The Philippine Star
August 26, 2022 | 00:00
MANILA, Philippines — Credit growth in the Philippines is expected to slow in the second half of the year as part of the central bank’s tightening cycle to anchor inflation expectations, according to Fitch Ratings.
In his unrated action comment titled “Philippine banking sector to sustain improved profitability as rates rise,” the debt watcher said high inflation and the monetary policy response of the Bangko Sentral ng Pilipinas (BSP) are likely to dampen loan demand for the remainder. of the year.
Fitch analysts Tamma Febrian and Willie Tanoto said the strong financial performance of major banks in the Philippines in the first half reflects continued improvement in loan demand, with system loan growth hitting the fastest pace since the onset of the COVID-19 pandemic at 9.1% YoY.
“We expect credit growth to decline in 2H22 as demand is dampened by inflation and a 175 basis point increase in the policy rate since the start of the year,” Febrian and Tanoto said.
The latest central bank data showed loans disbursed by major banks grew at a faster pace of 12% in June, compared to 10.7% in May, despite the start of the BSP interest rate hike. . This is the fastest growth since the 12.7% increase recorded in April 2020.
Loans disbursed by universal banks and major banks amounted to 10.19 trillion pesos at the end of June, 1.09 trillion pesos more than the 9.1 trillion pesos recorded in the same period. last year.
According to the BSP, sustained credit growth will support the momentum of economic recovery in the context of the ongoing withdrawal of monetary easing.
Despite the expected slowdown in credit growth in the second half of the year, Febrian and Tanoto believe the country’s big lenders will be able to put in a strong financial performance this year.
“However, bank earnings should be supported by wider credit spreads as floating rate loans are repriced. We maintained our outlook for improvement on the banking sector amid rising yields,” they said. added the analysts.
Preliminary data from the BSP showed that Philippine banks’ profits rose 16.7 percent to 143.12 billion pesos in the first half, from 122.67 billion pesos in the same period last year.
According to Fitch, interest rate hikes since May this year have normalized the reverse repurchase rate to a pre-pandemic level of 3.75%.
The BSP Monetary Council has so far raised interest rates by 175 basis points, including the huge 75 basis point hike in a surprise off-cycle rate-setting meeting last July 14, to curb rising inflationary risks.
“Banks’ reported margins have yet to reflect most of these increases, indicating additional tailwinds to profitability in 2H22. Still, further improvement may be tempered by growing lending competition, particularly in within the corporate sector which remains the dominant segment of banks’ loan books, as banks’ risk appetite returns,” Febrian and Tanoto said.
The debt watcher warned of potential weakness in asset quality as the country’s gross domestic product (GDP) growth is expected to weaken further in the second half of the year.
The country’s GDP grew by 7.8% in the first half of the year, slightly above the government’s target of 6.5-7.5%, despite slowing to 7.4% in the second quarter against 8.2% in the first quarter of the year.
“We expect the pace of economic recovery to slow in 2H22 as rising commodity prices reduce consumer purchasing power and weigh on asset quality,” the analysts said.
Fitch added that non-mortgage consumer loans are among the most vulnerable to write-downs, but large rated private banks are holding up relatively well to gradual weakness in loan quality within their loan loss coverage ratios. 138 to 196%.
In addition, the Debt Watcher believes that funding conditions will continue to support loan growth as the banking sector remains awash with liquidity, as evidenced by unusually low funding costs of around 60 basis points in the first half of the year. .
“We expect deposit liquidity to continue to support banks’ medium-term loan growth aspirations,” he said.