Sustained economic expansion will allow banks in the Philippines to remain profitable despite higher interest rates and tighter liquidity, says debt watcher Moody’s Investors Service.
“Our outlook for the Philippine banking system over the next 12-18 months is stable. Among other factors that will underpin the credit profiles of banks in the country, robust economic growth will continue to support asset quality at current strong levels,” Moody’s said in a June 20 banking system outlook report on the Philippines.
Moody’s expects the Philippines’ gross domestic product to grow 6 percent this year and 6.2 percent next year, auguring well for the banking sector.
“Banks will continue to benefit from strong economic growth. The Philippines’ economic growth rate will remain among the highest in Asia, underpinned by strong domestic consumption and an expansionary fiscal policy despite a budget delay and an export slowdown due to a weakening of global economic growth,” it said.
While lending rates were hiked by 175 basis points (bps) last year amid elevated inflation and only a 25-bp cut had so far been implemented by the Bangko Sentral ng Pilipinas’ Monetary Board this year, Moody’s sees asset quality remaining “broadly stable.”
“Banks will be able to maintain strong asset quality despite increases in interest rates because economic conditions are healthy and financial performance of Philippine corporates remains strong,” Moody’s said.
Also, banks’ capitalization would “decline moderately” given rising loan growth, even as Moody’s believes that “shareholder support will prevent their capitalization from deteriorating significantly.”
“Banks have been able to issue new shares every three to five years, thanks to strong financial support from shareholders,” it noted.
Robust loan growth will also further tighten domestic liquidity as the increase in deposits lags behind, but Moody’s said overall liquidity would remain ample to support loan growth.
It also said the expansion of net interest margins would allow banks to have stable bottom lines.
“Continued loan repricing following rate hikes by the central bank in 2018 and reductions in reserve requirement ratios will boost net interest margins. However, operating expenses will increase due to investments in branch expansion and IT infrastructure,” it said.