The Philippine banking sector’s asset quality is expected to “stay broadly stable” over the next two years amid a recovering economy, slowing inflation and a pause in interest rate hikes, according to S&P Global Ratings.
S&P Global, which on Nov. 29 affirmed the country’s “BBB+” sovereign long-term and “A-2” short-term ratings with a “stable” outlook, said banks here have benefitted mostly from deposit-funding with “high liquidity and limited linkages to global markets.”
“Strengthened oversight of the financial sector by Bangko Sentral ng Pilipinas (BSP; the central bank), combined with modest growth in private-sector debt and real estate prices, has contributed to improved system stability in recent years,” it said in its recent ratings report.
S&P Global still has a “5” Banking Industry Country Risk Assessment (BICRA) for the Philippines. The “1” scale is the highest assessment while “10” is the lowest.
The review noted that “the banking sector benefits from stable macroeconomic and employment conditions” and because of this, the sector's asset quality “will stay broadly stable” over the next two years.
However, the credit rating agency also noted that the “moderate increase in nonperforming loans from low-income and leveraged borrowers is likely due to higher interest rates and inflation.”
The BSP has raised the policy rate by a cumulative 450 basis points (bps) since May 2022 to 6.5 percent, to curb inflation which remains above-target but is expected to fall within the target range of two percent to four percent by the middle of 2024.
S&P Global said that “with inflation showing signs of gradually declining in recent months, interest rate hikes may slow down or pause.”
“We regard the BSP's ability to support sustainable growth while attenuating economic or financial shocks to be broadly neutral to our rating. This reflects the central bank's sound record in keeping inflation low and its history of independence,” it added.
Philippine banks’ ability to handle system risks under S&P Global’s BICRA assessment is still at level “5” which is a classification that was comfortably assuring, as far as the BSP is concerned.
In September, banks’ gross non-performing loans or NPL ratio improved to a five-month low of 3.4 percent, the second month in a row that it has declined.
The September NPL ratio is lower compared to both August 2023 and September 2022’s 3.42 percent.
Meanwhile, total NPLs increased 7.16 percent to P444.313 billion during the period versus P414.606 billion last year, based on BSP data. The basis for all these ratios is the total loan portfolio of P13.053 trillion in September, up 7.82 percent year-on-year or from P12.106 trillion.
Banks’ NPL coverage ratio which are loan loss reserves, in September stood at 103.65 percent from 103.02 percent in August and 102.54 percent in September 2022.
The industry also has adequate loan loss provisioning of P460.512 billion, up 8.32 percent from same period in 2022 of P425.117 billion.
The BSP in a report said local banks have strengthened their NPL management through various measures such as intensifying collection and resolution efforts, reducing risk exposures, and using credit risk mitigants.
It added that “banks' prudent credit underwriting practices and risk management on their credit exposures have allowed banks to report satisfactory loan quality even in the face of high-interest rates and inflationary pressures” and that “overall, the banking system's NPLs will continue to be manageable and well-supported by loan loss provisioning.”
Last March, S&P Global’s economic risk review noted that the Philippines have “very high” economic resilience risk and “high” credit risk in the economy. However the country has “low” risk of economic imbalances.
In terms of industry risk, the Philippines have a “high” institutional framework risk while the risk for competitive dynamics and system wide funding is assessed as “intermediate” risk factors.