Strong growth to benefit local banks—S&P report

Local banks are likely to benefit in 2016 from the domestic economy’s good growth prospects, and the banks’ healthy capitalization and asset quality, a report of credit watchdog Standard and Poors Ratings Services (S&P) said.

These factors underpin its stable outlook on the Philippines’s banking sector, S&P said in a report titled “The The Philippines’s Supportive Economy Underpins a Stable Outlook for its Banking Sector in 2016.”

“The Philippines’s robust economy will likely continue to drive expansion in domestic credit at about two to three times the gross domestic product (GDP) growth,” S&P credit analyst Ivan Tan said.

“We forecast (an) 8-percent to 12-percent loan growth for the Philippines for 2015 and 2016, which is slower than in 2014, but remains high by regional standards,” Tan said.

Philippine banks’ increasing exposure to consumer loans could weaken their asset quality and push up credit costs, given the inherently high risk in this segment in a growing economy, the report noted.

S&P expects the net interest margins of Philippine banks to strengthen as the proportion of higher-yielding consumer loans in total loans rises.

“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 report said.

S&P said it also anticipates domestic interest rates in the Philippines will trend upward, which may cause banks to book marked-to-market losses on their significant holdings of fixed-rate government bonds.

“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 said.

The report also noted that active capital-raising by Philippine banks in recent years has more than covered the gap between internal capital generation and growth in risk-weighted assets.