Banks broadly steady despite headwinds – Moody’s

MANILA, Philippines — Banks in Southeast Asia, including the Philippines, are expected to face challenges amid elevated inflation and possible economic slowdown, but remain well-positioned to address such risks.

In a report, Moody’s Investors Service said banks in Southeast Asia, as well as in India, are seen dealing with challenges from high inflation and rising interest rates.

Economic growth in the region is also expected to slow, which could affect the operating environment for banks in Southeast Asia.

“Across the region, economic growth will moderate in 2023 from 2022 levels, although it will be stronger than in most emerging markets globally,” Moody’s said.

“Higher debt-servicing costs and slowing economic growth pose asset risks for banks, although they are well positioned to cope with potential growth in problem loans thanks to prudent underwriting standards and ample reserves,” it said.

For the Philippines, Moody’s expects gross domestic product to ease to a little over six percent for this year from the assumption of close to seven percent growth in 2022.

The economic team of the Marcos administration already said growth may slow this year to a range of  six to seven percent on the back of continued inflationary pressures, albeit much softer than in 2022.

Moody’s projects that inflation in the region will likely decline this year, but will still be high, thus, increasing asset risks for banks.

“High inflation rates have led to monetary tightening and rises in interest rates, which will result in further increases in banks’ net interest margins,” Moody’s said.

“On a net basis, asset quality will be broadly stable because banks have already created ample credit reserves to cover new non-performing loans,” it said.

The Philippines’ headline inflation soared to a 14-year high of 8.1 percent in December, bringing the 2022 print to 5.8 percent, significantly higher than the two to four percent target of the government.

Last year, the Bangko Sentral ng Pilipinas also raised key policy rates by 350 basis points, with the overnight reverse repurchase rate hitting a 14-year high of 5.5 percent to fight inflationary pressures and stabilize the peso.

Moody’s expects inflation to hit the upper end of the target band at four percent this year.

Further, Moody’s noted that currencies in the region have depreciated due to a strong dollar, but a low level of reliance on US dollar funding will contain risks.

“Most banks in this region have low currency risks because of modest levels of dollarization. Large pools of local-currency deposits will contain refinancing risks for banks,” Moody’s said.