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Banks stable, but rate hikes pose downside risk — Moody’s

THE prospect of further rate increases is considered a risk to Philippine banks’ asset quality, though the outlook for the next 18 months is stable, Moody’s Investors Service said on Thursday.

At a webinar, Moody’s Vice-President and Senior Credit Officer of the Financial Institutions Group Srikanth Vadlamani said more rate hikes by the Bangko Sentral ng Pilipinas (BSP) beyond the current 6% will bring rates past “already historical levels.”

Rates are “actually quite high. And it’s not clear whether (the BSP is done); maybe there are a few more rate hikes to come because of inflationary pressures,” Mr. Vadlamani said.

Asked for his view on banks’ non-performing loan (NPL) ratios by the end of the year, Mr. Vadlamani said Moody’s has no explicit forecast, but said asset quality will be generally stable in line with the trend seen in 2022.

“But the key risk we are watching out for is, are there going to be more rate hikes? If so, what is the capacity of the borrowers to absorb these rate hikes?” he added.

The BSP raised borrowing costs by a total of 400 basis points (bps) starting May 2022, bringing the key policy rate to 6%, its highest in nearly 16 years.

The central bank said bad loans totaled P405.138 billion in January, up 1.6% from a month earlier. The January total was down 12.2% from a year earlier.

This brought the industry’s NPL ratio to 3.28%, up from the 3.16% posted in December but lower than the 4.14% in January 2022.

Last week, Moody’s Investors Service maintained its “stable” outlook for the banking industry for the next 12 to 18 months, due to Philippines’ robust economic recovery.

“Philippines is actually on the positive. The rebound from COVID (coronavirus disease) has been quite strong — better than expected. And we saw that in the fourth quarter numbers as well. That has been a key factor driving banks’ asset quality performance,” Mr. Vadlamani said.

The economy expanded 7.6% in 2022, surpassing the government’s 6.5-7.5% target for the year.

Mr. Vadlamani also said banks’ profitability and credit costs will remain stable this year, but reiterated that it depends on how asset quality will be affected by additional rate increases.

“Inflationary pressures are looking to be a bit more persistent. Last year, the view was probably a bit more supply-side, but now maybe it is more persistent. Hence more action has to be taken,” he said.

Inflation slowed to 8.6% in February, from the 14-year high of 8.7% in January. For the first two months of the year, inflation averaged 8.6%.

Core inflation, which excludes volatile prices of food and fuel, accelerated to 7.8% in February from 7.4% in January, the highest reading in over 22 years.

“Also, it has to be seen in the context of how the global scenario is evolving. The Fed may deliver more rate hikes than what we previously anticipated,” Mr. Vadlamani said, adding that one of the drivers of BSP’s rate hikes last year was the depreciating peso.

“Hence, the global rate hikes will have an impact as well. So, the BSP rate is at 6%, maybe a few more rate hikes will still be in the offing,” he added.

The Federal Reserve raised the Fed funds rate by 25 bps to 4.5-4.75%. It has hiked rates by a total of 450 bps since March 2022.

This has caused volatility in foreign exchange markets and brought the peso to a record low of P59 against the dollar in October. The peso has since rebounded to the P55-a-dollar level, closing at P55.24 on Thursday.

The Fed’s next policy review will be on March 21 and 22, while the BSP will meet on March 23.

The Philippines holds a “Baa2” sovereign rating — a notch above minimum investment grade — with a “stable” outlook from Moody’s, which was affirmed in September last year. — Keisha B. Ta-asan

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