By Lee C. Chipongian Local banks’ credit risks and lending rates continue to be manageable while capital buffers seem adequate against market stress and a financial environment that are seen to become more challenging, Fitch Ratings said in a report. “Philippine banks should maintain generally stable credit fundamentals amid rising domestic interest rates and choppier market conditions,” said Fitch in its report, “Philippine Banks: Steady Profiles Amid Rising Rates” released Wednesday. (REUTERS/Brendan McDermid/Files / MANILA BULLETIN) It said that “higher lending yields should bode well for interest incomes, and (Fitch) expects any softening in loan growth and credit quality to be modest as economic fundamentals remain supportive.” Fitch said credit risks are still manageable as the economy grows on “healthy economic drivers (that) should support asset quality as debt-servicing costs rise.” “We expect lending rates to remain manageable for most borrowers even with the latest policy rate hikes. Further large rate increases could have a greater impact on asset quality, but we do not expect excessive moves in the near term. Meanwhile, some corporates had already shifted to fixed-rate debt as rates were widely expected to rise,” it said. The Bangko Sentral ng Pilipinas (BSP) has raised key rates by 100 basis points since May and based on market projections, the Monetary Board is expected to hike rates further by 50 bps today (Thursday). The Fitch report noted that banks’ funding-cost pressures are still stable, mostly in time deposits and wholesale funding, and the manageable deposits “helps to limit the effect on NIMs (net interest margins). “However, banks with less entrenched domestic franchises and lower funding and liquidity headroom may be more susceptible to NIM pressure as funding-cost competition intensifies,” said Fitch. The implementation of the net stable funding requirement next January (2019) will “pull banks towards more stable funding sources such as CASA and term funding.” As far as credit stress is concerned, banks have adequate loss-absorption capital buffers. “This will help support their credit profiles as the operating environment turns more challenging,” said Fitch. “However, loan growth is likely to stay above the rate of internal capital generation, eroding capital ratios gradually. Banks with lower capital buffers may find themselves needing to raise more equity in the next year or so unless growth dynamics change.” Fitch also noted that current market weakness is undermining the NIM strength, which they expect to continue. The NIM improved in the first six months of the year with increased BSP policy rates. “Rising rates in the past 12 months have lifted loan yields and NIMs. We expect this trend to continue for the remainder of the year,” said Fitch. System liquidity has tightened amid brisk loan growth, while global liquidity has been on the wane, it added. Banks’ loan growth is predicted to moderate as interest rates move up, partly to contain high inflation of past months. Still, Fitch said that “any moderation is likely to be modest (as) ongoing infrastructure spend and broadening growth beyond Manila should continue to drive economic activity.” They expect credit growth of mid-teens for 2018, following on the first-half growth of 18 percent. In the meantime, with rising local rates, this would likewise raise asset yields for 2018. “We expect any asset-quality deterioration due to higher borrowing costs to be modest … Much higher interest rates would weigh more heavily on asset quality, but we expect the authorities to avoid excessive policy rate moves for this reason. Any strains are more likely to be felt at the outset by smaller businesses as their loans reprice, and consumer borrowers on ‘teaser’ rates.”