Philippine Banks To Benefit Anew From Strong Economy – S&P

Resiliency of the Philippine economy is seen to be extended again to its banking industry this 2016.

Citing its report entitled “The Philippines’ Supportive Economy Underpins a Stable Outlook for its Banking Sector in 2016”, released on Feb. 23, 2016, Standard & Poor’s (S&P) said domestic financial institutions were seen to greatly benefit from the robust economic expansion.

S&P analyst Ivan Tan, in a statement, said the country’s economy “will likely continue to drive expansion in domestic credit at about 2x-3x GDP (gross domestic product) growth.”

“We forecast eight to 12 percent loan growth for the Philippines for 2015 and 2016, which is slower than in 2014 but remains high by regional standards,” he said.

Bank lending in the Philippines reached over 20 percent in recent years due to rising demand of the rising economy.

However, it has since normalized with the December 2015 level rising by 13.1 percent, net of placements in the Bangko Sentral ng Pilipinas’ (BSP) reverse repurchase (RRP) facility, from year-ago’s 16.8 percent.

The debt rater noted that with the expected strong rise of Philippine banks’ consumer lending, the financials institutions’ asset quality could weaken and credit cost could rise.

The situation is, on the other hand, seen to also strengthen banks’ net interest margins vis-a-vis the increase of the share of higher-yielding consumer loans.

“However, the increase is from a low base, and the impact on margins will likely be gradual. Moreover, increasing competition and the high cost-to-income ratio of these banks are likely to limit profitability gains,” the statement said.

S&P also expects domestic interest rates to go up this year, which may prompt banks to book marked-to-market losses on fixed-rate government securities.

“We believe the combination of sound capital and funding profiles is an enduring strength of the Philippine banking system and will continue to underpin bank ratings in 2016,” Tan added. (PNA)