Fitch sees 8% rise in bank lending in 2022

MANILA, Philippines — Lending by Philippine banks is expected to accelerate at a faster rate of eight percent next year from a three percent growth this year as the economy continues to recover, according to Fitch Ratings.

In a report, the debt watcher said the Philippine banking system’s financial performance is expected to recover moderately in tandem with the pickup in economic activity.

“We expect loan growth to recover to eight percent in 2022, taking into account a low base effect and the gradual economic recovery. Banks are poised to print higher loan growth rates, however, if the economy recovers more quickly than we expect,” Fitch said.

This is still lower than the compounded annual growth rate (CAGR) of 14.6 percent in bank lending from 2015 to 2019 or before the COVID outbreak

“A premature return to high growth would leave banks with depleted buffers and vulnerable should the economy face a double dip,” Fitch said.

The debt watcher said there are promising signs for the Philippines as it emerges from a weak environment in 2021.

Fitch recently raised its gross domestic product (GDP) growth forecast for the Philippines to a range of five to 5.5 percent instead of 4.4 percent for this year and by 6.8 percent for next year.

“Loan growth is likely to accelerate with the resumption of business and consumer spending, buoying revenues and offsetting the pressure on margins stemming from excess liquidity. This, along with lower – albeit still elevated – impairment charges, should lead to better net overall profitability,” Fitch said.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed credit growth accelerated for the third straight month, rising by 3.5 percent in October from 2.7 percent in September.

Loans disbursed by big banks slumped for eight straight months between December last year and July this year as banks remained risk averse, while demand from borrowers remained tepid due to uncertainties brought about by the pandemic.

Bank lending finally started recovering in August as the aggressive easing, including the 200-basis-point cuts in interest rates and lowering of reserve requirement ratio undertaken by the BSP, was finally absorbed by the economy.

“High risk appetite in prior years means asset-quality weakness will remain pronounced, especially in certain vulnerable sectors, and challenges could linger in the first half of 2022, but we believe that the reported non-performing loan ratio in the system is likely to decline by end-2022 as the economy recovers and banks write off and sell bad debts,” Fitch said.

The BSP sees the NPL ratio of Philippine banks peaking at 8.2 percent next year.

“We expect the largest banks to use FIST tactically in most cases, disposing of modest packages of NPLs that have poor prospects of recovery so as to reduce their operational burdens. The smaller and state banks with higher NPL stocks may be more compelled to offload aggressively to clean up their balance sheets and restore lending capacities,” it said.

The debt watched pointed out banks’ credit costs would be kept relatively high by the need to replenish provision buffer, while net interest margins (NIM) would still be pressured by lower asset yields as loans continue to be repriced.

However, it said faster loan growth and potential cuts to reserve requirements should mitigate these factors.

“We believe the central bank’s monetary policy will remain accommodative, and any hikes in its policy rate in response to domestic inflationary pressures and higher global rates will be measured until the economy is on a firmer footing,” Fitch said.

It added capitalization would remain stable, as improved profitability is offset by faster loan growth as banks ramp up lending once again.