Higher cap on credit card rate to boost banks’ earnings P40 billion – Fitch

MANILA, Philippines — The recent lifting of the interest rate ceiling on credit cards by the Bangko Sentral ng Pilipinas (BSP) is seen boosting the interest earnings of Philippine banks by as much as P40 billion, according to Fitch Ratings.

In a commentary titled “Higher Credit Card Rate Cap to Aid Philippine Banks’ Profitability,” the debt watcher said that the newly announced rate ceiling could add about P30 billion to P40 billion in interest income for the banking sector.

Fitch said the decision of the BSP Monetary Board to raise the interest rate or finance charge ceiling on all credit card transactions by 100 basis points to three percent from two percent would further widen margins by about 15 basis points.

“This benefit may be partly offset by the rise in credit costs if banks relax their standards or expand their credit card portfolios more aggressively, though we do not expect any increase to be material, provided there is no new shock in the economy, which suggests that the sector’s profitability could marginally surpass our base case,” Fitch said.

According to Fitch, the increase would buoy the net interest margins of Philippine banks that is already projected to rise due to the aggressive rate hikes delivered by the BSP to tame inflation and stabilize the peso.

“The reversal of the rate cap first, implemented in November 2020, should enable banks to apply better risk-based pricing on unsecured lending. Credit costs are likely to increase as banks expand in the segment, but we expect them to be manageable amid resilient economic growth in 2023 and to be offset by higher lending yields,” Fitch said.

The temporary cap was introduced to ease borrowers’ debt burden during the COVID-19 pandemic, but has become less relevant with the Philippine economy rebounding strongly, in addition to interest rates that are now above pre-pandemic levels.

The central bank has raised key policy rates by 350 basis points, bringing the benchmark interest rate to a 14-year high of 5.50 percent last year from an all-time low of two percent.

“We had projected the banking sector’s net interest margins to rise by another 30 bp in 2023 from end- third quarter 2022 levels on the 350 bp policy rate hike since May 2022,” Fitch said.

Latest data showed credit card receivables rose to around 4.6 percent of total system loans at end November 2022 from around 2.8 percent at end 2017, as banks increased their consumer credit rapidly to diversify their loan portfolios and boost returns.

“We expect this trend to continue, potentially raising credit risks in the system, as the product’s sector non-performance ratio of around five percent is nearly double that of business loans,” it said.

Nevertheless, the credit rating agency expects the exposure of Philippine banks to the segment to remain manageable in the near term, as corporate finance is likely to remain the core of banks’ portfolios in the conglomerate-driven economy.

Sy-led BDO Unibank Inc. said the decision of the Monetary Board, chaired by BSP Governor Felipe Medalla, to raise the rate cap to three percent per month or 36 percent annum, from two percent or 24 percent annum, would help banks cope with rising costs of providing credit.

“We echo the view of BSP Governor Medalla that the increase in interest rate cap on credit card transactions will allow banks to cover higher costs related to handling consumer transactions, facilitate financial inclusion, and help the banks cover the cost of providing credit to consumers in a rising rate environment,” BDO said.

Jojo Ocampo, executive vice president and head of unsecured lending at Ayala-led Bank of the Philippine Islands (BPI), told The STAR that the higher ceiling helps boost the push towards financial inclusion in the country.

We are supportive of this move by the BSP as it will allow credit card issuers to have elbow room to give more value and rewards to clients, as well as have more accommodating policies to service credit card applicants, which will strengthen the industry’s thrust towards financial inclusion,” Ocampo said.

Likewise, Ty-led Metropolitan Bank & Trust Co. (Metrobank) believes the decision to adjust the cap higher would help banks deliver more meaningful services to customers.

“We support this move by the central bank as it provides credit card issuers flexibility in coping with current market conditions. More importantly, it enables the card businesses to give even more meaningful services to our customers,” Metrobank head of consumer business sector Ramon Del Rosario said.