Higher loan demand, low credit losses spell better year for PH banks

Philippines’ digital banks will continue to make losses due to weak asset quality.

2024 could shape up to be a better year for Philippine banks, with earnings likely to normalise and with policy rate cuts expected for the second half of the year, according to S&P Global Ratings.

"Philippine banks are well placed to ride the country's robust economic growth in 2024," said S&P Global Ratings credit analyst Nikita Anand. 

“We believe improving macroeconomic conditions will offer good growth opportunities along with stable asset quality,” she further noted, adding that earnings are likely to normalize with lower asset yields, given our expectation of policy rate cuts in the second half of the year.

Philippine banks' funding profile should remain healthy, with a loan-to-deposit ratio of 70%-75% and a high share of low-cost current and savings deposits at about 70% of total deposits. 

“We have not seen irrational deposit pricing in response to the high rates offered by new digital banks. These banks' operations are nascent and reflect initial struggles, with a market share of just 0.4% of sector deposits,” Anand added.

Manageable risks
Credit losses are expected to stay flat at 0.5% to 0.7% of gross loans in 2024.

The non-performing loan (NPL) ratio is expected to come at 3.5%, from 3.4% as of end-November 2023. This would be due to rapid growth in riskier segments such as credit card loans and other unsecured consumer loans in the past two years.

"As this portfolio matures, consumer NPLs are likely to rise," Anand said. "Risks should stay contained, given the Philippines' low household leverage of 10% of GDP and stable employment conditions."

Digital banks to continue making losses
It still won’t be the year of digital lenders, however, as they are expected to continue making losses because of very weak asset quality and high costs. 

“Digital banks' asset quality should stay significantly weaker than the sector. This reflects their heavy exposure to unsecured consumer loans and the largely untested credit profile of their target customers,” S&P wrote.

Overall, banks– both digital only and traditional– are expected to continue investing in digital capabilities throughout 2024 as a bid to drive efficiency.

Digitisation has also helped drive down the sector’s cost-to-income ratio, Anand noted. The banking sector's cost-to-income ratio has declined to 55%-57% as of end-2023 from 64%-65% as of end-2016, according to S&P data.

Double-digit credit growth
The country’s real gross domestic product (GDP) is sighted to grow by about 6% for 2024 and 2025. This, along with lower inflation and interest rates, will support demand for loans.

With this, S&P expects credit growth to fall between 10% to 12% in 2024, ramping up from the ‘subdued’ 5% to 6% growth reported in 2023.

“We believe policy rates could decrease in 2024 as inflation stays moderate,” Anand added.

However, net interest margins will decline in line with policy rate normalization. 

On the upside, lower operating expenses and an increasing share of unsecured retail loans could provide an upside to our profitability forecast, S&P said.