The Philippines’ large banks showed “solid performance” in the first semester of 2022 amid improving loan demand, but their credit ratings for long-term issuances remain with a “negative” outlook, showing low confidence that the government can support them in case of default.
According to Fitch Ratings, loan growth in the Philippine banking system reached the fastest pace since the onset of the COVID-19 pandemic at 9.1 percent for January to June.
Fitch Ratings said in an update on Philippine banks that they expect credit growth to taper in the second semester of this year as demand is curbed by inflation and several increases in the policy rate of the Bangko Sentral ng Pilipinas (BSP), which so far total at 175 basis points or 1.75 percentage points.
Since May, the Monetary Board has raised the BSP’s overnight borrowing rate to 3.75 percent from an all-time low of 2 percent.
The credit watcher said banks’ reported margins have not yet reflected most of these increases, which point to additional profitability in the remainder of this year.
Even then, further improvement may be tempered by rising loan competition—especially within the corporate sector that remains the dominant segment of the banks’ loan portfolio—as the banks’ risk appetite returns.
“However, banks’ earnings should be supported by wider lending margins as variable rate loans are repriced,” Fitch Ratings said. “We have maintained our improving outlook on the banking sector against the backdrop of rising returns.”
Still, such improvement in the profitability of local banks have no effect on their issuer default ratings.
Fitch Ratings said improved numbers look good for the large financial institutions’ standalone credit profiles.