said in an e-mail.
“A weaker economic outturn could also result in higher delinquencies and credit costs than our forecast, especially if it is coupled with prolonged inflation and a rise in the unemployment rate,” he added.
The Monetary Board delivered a 25-basis-point (bp) rate hike in an off-cycle move on Thursday, bringing the key interest rate to a fresh 16-year high of 6.5%.
BSP Governor Eli M. Remolona, Jr. earlier said interest rates might remain higher for longer, as inflation could still be above the 2-4% target through the first half of 2024.
Ms. Anand said S&P expects the BSP to cut rates by a total of 75 bps in 2024 as inflation eases.
“This should help contain asset quality risks. However, if inflation and rates remain high, default risks for some leveraged and low-income borrowers could increase. This will in turn increase credit costs and affect profitability,” she said.
The Philippine banking industry’s net income grew by 27.7% to P182.76 billion in the first half from P143.12 billion a year earlier, BSP data showed.
Other measures of profitability, such as return on assets (ROA) and return on equity (ROE) also improved in the first quarter. Ms. Anand said lending growth in the Philippines could improve over the next two years, as S&P expects Philippine gross domestic product (GDP) growth at over 6% in 2024 and 2025.
“Higher economic growth, along with lower inflation and interest rates, will support credit demand. We forecast credit growth of 10-12% in 2024, higher than the estimated 7-9% in 2023,” she said.
Outstanding loans issued by big banks expanded by an annual 7.2% to P11.06 trillion in August, data from the BSP showed. August also marked the fifth straight month of easing credit growth this year, as tighter monetary policy dampens demand for loans.
Fitch’s Mr. Febrian said a better Philippine economic outlook would likely translate into an uptick in loan demand, while keeping asset impairments “relatively steady.” Fitch expects GDP growth at above 6% in 2024.
The Philippine government’s efforts to boost public-private partnerships for infrastructure projects are also expected to lift credit growth, he added.
“Banks are also poised to benefit from wide interest spreads for longer if the policy rate remains high for longer, helped by banks’ continuing appetite to grow into higher-yielding loan segments. Further cuts in reserve requirements will also aid NIMs,” Mr. Febrian said.
Earlier in June, the BSP cut the reserve requirement ratio for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 bps to 9.5%.
Meanwhile, Ms. Anand said credit losses in the Philippines would remain “flattish” in the coming years, as credit costs may stay at 0.6-0.7% of total loans in 2024.
“We forecast a manageable deterioration in the nonperforming loan (NPL) ratio. Large corporates that form the bulk of the sector’s loan portfolio should be able to absorb the higher input and financing costs,” she said.
The banking sector’s gross NPL ratio slipped to 3.42% from 3.43% as of end-July and from 3.53% a year ago. The NPL ratio in August was the lowest since 3.41% in April.
Bad loans declined by 5.9% year on year to P442.9 billion at end-August. However, it was 0.6% higher than P440.1 billion at end-July.
“A sharp correction in asset prices would hurt asset quality given sizeable exposures to the residential and commercial real estate markets. Real estate loans form about 21% of sector loans with two-thirds of this being commercial real estate loans,” Ms. Anand said, noting that office vacancy rates remain elevated in Metro Manila.
“While a fallout in property sector is not our base case, it remains a key downside risk amid higher interest rates and a global slowdown,” she added. — Keisha B. Ta-asan