Philippine banks to withstand credit risks from rate hikes — Fitch
MANILA, Philippines — Interest rate hikes meant to cool down red-hot inflation are unlikely to create alarming credit risks for Philippine banks, thanks to a “supportive economy” and loan portfolios that mostly consist of big corporate borrowers with large financial buffers.
In a report released Monday, Fitch Ratings said bad debts held by the local banking sector are forecast to corner 3.5% of their entire loan portfolio by the end of 2023, higher than the 3.3% ratio last year as higher borrowing costs weigh down on credit quality.
But this deterioration in credit quality is deemed “manageable”. Fitch explained that any risks would be largely offset by high concentration of corporate borrowers, which still make up over three-quarters of local banks’ loan portfolios despite the rapid expansion in retail lending prior to the pandemic.
At the same time, a “robust” economy, which Fitch forecasts to grow 5.5% this year, should help big borrowers weather the impact of rising interest rates on their earnings.
“Earnings buffers are more than sufficient to cover the expected increase in interest expenses for the vast majority of debt among listed corporates,” Fitch said.
Since May last year, the Bangko Sentral ng Pilipinas has raised its policy rate by 400 basis points amid a painful battle against brutally-high inflation.
Banks typically use the BSP’s benchmark rate as basis when charging interest on loans, so raising it has the effect of tempering consumption.
This, in turn, brings demand in line with limited supply, thereby taming inflation. But crimping consumption, a main growth driver, could hurt the economy and make debt servicing difficult for some borrowers.
Fitch said small businesses and consumer loans are more vulnerable to shocks from tight financial conditions given their thinner buffers. But the credit rating agency said any weakening would be manageable on expectations that the local job market would remain resilient in the near term.
“Buffers have likely eroded amid high inflation and the normalisation of credit card interest rates,” it added.
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