January 31, 2023

Filipino Guardian

Sentinels of Filipino Free Press

Rising interest rates may slow PHL’s credit growth

PHILIPPINE BANKS could see slower loan growth next year due to the impact of higher interest rates, S&P Global Ratings said.

In a Nov. 17 report, Nikita Anand, primary credit analyst at S&P Global Ratings, said credit growth in the Philippines is expected to increase by 5-7% in 2023, slower than this year’s 7-9% growth.

“This is because of our expectation of a 300 basis point (bp) rise in policy rates in 2022. Given that credit yields will rise with a lag, the full impact of the rate hike will be felt in 2023,” she said.

The Bangko Sentral ng Pilipinas (BSP) last week raised interest rates by 75 basis points to 5% – the highest level in almost 14 years.

Since May, the BSP has hiked interest rates by 300 basis points in a bid to tame inflation and prevent the peso from depreciating further against the US dollar.

Ms Anand said high inflation and interest rates pose downside risks to the Philippine economy “because they could dampen credit demand and hit highly indebted and lower-rated borrowers.”

S&P forecasts gross domestic product (GDP) growth of 6.3% for the Philippines this year, slightly below the government target of 6.5-7.5%.

She sees average Philippine growth of 6.1% over the next three years, also below the government’s target of 6.5-8%.

Ms Anand said interest rates could normalize over the next two years.

“We forecast that interest rates could fall by a combined 150 basis points in 2023 and 2024 as inflationary pressures ease. However, if inflation persists and interest rates remain high, it could increase the risk of default for some leveraged and low-income borrowers,” she said.

Ms Anand said that large companies are expected to remain resilient, which would reduce the impact on banking sector asset quality. It noted that banks will be able to absorb a “modest” increase in consumer and small business non-performing loans (NPLs).

Loan defaults in the banking sector are also likely to fall further next year.

“This is because most of the pandemic-related bad loans have either been recognized or restructured… If interest rates rise sharply and sustainably, it could also lead to higher defaults in the consumer and small to medium-sized business segments. The divestiture of bad loans by banks to asset management companies could lower the level of bad loans visible in the system,” Ms Anand said.

The banking industry’s bad loans fell 14.6% yoy to P415.225 billion in September from P486.362 in the same month last year, based on the latest data from Bangkok Sentral ng Pilipinas.

This brought the system-wide NPL ratio to 3.43% in September, after 3.53% in August and 4.44% in September 2021. The NPL ratio in September was the lowest in 25 months or since those recorded in August 2020 2.84%. – KBT