Philippine banks are expected to post double-digit or at least 10 percent credit growth this year amid an expanding economy, positive asset quality and lower interest rates, according to global bank UBS AG.
In a press briefing Wednesday, Feb. 28, UBS senior economist Grace Lim said they see “slightly above 10% for the full year” of lending growth, citing the “increasing GDP (gross domestic product) growth as well as solid nominal GDP growth” as the factor behind the banking outlook.
“We don't see any evidence of asset quality risk. And, as rates come down a little bit, that could actually spur demand for loan growth,” she said, adding that UBS banking analysts have maintained its positive outlook for Philippine banks’ asset quality for 2024.
Local big banks’ lending grew by seven percent year-on-year in December 2023 on sustained loan demand despite high borrowing rates. In peso terms, big banks’ outstanding loans totaled P11.693 trillion net of reverse repurchase placements in the central bank.
Lim, who is the Asia and ASEAN economist for UBS Investment Bank Global Research, said banks will likely participate in the large public-private partnership or PPP projects this year.
“If there are big PPP projects coming through, that could also spur some demand for loans. That might be maybe towards the second half of the year,” she said.
She emphasized the government’s 72 flagship infrastructure projects, including PPP projects and official development assistance or ODA-funded projects that are ongoing. “Most of these projects will be completed beyond 2028. So, that's not something that will all come through in just one year,” she said.
Lim added, “there are some ongoing projects worth about 300 billion pesos targeted for completion by the end of this year. So, big ticket PPPs, including the airport, if they do come through, could be another source of growth.”
“Nevertheless, when it comes to this kind of large-scale investment, when it starts breaking ground and when it starts adding to GDP via the investment route, tends to be rather spread out. So, investment would actually be taking place over quite a number of quarters, in fact, in quite a number of years,” she said.
UBS previously announced that it expects Philippine GDP to grow by 5.7 percent this year and six percent in 2025 – both forecasts are lower than the government’s 6.5 percent to 7.5 percent goal for this year and 6.5 percent to eight percent for 2025 until 2028.
On top of the sustained growth, the Zurich-based banking giant expects the Bangko Sentral ng Pilipinas (BSP) to cut rates by 100 basis points (bps) this year starting in June. If the US Federal Reserve starts to cut its own rates, the BSP is expected to mirror this move. A 100 bps rate cut will bring down the benchmark rate from its current 6.5 percent to 5.5 percent by end-2024.
“The BSP sees scope for easing once it is clear that inflation will return to and stay within the target band. We think that should current trends continue, we expect about 100 basis points of rate cuts, mostly in the second half of this year,” said Lim.
Meanwhile, the UBS economist said that as far as GDP growth perspective is concerned, they remain “cautiously optimistic that it would be an upside risk for investment and GDP growth.”
“But we also would like to highlight that it will not be a one-quarter or two-quarter thing. But more spread out over the course of a few years,” she said.
As to inflation, UBS still forecasts 3.6 percent for this year which is within the BSP target range of two percent to four percent.
“Initially, we were warning of the inflation risk to consumption because inflation would generally squeeze a household real disposable incomes. But it looks like with the robust labor market and strong employment growth, that had helped to more than offset the drag from inflation,” she said.
She also noted that “now that inflation is likely to fall, and we see that because so far right now, the only pockets of price pressures we are seeing is in terms of rice. Everything else seems to be easing quite nicely. The improvement or tailwinds from reduced inflation could be another upside to consumption if this is sustained.”
Lim reiterated that consumption in the country is resilient and as a driver to growth, it is “broadening out”.
“So the bottomline, for the Philippines, we are quite cautiously optimistic. We expect robust growth of 5.7% in 2024 with some upside risk to consumption if inflation falls quickly enough,” said Lim.
She added, “apart from rice inflation, core inflation is quite well contained, supporting our view that inflation will settle around 3% by the end of the year as rice supply constraints ease.”
The economist pointed to the country’s resilient labor market which should “support consumption, whilst lower commodity prices should help to ease the current account drag.”