Credit watcher Fitch Ratings said Philippine banks will earn an additional P30 billion to P40 billion with the higher interest rate and charges on credit card balances.

“The recent lifting of the interest rate ceiling on credit cards in the Philippines will buoy banks' net interest margins, which we already forecast will rise on the aggressive monetary policy tightening in recent months,” said Fitch in a non-rating commentary.

It added that the “reversal of the rate cap first implemented in November 2020 should enable banks to apply better risk-based pricing on unsecured lending. Credit costs are likely to increase as banks expand in the segment, but we expect them to be manageable amid resilient economic growth in 2023 and to be offset by higher lending yields.”

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) on Jan. 13 approved to increase the two percent credit card ceiling on rates and charges to three percent. This was announced on Jan. 20.

“We estimate that the newly announced rate ceiling could add about PHP30 billion-40 billion in interest income for the banking sector, further widening margins by about 15 bp (basis point). This benefit may be partly offset by the rise in credit costs if banks relax their standards or expand their credit card portfolios more aggressively, though we do not expect any increase to be material, provided there is no new shock in the economy, which suggests that the sector's profitability could marginally surpass our base case,” said Fitch.

Fitch earlier projected that the banking sector's net interest margins will increase by another 30 bp this year with BSP’s combined 350 bps rate hikes last year.

“Credit card receivables rose to around 4.6% of total system loans by November 2022, from around 2.8% at end-2017, as banks increased their consumer credit rapidly to diversify their loan portfolios and boost returns,” it noted.

Fitch said it expects this trend to continue and “potentially raising credit risks in the system as the product's sector non-performance ratio of around 5% is nearly double that of business loans. Philippine credit card borrowers’ minimum income requirements also tend to be low, with some smaller banks asking for annual incomes of just over USD2,000 (2022 GDP per capita estimate: USD3,587).”

The credit watcher, meanwhile, said banks’ credit card exposure will continue to be manageable in the near term because it expects corporate finance to remain “the core of banks' portfolios in the conglomerate-driven economy.”

“We think that further enhancements in profitability, as long as they are not accompanied by large increases in risk appetite, will be supportive of the banks' standalone credit profiles, indicated by their Viability Ratings,” said Fitch.

Since November 2020, credit card rates had been two percent per month or 24 percent annually. Beginning next month, cardholders will pay three percent per month or 36 percent per year interest rates and charges on their credit card balances.

The three percent ceiling on credit card transactions will remain in effect unless revised by the BSP. The BSP will review this ceiling by July this year to determine its impact on consumers and the credit card industry.

While it raised the ceiling, the Monetary Board kept the existing maximum rate of one percent on the monthly add-on rate that credit card issuers can charge on installment loans. It also maintained the maximum processing fee on the availment of credit card cash advances of P200 per transaction.

The ceilings on credit card transactions are temporary relief measures. It was given for cardholders’ reprieve during the pandemic and to allow them affordable access to credit.