Bank lending growth seen to slow next year

MANILA, Philippines — Credit growth in the Philippines may slow down to 6.5 percent next year from the projected growth of 8.8 percent this year amid a  spate of rate hikes imposed by the Bangko Sentral ng Pilipinas (BSP) to tame inflation and stabilize the peso, according to Fitch Ratings.

In a report, Fitch sees a slower lending growth in the Philippines despite the broadly moderate loan deterioration in the region as support measures unwind.

“We forecast loan growth to slow to 6.5 percent in 2023  under a base case of the policy rate rising to 5.25 percent, with further downside risks to loan growth if rates exceed our forecasts,” Fitch said.

The BSP has raised key policy rates by 300 basis points, including the aggressive 75-basis-point increase on Nov. 17, which brought the benchmark rate to a 14-year high of five percent from an all-time low of two percent.

Inflation averaged 5.4 percent from January to October, well above the central bank’s two to four percent target, after accelerating to a 14-year high of 7.7 percent in October from 6.9 percent in September.

This prompted the BSP to raise its 2022 inflation forecasts to 5.8  percent, 4.3 percent for next year and 3.1 percent for 2024.

“Conversely, lower inflation and policy rates may stimulate credit demand, which will be readily met by banks’ considerable risk appetite and excess liquidity in the system,” Fitch said.

Latest data from the central bank showed that loans disbursed by big banks grew at their fastest pace in more than two years at 13.4 percent in September from 12.2 percent in August amid higher demand from both corporate and household borrowers.

Universal and commercial banks extended P10.49 trillion worth of loans in end-September from a year-ago level of P9.25 trillion.

Fitch said Philippine banks are expected to benefit from wider net interest margins (NIMs) arising from higher interest rates.

“We expect the Philippine banking sector’s profitability metrics to improve moderately in 2023, as gains from wider NIMs are likely to be offset by slower loan growth and higher credit charges stemming from higher interest rates,” it said.

NIM expansion, Fitch explained, may prove less than its forecasts should depositor behavior become more price sensitive than in the past, due to rates rising much faster than before.

“Nevertheless, we expect the overall margin trend to remain positive as banks are likely to be able to pass on most of the higher costs to their borrowers,” it said.

The nine-month profit of banks jumped by 43.7 percent to P243.06 billion this year from a year-ago level of P169.09 billion.

According to Fitch, liquidity conditions are poised to tighten but remain conducive, and banks continue to benefit from ample low-cost deposit liquidity.

Likewise, the debt watcher explained that asset-quality pressures from higher rates are manageable for most banks since most loans have relatively short tenors – and the debt-service burden is hence likely to rise less severely.

“Nevertheless, credit costs may still rise amid potential asset-quality weakness from vulnerable sectors and as some banks rebuild buffers,” Fitch said.

It warned a higher-than-expected interest-rate hikes that may lead to a much weaker economic environment may expose vulnerabilities among over-extended borrowers, with retail as well as small and medium enterprise (SME) borrowers most susceptible due to their weaker debt-servicing capacity than large corporates.