Fitch unit expects 3 Philippine banks to underperform as headwinds mount

Only five rural banks were put under receivership by the central bank in 2020, the lowest number since 2004, data from the Philippine Deposit Insurance Corp. (PDIC) showed. PDIC oversees financially struggling lenders.

MANILA, Philippines — Three Philippine banks are forecast to underperform in the coming months, as their "riskier" loan portfolios would likely come under pressure from competition and a projected economic slowdown.

In an emailed commentary on Tuesday, CreditSights, a unit of the Fitch Group, held a cautious outlook over the prospects of Security Bank Corp., Union Bank of the Philippines, and Philippine National Bank. CreditSights indicated that the competitive positions of these three lenders — classified as "second tier" banks because of their smaller size compared to rivals — were weak, likely forcing these banks to dip their toes in risky lending waters considering roiling external headwinds.

CreditSights noted that the pressure on the net interest margins, or amount of money earned from interest on loans, of these three banks were highly visible. The Fitch unit explained that this was due to weaker deposit franchises and competition in the term loan market, which would compel these lenders to seek out riskier but high-yielding lending markets, since corporate demand is still wanting. 

“The second tier banks on the other hand are in a tough spot,” the commentary read.

Meanhile, CreditSights held BDO Unibank Inc., Bank of the Philippine Islands, and Metropolitan Bank and Trust Co. — which are grouped into "first tier" banks — in high regard. 

"Overall, we remain comfortable with the first-tier banks due to their bigger size, ability to withstand funding cost pressure, larger corporate books, good capital and loan loss buffers and relative stability in operating performance," it said.

'Weak' asset quality

The Fitch unit noted various vulnerabilities they deemed would keep these “second-tier” banks underperforming. These include weaker franchises, lending out to riskier segments amid headwinds, and thinner capital and loss-absorption buffers. 

CreditSights underscored these risky moves, such as Security Bank expanding lending towards MSMEs through its new business unit and underwhelming loan growth specifically at Rizal Commercial Banking Corp. and PNB.

Asset quality proved weak as well, as the Fitch unit noted. CreditSights spotlighted gross non-performing loan ratios within the three were “still fairly high.” Persisting economic headwinds in 2022 forced these three banks to boost their provisions. 

Risks still abound, as experts noted that 2023 could prove to be a tough year since economic growth everywhere could sputter as a result of expensive borrowing costs. Interest rates globally posted sharp increases as central banks increased their benchmark rates to tame inflation. — Ramon Royandoyan

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