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BMI Research optimistic of continued robustness of PH banking system

By Joann Villanueva

April 12, 2018, 7:05 pm

MANILA -- BMI Research sees continued strengthening of the Philippine banking system although it forecasts a deceleration in loan growth owing to expectations of fresh interest rate hikes.
 
In a study, the research arm of Fitch Group said domestic banks’ capital buffers remain robust “and we do not expect any major asset quality deterioration.”
 
“Liquidity remains ample and the BSP’s (Bangko Sentral ng Pilipinas) move to reduce the reserve requirement of banks should help to free up more liquidity,” it said.
 
The central bank’s policy-making Monetary Board (MB) decided to cut banks’ reserve requirement ratio (RRR) by a percentage point to 19 percent effective March 2, 2018 in a bid to gradually lessen reliance on this tool in managing liquidity in the financial system.
 
Its decision was also made as BSP shifts to more market-based monetary policy implementation.
 
Amid the RRR cut, the Philippines continues to have one of the highest RRR in the region.
 
“We expect the Philippine banking system to remain stable over the medium term, as risks to financial stability, albeit rising, remain low. Key metrics that measure asset quality, capital adequacy, and liquidity show that the banking sector remains in a solid shape amid a robust macroeconomic backdrop and an accommodative interest rate environment,” the study said.
 
Even as capital buffers remain strong, BMI Research, however, sees lower loan growth in the coming months in line with its projection that the central bank will eventually cut policy rates in line with the Federal Reserve’s decision to hike its own key rates as well as the continued rise of domestic inflation rate.
 
BSP’s preliminary data show that as of end-February 2018,  banking lending, excluding banks’ placements in the central bank’s reverse repurchase (RRP) facility, rose faster at 19.5 percent from the previous month’s 19 percent.
 
Including RRP placements, bank lending expansion, on the other hand, decelerated to 17.6 percent from 18.4 percent in the previous month.
 
These growth levels are seen to be hit by expectations of gradual increases in the BSP's rates.
 
The study said the Fed's rate hikes and inflation upticks “will likely weigh on loan growth to some extent, while credit stress could start to rise, and eat into the profitability of banks over the coming quarters.”
 
Citing BSP data, the study said total loan portfolio (TLP) of domestic banks went up by 16.5 percent year-on-year in December 2017.
 
However, BMI Research expects this growth to slow down in the near term.
 
This, as the Fitch Group subsidiary forecasts a 50 basis points increase in the BSP’s key rates by the end of 2018 “to safeguard macroeconomic stability.”
 
“This should see banks adjust their lending rates higher, leading to a slowdown in loan demand,” it said.
 
“A higher interest rate environment could in turn see credit risk increase in the medium term as it impacts borrowers’ cash flow and ability to service debt, while also weighing on the value of collateral supporting the loan,” it added.
 
To date, the floor rate of BSP’s interest rate corridor is 2.5 percent, key rate is at three percent, which is the RRP, and ceiling rate is 3.5 percent, which is the repurchase (RP) facility. (PNA)
 
 

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