Philippines – Fitch: Loan growth slows as interest rate hikes bite
MANILA, Philippines — Credit growth in the Philippines is likely to taper off in the second half of the year amid the central bank’s tightening cycle to anchor inflation expectations, according to Fitch Ratings.
In its non-rating action commentary titled “Philippine Banking Sector to Sustain Improving Profitability as Rate Rises,” 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 rest of the year.
Fitch analysts Tamma Febrian and Willie Tanoto said the solid financial performance of large banks in the Philippines in the first half of the year reflects continued improvement in loan demand, with system loan growth reaching the fastest pace since the onset of the COVID-19 pandemic at 9.1 percent year-on-year.
“We expect credit growth to taper in 2H22 as demand is curbed by inflation and a 175-basis point year-to-date increase in the policy rate,” Febrian and Tanoto said.
Latest data from the central bank showed loans disbursed by big banks grew at a faster rate of 12 percent in June from 10.7 percent in May despite the start of the BSP’s interest rate liftoff. This was the fastest growth since the 12.7 percent increase recorded in April 2020.
Loans disbursed by universal and big banks amounted to P10.19 trillion in end-June, P1.09 trillion higher than the P9.1 trillion recorded in the same period last year.
According to the BSP, the sustained growth in credit will support the momentum of economic recovery amid the ongoing withdrawal of monetary accommodation.
Despite the expected slowdown in credit growth in the second half of the year, Febrian and Tanoto believe large lenders in the country will be able to deliver a solid financial performance this year.
“However, banks’ earnings should be supported by wider lending margins as variable rate loans are repriced. We have maintained our improving outlook on the banking sector against the backdrop of rising returns,” the analysts added.
Preliminary data from the BSP showed earnings of Philippine banks increased by 16.7 percent to P143.12 billion in the first half of the year from P122.67 billion in the same period last year.
According to Fitch, the interest rate hikes since May this year have normalized the reverse repurchase rate to a pre-pandemic level of 3.75 percent.
The BSP Monetary Board has so far raised interest rates by 175 basis points, including the huge 75-basis point hike during 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, which point to additional profitability tailwinds in 2H22. Further improvement, nevertheless, may be tempered by rising loan competition, especially within the corporate sector that remains the dominant segment of the banks’ loan portfolio, as the banks’ risk appetite returns,” Febrian and Tanoto said.
The debt watcher warned about a potential weakness in asset quality as the country’s gross domestic product (GDP) growth is expected to further weaken in the second half of the year.
The country’s GDP expanded by 7.8 percent in the first half of the year, slightly above the government’s 6.5 to 7.5 percent target, despite slowing down to 7.4 percent in the second quarter from 8.2 percent in the first quarter of the year.
“We expect the pace of economic recovery to ease in 2H22 as higher commodity prices dent consumer purchasing power and weigh on asset quality,” the analysts said.
Fitch added that non-mortgage consumer lending is among the most vulnerable to impairments, but rated large private banks are seen weathering incremental weakness in loan quality relatively well amid their loan loss coverage ratios of 138 to 196 percent.
Furthermore, the debt watcher believes funding conditions will continue to support loan growth as the banking sector remains awash in liquidity, indicated by the unusually low funding costs of about 60 basis points in the first half of the year.
“We expect deposit liquidity to remain supportive of banks’ loan growth aspirations over the medium term,” it said.