‘Bank loan book, profits and asset quality still tops’

The lending business in the Philippines should remain in the pink of health this year, but the Bangko Sentral ng Pilipinas (BSP) should not rest on its laurels, as pockets of instability could begin to present themselves.

Recent readings by BMI Research validate the continued positive performance of Philippine banks for 2018 given the robust macroeconomic backdrop.

“Philippine banks will likely continue to benefit from the robust macroeconomic backdrop, which should be broadly supportive of loan growth, profitability and asset quality,” BMI Research said in a note on the Philippines.

Its analysts said loan growth should average 14 percent over the next two years given the large appetite for loans as the government pursues a very ambitious multi-year public infrastructure buildup and as prospects of continued growth averaging more than 6 percent in terms of the GDP.

BMI also particularly cited the asset quality of the banking sector, saying this has considerably improved the past many years based on rather low incidence of soured or nonperforming loans (NPLs).

The industry’s NPL ratio fell to only 1.9 percent in November last year, from over 3 percent in 2013.

“However, we believe that this is likely as good as it gets as higher interest rates weigh on household income, corporate profitability and possibly, asset prices. Meanwhile, sustained periods of high credit growth generally precede a future asset-quality deterioration, as the quality of lending is often lax when sentiment is upbeat,” BMI said.

“Our core view is for the gross NPLs ratio to stabilize at around 2 percent over the coming quarters,” it quickly added.

Banks were also said to be “well-capitalized,” with the industry-wide capital adequacy ratio standing at 15.5 percent as of end-June 2017. This was significantly higher than the regulatory threshold of 10 only percent.

The think tank also said downside risks loom in the horizon in the form of low interest rates and buildup of loans in the real-estate sector.

“We highlight that downside risks to financial stability are rising, as record-low interest rates have likely led to an increase in speculative and unproductive investment. Already, we have seen the strong economic sentiment and low interest-rate environment since 2010 lead to heavy lending by commercial and universal banks to the real-estate sector, with the outstanding loan exposure doubling from P 866.6 billion in March 2014 to P 1.709 [trillion] in September 2017,” BMI Research said.

Buoyant projections on property demand have also resulted in excess supply in some subsegments, while an increasing number of corporates and conglomerates have ventured into property development.

“This raises contagion risk in the event of a real-estate downturn, and the concentrated loan portfolios could exacerbate the situation,” BMI Research said.

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Bianca Cuaresma graduated cum laude from the University of Santo Tomas (UST) with a degree in AB Journalism. She was with the BusinessMirror during her internship in 2012 where she was assigned at the Department of Foreign Affairs (DFA) beat. She continued to be of service to the paper after she graduated in 2013. In 2014, she was awarded as the Reporter of the Year by the paper for her coverage in the Bangko Sentral ng Pilipinas (BSP). She is a BusinessMirror reporter for 3 years now, and has covered general assignments and agencies related to banking and finance in the country.