S&P sees 15-17% credit growth

MANILA, Philippines - S&P Global Ratings said Philippine credit growth would range between 15 and 17 percent this year on the back of sustained economic growth.

In its latest sector review titled “Philippine Banks to continue to ride robust economic growth,” S&P analyst Ivan Tan said loan growth would remain robust from last year’s 16.5 percent amid the projected 6.4 percent gross domestic product (GDP) expansion this year.

 “The conditions for sustained growth remain intact, in our view. Interest rates have stayed low by historical standards. Banks have abundant liquidity to lend,” Tan said.

He explained credit penetration has a room to rise as it is moderately low with a credit-to-GDP ratio of about 50 percent.

Banks are now focusing more on lending after preferring to channel excess liquidity into government bonds prior to 2013 due to declining interest rates, according to Tan.

“We believe the Philippines’ robust economic conditions will continue to support borrower repayment,” he said.

Tan said the corporate sector that accounts for 82 percent of banking sector exposure has healthy margins, good profitability and adequate interest coverage.

Furthermore, the asset quality of Philippines banks has improved over the past six years with reported non-performing loans (NPLs) declining to two percent of total loans last year from 3.8 percent in 2010.

“We believe the credit cycle in the Philippines has further to run. Most of the factors that drive credit cycles – corporate profits, low interest rates, and abundant liquidity – still look very much in place,” Tan said.

The analyst said the profitability of banks would continue to face headwinds.

“The rebalancing of the loan portfolio is likely to be protracted, and it will be some time before banks achieve a meaningful shift toward higher-yielding retail and consumer loans. Meanwhile, these banks’ high costs remain a key hurdle in improving their profitability,” Tan said.

Tan added the quality of profits of Philippine bank would remain good as the share of recurring interest are fee income from long-standing corporate customers would remain significant.

The analysts said the portfolio mix of Philippine banks is heavily tilted toward low-yielding corporate loans resulting in narrow interest margins.

Furthermore, Tan cited the poor cost efficiency of Philippine banks with a cost to income ratio of 63 percent as they maintain a large number of branches owing to under-penetration.