Fitch Ratings revised the Philippine banking sector outlook to “improving” from “neutral,” citing expectations that banks will preserve their record-high net interest margins (NIM) for longer due to a delay in policy rate cuts.
This, coupled with a sustained rise in higher-yielding consumer lending and the rollout of key infrastructure projects, is likely to buoy banks’ revenue prospects for the rest of 2024, Fitch said in a statement.
“We believe the extension in higher interest rates will have a manageable impact on the sector’s asset quality given the resilient economy, with Fitch projecting GDP growth of 5.8 percent in 2024,” it said.
The Bangko Sentral ng Pilipinas (BSP) opted to maintain its policy rate at 6.5 percent in its May 2024 monetary policy meeting, following a reacceleration in local inflation and persistent US dollar strength in recent months.
“We still expect the BSP to embark on its policy easing cycle this year, but we believe the gradient of normalization is gentler than we previously forecast,” it said.
Higher interest rates should help the banks maintain asset yields for most of the second half of 2023, while the sustained expansion in higher-yielding unsecured lending should result in incrementally better NIM, which Fitch now expects to expand by about 7 basis point for the year, reversing from a 7-bp contraction previously.
“We see upside potential for our forecast should BSP decide to further reduce banks’ deposit reserve requirements this year. BSP officials in April 2024 said the eventual target for the reserve ratio is about 450bp lower than current levels,” Fitch said.
Fitch said it expects loan growth and business volume to remain healthy for the rest of the year. System loan growth accelerated to 10 percent year-on-year by end-April 2024, from 8 percent in December 2023, on sustained credit card lending (up 29 percent) and higher loan disbursements to the construction (15 percent) and transportation sectors (22 percent).
“Demand for credit card and unsecured personal lending is less sensitive to policy rate movements and we expect the implementation of more infrastructure projects with private-sector participation to further prop up loan growth in the coming months,” it said.
“The growth and the robust economic outlook led us to raise our 2024 credit growth projection to 11.5 percent from our earlier forecast of 9.8 percent,” it said.