Philippines banks expected to post strong credit growth

Philippine banks are poised for strong credit expansion over the next two years, but risks are mounting in the fast-growing consumer lending segment, S&P Global Ratings said in a report by Philippine Star.

In a webinar on Tuesday, S&P director Nikita Anand said the Philippines’ relatively low reliance on exports shields its economy from global headwinds, such as tariffs and trade disruptions. This is a resilience that bodes well for the country’s banking sector.

“We forecast strong credit growth of 11 to 13 percent over the next two years,” Anand said.

“It will also continue to grow faster at 18 percent because banks will pursue higher risk-adjusted returns and better loan portfolio diversification by expanding their consumer loan books,” she said.

The debt watcher expects these high-yielding consumer loans to help sustain profitability even in a declining interest rate environment, supported by easing inflation and rate cuts that improve repayment capacity.

However, Anand warned that the boom in consumer lending also comes with rising credit risks. Non-performing loan (NPL) ratios in unsecured consumer segments are now at around five percent, significantly higher than the banking system average of 3.5 percent.

“Consumer lending in the Philippines generally entails higher credit risk,” Anand said.

“The share of riskier loans such as credit cards and personal loans has risen significantly in the last few years,” she added.

According to Anand, the segment has grown to nine percent of total loans today from five percent in 2019.

“These portfolios are largely unseasoned and will likely face higher delinquencies as they mature,” she said.

Anand also expressed concern over rising household debt, noting that while official data shows household debt-to-gross domestic product (GDP) remains low compared to regional peers, the figures likely understate the true burden.

“These numbers often exclude informal loans from family and friends, and financing from real estate developers. So, the actual consumer leverage could be higher,” she said.

Despite the uptick in credit card debt and rising household leverage, S&P said Philippine banks remain well capitalized, with an average common equity Tier 1 ratio of 15.7 percent and loan-to-deposit ratio of 75 percent, providing sufficient buffers against shocks.

Anand said provisioning costs would likely stay between 0.7 and 0.8 percent of total loans, higher than pre-pandemic levels but lower than many of the country’s regional peers.

On profitability, the credit rater said that Philippine banks have improved  in recent years with better margins and sustained reduction in operating expenses.

“An increase in the proportion of higher-yielding loans could potentially help sustain this improvement in profitability in a declining interest rate environment,” she said.

The rating agency also flagged vulnerabilities tied to real estate exposures.