Rate hikes favorable to Philippine banks, according to Fitch

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MANILA, Philippines — The current round of monetary policy tightening in Asia-Pacific is supportive for Philippine banks, but is unlikely to lead to a significant decline in credit growth and asset quality, according to Fitch Ratings.

In a report, the Debt Watcher said that rising interest rates would be mildly supportive and raise revenue for banks operating in the Philippines.

Similarly, Fitch said the series of rate hikes by the Bangko Sentral ng Pilipinas (BSP), as well as other central banks, would have a moderate impact on deteriorating asset quality for Philippine banks.

The BSP has so far raised policy rates by 125 basis points, bringing the overnight reverse repurchase rate to 3.25% from an all-time low of 2% to curb rising inflationary pressures.

In addition to back-to-back 25 basis point hikes on May 19 and June 23, the central bank made a whopping 75 basis point hike in a surprise off-cycle rate-setting meeting on July 14.

BSP Governor Felipe Medalla said that the Monetary Council could raise rates again by another 25 to 50 basis points on August 18.

Fitch said it expects the BSP policy rate to reach 4% by the end of 2023.

He also said the current round of monetary policy tightening would generally support banks’ credit profiles in Asia as higher interest rates would increase net interest margins.

Fitch said the Philippines has one of the most liquid banking systems in the region and a high share of rate-sensitive checking and savings account deposits gives banks a strong ability to manage transaction costs. deposit.

“On the other hand, changes in the political repo rate have historically not been fully passed through to bank lending rates,” he said.

According to Fitch, asset quality exposures appear to be well contained, but risks may remain after a long period of supportive monetary policy that has contributed to rising leverage and asset prices in many markets.

“The loan-to-deposit ratio appears to have bottomed out in early 2022, and the deployment of excess liquidity into higher-yielding loans is poised to boost interest income, though lingering inflation may dampen the pace of loan growth,” he said.

Jose Teodoro Limcaoco, president and CEO of Ayala-led Bank of the Philippine Islands, said banks’ net interest margins (NIMs) are expected to increase further with the latest rate hike by the BSP.

“The recent increase of 75 basis points was just two weeks ago… Many loans have been reviewed over the next month to three months and so we should see further increases in our NIMs as we move forward. said Limcaoco.

According to Limcaoco, a 25 basis point rise in interest rates translates to an eight basis point increase in NIMs on an annualized basis.

BPI’s executive vice president and head of retail banking, Maria Christina Go, told reporters that rising interest rates would not drastically alter the growth in loan demand.

“We don’t think rising interest rates will dramatically change demand. Currently, this is still very well located and we are monitoring this closely,” she said.

Go said the 171-year-old bank’s home loan releases jumped 48%, while car loans rose 29%.

“It’s really a very good sign that consumer spending or consumer confidence is back. Again, these initial green shoots allow us to provide greater traction in the months that follow as we continue to monitor the impact of interest rates on our loan books,” Go said.

Racheleen Rodriguez, an analyst at Malaysian financial giant Maybank, said the bank expects bank lending to grow 4-12% this year and 9-13% next year.

“We see historical data that once the BSP raises rates above the four percent level is when loan growth starts to decline, but at the four percent level most borrowers might still be able to absorb that kind of lending rate so we don’t see any slowdown in lending,” Rodriguez said.

Latest data showed credit growth accelerated to a two-year high of 12%, with loan disbursements reaching 10.19 trillion pesos at the end of June, from 9.1 trillion pesos at the end of June. June of last year.

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