MANILA, Philippines — The profitability of local banks is expected to hold up even if net interest margins are “peaking,” which could possibly come under pressure in late 2024 as the Bangko Sentral ng Pilipinas (BSP) is widely expected to start easing monetary policy this year, according to Fitch Ratings.
In a commentary sent to reporters on Friday, the global debt watcher said a “sustained economic momentum” would continue to spur demand for bank credit, which is projected to gain pace after high borrowing costs had slowed lending to 7.8 percent in 2023.
Fitch forecasts the Philippine economy to grow between 6 percent and 6.5 percent in 2024 and 2025, well within the Marcos administration’s scaled-down targets for those years.
“[Loan] demand is likely to pick up, however, as uncertainty surrounding rate trajectory and economic growth dissipates,” the credit rating agency said.
READ: Bank lending to stay resilient despite high rates
“An acceleration in loan disbursement for certain public-private partnership infrastructure projects is also likely to spur loan growth,” it added.
Loan disbursement for PPP projects
The BSP’s benchmark rate—which banks use as a guide when charging interest rates on loans—is currently at 6.5 percent, the highest in nearly 17 years.
By keeping borrowing costs high, the central bank wants to bring demand for key consumer items in line with limited supply to prevent a fast rise in prices.
BSP Governor Eli Remolona Jr. last month said the BSP would stay hawkish—or in favor of keeping borrowing rates high—in the face of persistent price pressures that may upset inflation expectations. For analysts, this means borrowing costs would likely stay higher for a longer period.
READ: BSP still ‘hawkish’ but rate cut possible in 2024
But bank lending continued to grow despite high borrowing costs, boosting lenders’ net interest margins. Fitch said margins “have most likely peaked” and pressures would likely build in the second half of 2024 as the BSP starts cutting rates.
The debt watcher said any strain on margins would be offset by healthier demand for credit and “controlled” costs growth as inflation softens.
“The compression will most likely accelerate in 2025, in line with our projected 175 [basis-point] cut in policy rates over 2024 and 2025,” Fitch said. —Ian Nicolas P. Cigaral INQ