Philippine banks are expected to have one of – if not the highest – net interest margins (NIM) in the ASEAN bloc since with a rising inflation, the central bank will continue to increase the policy rate, said Moody’s Investors Service on Monday, Aug. 29.
Increasing inflation widens banks' NIMs. “We expect interest rates in the Philippines will rise the most among the six ASEAN economies,” said Moody’s. Since May 19, the Bangko Sentral ng Pilipinas (BSP) has increased the benchmark rate by 175 basis points (bsp) to 3.75 percent. Most credit rating agencies expect the BSP to close 2022 with an above four percent policy rate.
Moody’s said margins will be higher for Philippine banks compared to other banks in Malaysia, Thailand, Vietnam, Singapore and Indonesia, because domestic banks have “larger current and savings accounts (CASA) deposits in total deposits (and) modest proportions of market funds in total funding mixes.” A bank’s NIM is an indicator of its profitability since it measures asset earnings’ net returns.
Moody’s Aug. 29 commentary on ASEAN banks (“Banks – ASEAN: Inflation-driven rate rises will boost margins but rapid increases would be credit negative) has noted that banks in the Philippines and Singapore will have the largest NIM increases as interest rates are raised more in these two countries.
“While the extent of changes in NIMs depends on many factors, the most significant one is the degree of a bank’s reliance on low-cost CASA deposits relative to term deposits and market funds such as interbank borrowing, both of which are more sensitive to changes in interest rates. The more a bank uses CASA deposits for funding, the smaller increases in interest expenses will be when rates rise, which helps NIMs widen,” the credit watchdog said.
Moody’s said generally, they expect ASEAN central banks to remain hawkish in their monetary policy stance. The BSP and other central banks in the region is expected to tighten monetary policy in the next 12 months to curb inflationary pressures.
“Inflation rates have risen in all ASEAN economies because of supply constraints. Among the six ASEAN economies covered in this report, Thailand saw the fastest pace of inflation at the end of June 2022, at 7.7% (percent), followed by Singapore at 6.7% and the Philippines at 6.1%,” it said.
Meantime, Moody’s said credit demand will remain stable in most ASEAN economies in the next 12 months which is a positive factor for banks. However, China’s weak economy is a key risk which could drag ASEAN trade.
Moody’s also see modest increases in banks’ non-performing loans (NPL) in the region as inflationary pressures subside in 2023. The recovering ASEAN economy will also promote gradual policy rate hikes. “Banks will not have to increase loan-loss provisions substantially also because banks have made substantial forward looking provisioning at the peak of the pandemic,” it added.
Moody’s noted a close correlation between inflation and NPL growth in ASEAN.
“The link is the strongest in Indonesia and the Philippines because periods of high inflation rates in the two countries have been accompanied by economic slowdowns and volatility in foreign-exchange rates. However, unlike the relationship between inflation and NPLs, the correlation between inflation and credit costs, or loan-loss provisions has not been historically strong across ASEAN. It has been distorted by loan restructuring in Indonesia and Thailand and regulatory forbearance for provisioning requirements in Vietnam,” said Moody’s.
As explained by Moody’s, inflation leads to a higher borrowers' default risks but NPL increases will moderate 2023 while the pace of rate hikes will be gradual. “An acceleration of inflation has historically resulted in increases in NPLs in five of the six systems (ASEAN). This is because inflation typically results in an economic slowdown, with consequent rises in interest rates increasing debt repayment burdens for borrowers,” said the rating agency.
Moody’s stressed that ASEAN central banks for the most part has supported growth over policy tightening.
“Yet they will step up efforts to contain price appreciation as inflationary pressure grows. Rises in interest rates will lead to a widening of banks' net interest margins. However, asset risks for banks also increase when interest rates rise. We expect increases in interest rates in the region will be gradual and growth in problem loans will be modest,” it added.