Industry Forecast - Risks To Financial Stability Low But Rising - MAR 2018

BMI View: We expect the performance of Philippine banks to remain supported by the robust macroeconomic backdrop, but this will be somewhat offset by rising interest rates over the coming quarters. Although banks are well capitalised, we note that downside risks to financial stability are rising.

We hold a neutral view on the Philippines banking sector. On one hand, Philippine banks will likely continue to benefit from the robust macroeconomic backdrop, which should be broadly supportive of loan growth, profitability, and asset quality. On the other hand, as the Bangko Sentral Ng Pilipinas (BSP) gradually unwind its ultra-supportive monetary policy over the coming quarters, rising interest rates act as a damper on some of these performance metrics. We note that the current record-low interest rate environment and upbeat economic growth expectations have resulted in a sharp rise in leverage, and malinvestment have started to accumulate in the economy. If left unchecked, this pose downside risks to financial stability, even though Philippine banks generally boast healthy capital buffers.

After reaching multi-year highs in July 2017, both banking asset and credit growth slowed in the subsequent months, coming in at 12.4% y-o-y and 16.0% y-o-y in November, respectively. This was in line with our view for loan growth to normalise from a high base ( see ' Bank Remain On Solid Footing ' , October 5 , 2017), and we expect this trend to continue as interest rates are likely to rise over the coming quarters as the BSP tightens its monetary policy stance over the course of 2018.

Credit Growth To Moderate But Still Strong
Philippines - Asset & Loan Growth, % chg y-o-y

This article is part of our South East Asia Vol 2 coverage. To access this article subscribe now or sign up for free trial