Fitch Ratings said the Philippine banking system is generally well-capitalized against risk of asset-quality deterioration this year but if the economy slows down as some expects, banks could be exposed to “lumpy impairements”.
In its latest banking report on the region’s asset quality, Fitch said the continuing tightening of interest rates will weaken asset quality of most banks in ASEAN, but the risks to bank credit profiles in 2023 “should be mitigated by robust economic growth, adequate provisioning and the higher rates lifting net interest margins in most markets.”
“Asset-quality risks will vary, with the unwinding of forbearance measures introduced during the Covid-19 pandemic, the challenges associated with corporate, retail and SME lending, and exposure to potential housing market weakness,” said Fitch.
The credit watcher said banking systems in ASEAN are “generally well-capitalised, which provides a further buffer to bank credit profiles against the risk of asset-quality deterioration”.
While many ASEAN banks’ Issuer Default Ratings (IDRs) are based on expectations of “extraordinary government support if needed” some countries have different scenarios if their economy declines.
“Scenarios under which adverse economic developments cause asset quality to deteriorate beyond our baseline could also have the potential to affect sovereign credit profiles, notably in the Philippines, where the ‘BBB’ rating is on a Negative Outlook, and Vietnam, where the ‘BB’ rating is on a Positive Outlook. Any changes in sovereign ratings would influence the IDRs of banks whose ratings are driven by our expectations of sovereign support,” said Fitch.
Fitch expects modest increases in non-performing loan (NPL) ratios in Indonesia, Malaysia, Singapore and Thailand. For the Philippines, it said the NPL ratio “should be broadly stable”.
In terms of corporate lending exposures, Fitch noted that the Philippines has a high share at 77 percent compared to Malaysia with 41 percent.
“Under our baseline assumptions, asset-quality risks should be moderate for corporates as a whole in most markets. However, some sectors may be more vulnerable than others, while a number of banks in the Philippines may also be exposed to greater risk of lumpy impairments in the event of protracted economic weakness or further economic shocks in light of their high large borrower concentration,” said Fitch.
The Philippines expects to grow its GDP by six percent to seven percent this year, which was slower compared to previous estimates of 6.5 percent to eight percent. Key challenges to this growth is inflation management and the central bank’s timely monetary tightening to ensure inflation will be target-consistent.
Meanwhile, Fitch noted that the lagged effect of the policy rate hikes in 2022 is one of the reasons for the region’s “modest” asset-quality deterioration this year.
The Bangko Sentral ng Pilipinas (BSP) has already signalled to the market that it will continue to raise rates in the early part of 2023 after increasing it by 350 basis points (bps) in 2022 to 5.5 percent.
Fitch said the “scale and speed” of rate hikes will determine the “likelihood and extent of loan deterioration.” Compared with other countries in ASEAN, the BSP’s 350 bps rate increase is faster than 200 bps in Indonesia, 100 bps in Malaysia and 75 bps in Thailand.
“We expect further, albeit mostly milder, rate hikes in all ASEAN markets in 2023. The Philippines is likely to remain a regional outlier in terms of the scale of its rate hikes, reflecting greater inflationary pressure in that economy compared with markets like Indonesia, Malaysia and Thailand,” said Fitch.
The credit watcher said the impact of the monetary tightening could be “more severe” in countries with higher leverage issues.
“We expect system leverage to rise in Thailand and Vietnam in 2023. However, we expect it to fall in Malaysia, the Philippines and Singapore in 2023, which will continue the trend from 2022,” it said.