The Philippine banking system is seen in the best position to withstand the challenging operating environment gnawing on peers across the region, a research of British banking giant HSBC said.
In a research note dated
Jan. 6, HSBC said bad loan trends would be key to bank sector performance in 2017. The research added that the trends varied across different markets.
The note was authored by a group led by Herald van der Linde, head of equity strategy for Asia-Pacific.
“Banks across the region are facing a difficult operating environment. Demand for loans is low, interest rates have declined and the regulatory environment is becoming increasingly complex. Asset quality is, therefore, a defining factor across the region, with markets where nonperforming loan (NPL) risk is declining being more favorable than those where bad assets are being accumulated by the banking system,” the research said.
“The Philippines is the only banking sector that appears relatively immune to the challenges seen so far. We continue to expect sustained and strong credit growth with minimal asset quality risk in the system.”
The local banks’ asset quality is now at the same level as it was before the Asian currency crisis of 1997, which caused a spate of corporate loan defaults and a spike in NPLs across the region.
Based on the Bangko Sentral ng Pilipinas’ third quarter financial report, the net NPL ratio of Philippine banks stood at 0.8 percent. In computing for the net NPLs, specific allowances for credit losses on total loan portfolio were deducted from gross NPLs. Meanwhile, consolidated capital adequacy ratio amounted to 15.8 percent.
Elsewhere in Southeast Asia, the report said the protracted asset quality problems in Thailand and Indonesia were expected to have peaked by the end of 2016, which meant credit cost should at the very least stabilize in 2017.
In China, HSBC expects no significant changes in the banks’ fundamentals, forecasting stable margins, orderly NPL recognition and capital strength above requirements for most banks.
“A key upside risk to Chinese banks is the expansion of the existing NPL securitization plan and more asset managers to buy and transfer bank NPLs out of the banking system. Conversely, key downside risks include further debt equity swap programmes and public private partnership programmes posing new capital and liquidity risks for banks with increased involvement with equity,” the research said.
In Korea, HSBC expects the existing earnings trend to continue in 2017, backed by stable margins, low credit cost and tight cost control. Further risk of net interest margin contraction is seen limited as the pricing environment is expected to improve.
In India, the focus has been on demonetization, which HSBC believes will attract consumers to electronic transaction channels. This is seen positive for private banks with superior technology and products than public sector banks. However, demonetization is seen to affect asset quality, especially for real estate developers and gems and jewelry companies.