Philippine banks brace for greater loan demand in 2023

DOWN BUT NOT OUT The country’s central business district in Makati City is busy as ever. According to Moody’s Investors Service, accelerating rate hikes will dampen but not derail the country’s economic recovery. —File photo

MANILA  -The profitability of banks in the Philippines is expected to remain stable in an operating environment engendered by strong economic growth, even as the effects of monetary tightening over the past 11 months start to kick in.

Moody’s Investors Service, in its latest outlook report on the Philippine banking system, said accelerating rate hikes in the country would dampen but not derail economic recovery.

After keeping the Bangko Sentral ng Pilipinas’ (BSP) key policy rate at a historic low of 2 percent at the height of the COVID-19 pandemic until May 2022, the Monetary Board has implemented a series of hikes that has brought this to 6.25 percent.

Moody’s said Philippines banks would operate in an economy that will grow by 6.2 percent in 2023 and 2024. This growth forecast is within the government’s target range of 6 percent to 7 percent, but is slower than the 7.6 percent reported for 2022.

https://business.inquirer.net/380529/ph-growth-in-2023-to-outpace-asian-pack-says-moodys-analytics

“The lagged impact of rate hikes, as well as subdued capital investment by the private sector are key risks to the country’s economic growth,” the debt watchdog said.

Moody’s said that while increases in interest rates would enable Philippine banks to raise rates on loans with floating rates, this would be offset by increases in demand for term deposits that offer higher rates than savings deposits.

“Further, increased competition for funding amid reduced liquidity as a result of monetary tightening will drive up term deposit costs more than increases in lending rates,” Moody’s added.

Meanwhile, banks continue to see robust demand for loans even if preliminary data in January on outstanding loans granted by banks to businesses and consumers suggested a continued slowdown in lending activities.

The money trail

BDO Unibank, which lends to a broad range of businesses and consumers, has seen increased demand for loans in line with economic reopening and improving business and consumer activities.

“For corporate borrowers, loans are mainly to support working capital requirements,” BDO told Inquirer Business. “For consumers, loans are for purchase of property and vehicles via home mortgage loans and auto loans, respectively, and for essential or discretionary items via credit cards or personal loans.”

Thrift bank Citystate Savings Bank (CSB) echoes this, noting that demand continued to be robust across customer segments.

“One particular group that I have seen with strong demand for loans are OFWs (overseas Filipino workers),” CSB chair Edgard Cabangon said in an interview.

Among universal and commercial banks alone, BSP data show that growth of lending was slower for the third month in a row, by 10 percent to a total of P10.69 trillion in February 2023.

https://business.inquirer.net/388912/bank-lending-growth-slowed-in-january-amid-rising-interest-rates

The momentum lessened from 13.9 percent in October and November, 13.7 percent in December and 10.4 percent in January. However, February growth was still faster than the 8.8 percent seen in the same month of 2022.

The aggregate value of outstanding loans that universal and commercial banks granted to businesses and consumers has been growing year-on-year every month for 19 months straight, since August 2021 at 1.3 percent.

In February alone, loans granted to businesses grew by 8.7 percent to P9.33 trillion, also slower compared with 9.2 percent (P9.37 trillion) in January.

That month, the biggest borrowings were put on the tab of companies engaged in real estate activities; wholesale and retail trade, repair of motor vehicles and motorcycles; manufacturing; electricity, gas, steam and air-conditioning; and financial and insurance activities.

At the same time, the growth of consumer loans to residents—for credit card transactions, motor vehicle purchases, salary-based general purpose and other purposes—revved up to 21.2 percent at P1.04 trillion in February from 20.3 percent at P1.03 trillion in January.

Ample liquidity

Still, the BSP said “brisk credit growth and adequate liquidity will continue to sustain the momentum of economic growth.”

Based on the BSP’s fourth quarter 2022 Senior Bank Loan Officers’ Survey, lending standards for businesses are expected to tighten further over the first quarter of this year and at the same time ease for households.

This is based on data collected from 50 universal and commercial banks as well as thrift banks from Dec. 14, 2022 to Jan. 13, 2023.

Similar with results in the previous survey conducted for the third quarter of 2022, stricter lending process to business is seen being driven mainly due to banks’ lower tolerance for risk and deterioration in borrowers’ profiles.

https://business.inquirer.net/388912/bank-lending-growth-slowed-in-january-amid-rising-interest-rates

Specific lending standards that reflected the net tightening of overall credit standards for businesses include the increased use of interest rate floors, tighter collateral requirements and loan covenants, and reduced size of credit lines.

For households or consumer borrowers, a more accommodative attitude of banks was expected in the first quarter this year amid an improvement in borrowers’ profiles and profitability of banks’ portfolios, as well as higher risk tolerance.

Regarding the demand for loans, bank officers are expecting during the current quarter a net increase in overall demand from businesses, driven by customers’ more optimistic economic outlook as well as increased customer inventory and accounts receivable financing needs.

Likewise, demand for loans from households is expected to show a net increase, mainly due to higher household consumption and housing investment. Related to these factors, bank officers also expect increases in both commercial and household loans for real estate.

Moody’s expects Philippine banks’ asset quality to remain at current levels after improving in 2022.

“The systemwide nonperforming loan ratio declined to 3.3 percent as of the end of November 2022 from 4 percent at the end of 2021, with corresponding decreases in loan-loss provisions,” the company said, referring to the reserve that banks set aside to cover for loans that are unlikely to be repaid.

Moody’s believes that the quality of loans to large conglomerates—where bank loans are heavily concentrated — will be stable as these borrowers’ revenue and earnings improve in line with economic growth.

“Large borrowers should be able to absorb a moderate increase in interest rates,” Moody’s said.

Meanwhile, Moody’s saw signs of stabilization in the quality of retail loans and loans to small and medium-sized enterprises, which deteriorated significantly during the pandemic.