PH banks to improve capital, assets in 2024 – S&P

Philippine banks are expected to boost earnings, capital and assets this year on the back of a recovering economy and on expectation that interest rates will decline, according to credit rating agency S&P Global Ratings.

In a report released Tuesday, Jan. 30, titled "Philippine Banks Outlook 2024: Better Economic Prospects Will Bolster Sector," S&P credit analyst Nikita Anand said it will be a better year for local banks especially since the predicted gross domestic product (GDP) growth is among the highest in the region.

"Philippine banks are well placed to ride the country's robust economic growth in 2024," she said. "We believe improving macroeconomic conditions will offer good growth opportunities along with stable asset quality," she added.

The credit rating firm projects Philippine GDP will grow by 5.2 percent in 2023 – to be announced on Jan. 31 – and improve to six percent this year and in 2025. The forecast is lower than the government’s six percent to seven percent for 2023 and 6.5 percent to 7.5 percent target for 2024.

S&P noted that bank earnings will “normalize with lower asset yields” amid expectation that the Bangko Sentral ng Pilipinas (BSP) will start reducing its 6.5 percent target reverse repurchase (RRP) rate or the policy rate in the second half of 2024.

“We believe policy rates could decrease in 2024 as inflation stays moderate,” said Anand.

Based on the report, with improving economic conditions, this will translate to a 10 percent to 12 percent credit growth this year from five percent to six percent in 2023, while gross non-performing loan (NPL) ratio is expected to remain around 3.5 percent.

Banks’ return on assets, meanwhile, is seen to drop to 1.3 percent this year from 1.4 percent in 2023 while low cost deposits to total deposits is 70 percent.

“The sector's return on average assets could normalize to a long-term average of 1.2%-1.3% over the next two years after peaking at about 1.4% in 2023. This is because net interest margins will decline in line with policy rate normalization. Lower operating expenses and an increasing share of unsecured retail loans could provide an upside to our profitability forecast,” said Anand.

The pass through of the policy rate to the earnings asset yields continue to be measured. The BSP’s RRP rate has increased by a cumulative 450 basis points since May 2022 but S&P said the effect on asset yields was smaller at 140 bps increase.

“A similar trend occurred during the pandemic when interest rates were cut. Asset yields at that time did not fall in tandem. Also,banks have taken a pragmatic approach to interest resets to limit new (NPLs),” said S&P.

Local banks’ asset quality is also expected to remain stable this year amid lower inflation and rate cuts that should support loan repayments, said the credit rating agency.

“Asset quality fared better than we expected in 2023 as pass through of higher policy rates was measured. NPLs in corporate loans and credit cards rose slightly reflecting tighter financing conditions,” it added.

S&P also said that credit costs “should be flattish” this year. “Provisioning requirement should be contained backed by stable NPLs. Credit costs continued to decline in 2023 and are very close to pre-pandemic levels,” it said, stressing that “banks with higher exposure to unsecured loans could see elevated credit costs as the portfolio matures (while) banks have adequate provisions, with coverage ratio of over 100%.”

"As this portfolio matures, consumer NPLs are likely to rise," said Anand said. She said risks “should stay contained, given the Philippines' low household leverage of 10% of GDP and stable employment conditions."

The report also noted that Philippine banks' funding profile is relatively stable with a loan-to-deposit ratio of 70 percent to 75 percent and a high share of low-cost current and savings deposits at about 70 percent of total deposits. “Whereas the deterioration in metrics has been more pronounced for regional peers, there's only been a small decline from the 2021 peak for Philippine banks,” said S&P.

In late November 2023, S&P affirmed its “BBB+” long-term and “A-2” short-term sovereign credit ratings on the Philippines as they see “solid” economic recovery despite near-term risks to growth while the fiscal profile is expected to gradually improve as recovery takes hold.

The credit rating agency said the country’s economy has remained robust amid persistent global risks but it has decided to maintain its current investment grade due to the government’s ongoing fiscal consolidation, lower budget deficit and “stabilizing” debt burden.

It also noted that with a stable balance of payments and reserves, the country's external position “remains a rating strength” but continues to watch the current account deficits which have eroded net external assets.

As for the stable outlook, S&P said this comes from its expectation that the recovering economy will be sustained and fiscal deficits will decline over the next two years.

A credit rating translates to a sovereign issuer’s creditworthiness. As per S&P metrics, a “BBB” rating is an investment grade and indicates adequate capacity to meet financial commitments but there are also adverse economic conditions.