Philippine banks are set for a banner year in 2024, riding a wave of robust economic growth fueled by some of the highest real gross domestic product growth rates in the region.
“Philippine banks are well-positioned to capitalize on the country’s robust economic growth in 2024,” said Nikita Anand, a credit analyst at S&P Global Ratings. “We believe improving macroeconomic conditions will offer good growth opportunities alongside stable asset quality.”
S&P Global Ratings expects earnings to normalize with lower asset yields, due to anticipated policy rate cuts in the second half of the year.
Higher economic growth, coupled with lower inflation and interest rates, will support credit demand, it said. S&P Global Ratings forecasts credit growth of 10 percent to 12 percent in 2024, faster than the subdued 5-percent to 6-percent growth in 2023.
The agency projects real GDP growth of about 6 percent for both 2024 and 2025, up from the estimated 5.2 percent in 2023. Policy rates could decrease in 2024 if inflation remains moderate, S&P said.
The sector’s return on average assets could normalize to a long-term average of 1.2 percent to 1.3 percent over the next two years, after peaking at about 1.4 percent in 2023.
This is because net interest margins will decline with the expected policy rate normalization. However, lower operating expenses and an increasing share of unsecured retail loans could offer upside to the profitability forecast, the credit watcher said.
Banks are expected to continue investing in digital capabilities to improve efficiency. The industry’s cost-to-income ratio declined steadily to 55 percent to 57 percent by the end of 2023, from 64 percent to 65 percent in 2016, thanks to rapid digitalization of banking services.
Credit losses are expected to remain flat at 0.5 percent to 0.7 percent of gross loans in 2024.
S&P Global Ratings also anticipates a manageable increase in the nonperforming loan (NPL) ratio to 3.5 percent from 3.4 percent as of November 2023, driven by rapid growth in riskier segments like credit card loans and other unsecured consumer loans in the past two years.
“Risks should stay contained, given the Philippines’ low household leverage of 10% of GDP and stable employment conditions,” Anand said.
Digital banks’ asset quality is expected to remain significantly weaker than the sector as a whole due to their heavy exposure to unsecured consumer loans and the largely untested credit profiles of their target customers.
S&P Global Ratings expects these banks to continue making losses in the near term due to weak asset quality and high costs.
Philippine banks’ funding profile should remain healthy, with a loan-to-deposit ratio of 70 percent to 75 percent and a high share of low-cost current and savings deposits at about 70 percent of total deposits.
Unlike some regional peers, Philippine banks have not seen a significant decline in key metrics compared to pre-pandemic levels.
Despite the positive outlook, risks remain, according to S&P. Elevated inflation and interest rates could erode household savings, putting a strain on low-income households and small and medium-sized enterprises.
The sector’s strong capital position (15.5 percent Tier-1 ratio) and provisioning, however, should help absorb potential asset quality risks, it said.