Philippine banks' bad loan ratio to hold steady at 3.5% in 2019

Strong capital buffers can help weather volatile currency risks.

The Philippine banking sector’s non-performing loan (NPL) ratio is set to hold firm at 3.50% by end-2018 and 2019 as the country’s lenders remain in strong position to weather deterioration in asset quality, according to S&P Ratings.

Although the sustained currency depreciation poses corporate credit risks especially for sectors like construction and transportation which have dollar inputs and peso revenues, Philippine banks are still on strong footing to withstand downside risks.

“We expect the impact of currency volatility, higher inflation, and slower credit growth to be manageable for the banking system given banks' good capital buffers and coverage ratios,” Nikita Anand, primary credit analyst at S&P Global said in a report.

Also read: Bloated corporate loan books drag down Philippine banks

Additionally, the sustained economic expansion is expected to lend support to stability in asset quality even amidst a higher interest rate environment.

“Sharp spikes in interest rates would increase debt-servicing burdens, and could lead to higher nonperforming loans particularly for highly indebted borrowers. That said, both household and corporate leverage are at modest levels, and interest rates are rising from a historically low base,” added Anand.

However, credit growth is poised to taper off from a strong 18.32% in 2017 to 15% by end-2018 and 2019 amidst higher policy rates although the government’s massive infrastructure programme may aid credit growth via multiplier effect.