Debt watchdog Fitch Ratings said the financial performance of the Philippine banking system is expected to recover moderately next year.
In its “Fitch Ratings 2022 Outlook: Asia-Pacific Emerging Market Banks” report released on Monday, Fitch said the outlook for the sector is improving.
“Loan growth is expected to accelerate as business and consumer spending recovers, boosting revenues and offsetting pressure on margins from excess liquidity,” Fitch Ratings said.
“This, along with lower – albeit still high – impairment charges should lead to better overall net profitability,” he added.
Fitch Ratings said loan growth is expected to rise 8% in 2022 compared to forecast growth of 3% this year. The projection takes into account a weak base effect and the gradual economic recovery.
The rating agency had previously forecast the Philippines economy to grow 6.8% in 2022.
“Banks are poised to print higher loan growth rates, however, if the economy recovers faster than expected. This takes into consideration the excess liquidity in the system and banks’ large appetite for grow, as evidenced by their rapid expansion before the pandemic where lending grew at a CAGR (compound annual growth rate) of 14.6% over the period 2015-2019,” he said.
Fitch Ratings, however, warned that a premature return to high growth would leave banks with depleted buffers and “vulnerable if the economy faces a double dip”. According to the rating agency, while the high risk appetite of previous years means that the weakness in asset quality will remain pronounced and that the challenges could persist until the first half of 2022, the ratio of non-performing loans ( PNP) will likely decline as the economy recovers. and banks write off and sell bad debts.
PNPs are delinquent loans where the balance of principal or interest has been outstanding for 30 days or more after the due date. This includes the outstanding balance of loans payable in monthly installments when three or more installments are overdue.
Impact of the FIST law
The Financial Institutions Strategic Transfer (FIST) Act enacted earlier this year allows banks to dispose of unrecoverable assets through asset management companies and helps maintain stability in the banking system despite the impact of the pandemic .
Data from the Bangko Sentral ng Pilipinas (BSP) showed that in September this year, banks’ gross NPLs increased by 29.71% to P485.53 billion from P374.30 billion in the year. last.
“Banks are likely to drive sales of bad debt to FIST companies in 2022 as regulatory proceedings and supply and demand dynamics are clarified to recover in order to reduce their operating expenses,” Fitch Ratings said. .
Small banks and state banks with higher NPL stocks are likely to offload aggressively to clean up their balance sheets and restore their lending capabilities.
Fitch Rating said banks’ borrowing costs will also remain relatively high due to the need to replenish provision reserves.
The report notes that net interest margins (NIMs) will continue to come under pressure due to lower asset yields due to loan repricing.
Fitch Ratings, however, said this could be tempered by faster loan growth and potential reductions in reserve requirements.
“We believe the central bank’s monetary policy will remain accommodative, and any hikes in its policy rate in response to domestic inflationary pressures and rising global rates will be measured until the economy is on firmer footing. “, did he declare.
The Bangko Sentral ng Pilipinas (BSP) at its last meeting kept its key interest rates at historically low levels.
Overnight borrowing, lending and deposit rates were maintained at 2.00%, 1.50% and 2.50%, respectively.