The robust economy will support Philippine banks’ asset quality and earnings over the next two years, Fitch Ratings said in a new report.
Fitch forecasts gross domestic product growth to accelerate to above 6.0 percent to 6.5 percent in 2024 and 2025, even as lower interest rates in the second half of 2024 point to narrower net interest margins for the banks.
“We expect the issuer default ratings of the rated Philippine banks to remain stable, as they are driven by our expectation of extraordinary support from the Philippine sovereign (BBB/Stable), should the need arise,” Fitch said.
The standalone credit profiles of the large privately owned Philippine banks—BDO Unibank Inc., Bank of the Philippine Islands and Metropolitan Bank & Trust Company—continue to outperform their state-owned peers, helped by the banks’ steadier underwriting standards and entrenched business profiles.
“We also expect asset quality at the three banks to remain resilient over the next 12 to 18 months, which led us recently to revise their asset quality scores upwards,” it said.
Fitch downgraded state-owned Development Bank of the Philippines’ viability rating last month, reflecting its view that the state lender’s underlying loss-absorption buffers materially weakened after its capital contribution to Maharlika Investment Fund (MIF).
Land Bank of the Philippines also contributed to MIF, but the impact on its standalone profile is less pronounced due to its higher capital buffers, better asset quality and funding profile than its smaller state-owned peer, it said.
Fitch said the Philippine banking sector’s profitability hit a 10-year high in 2023, driven by wider margins. System asset quality also held up well despite the sharp rise in interest rates, as indicated by the system non-performing loan (NPL) ratio of 3.5 percent as of January 2024, helped by the supportive economic environment.
“Our neutral sector outlook reflects our expectation that the banking system’s financial performance is likely to remain broadly steady over the next 12 to 18 months,” it said.
Fitch, however, expects that interest margin pressure will build in the second half of 2024 as the Bangko Sentral ng Pilipinas starts to cut rates.
“The compression will most likely accelerate in 2025, in line with our projected 175bp cut in policy rates over 2024 and 2025,” it said.
“Partially offsetting the decline in margins is a recovery in loan demand and larger trading gains as banks realize higher valuations on debt securities amid declining rates. Cost growth is likely to remain controlled with inflation subsiding. Credit impairment levels are likely to remain broadly steady due to the robust economy,” the debt watcher said.
