By Eileen Mencias
Rising interest rates and stable credit costs are expected to boost the profitability of Philippine banks this year, according to S&P Global Ratings.
The credit rating agency’s chartbook titled “Philippine Banks In 2023: Slower Growth, Strong Fundamentals,” highlighted the sector’s robust capitalization and strong retail deposit base, which could serve as key credit strengths.
However, high inflation could pose a downside risk for banks as it may erode household savings and dampen credit demand. Despite this, S&P Global Ratings believes that pass-through of higher policy rates could widen net interest margins by around 20 basis points.
The central bank has already raised interest rates by 400 basis points, and further hikes could be on the cards as core inflation remains elevated.
While credit growth may slow down to 7 to 9 percent due to loan yield increases, asset quality deterioration is expected to be marginal and limited to leveraged consumers and small businesses. Large corporates should remain resilient to higher input and financing costs.
S&P Global Ratings predicts that banks’ profitability could continue to improve with return on assets of about 1.5 percent, even with the impact of lower loan growth. The agency expects sector credit costs to stay flattish at 0.6-0.7 percent of total loans.
Overall, the chartbook provides a positive outlook for Philippine banks, with the sector’s strong fundamentals likely to support profitability in the year ahead.
