Loan growth to inch up amid BSP rate cuts

MANILA, Philippines —  S&P Global Ratings expects Philippine banks’ lending growth to slowly increase in the next two years amid the monetary easing cycle of the Bangko Sentral ng Pilipinas (BSP).

“We think that the loan growth will start to pick up, but at a very slow rate,” Ivan Tan, director and Southeast Asia lead analyst at S&P Global Ratings, said in a webinar yesterday.

He said that the 25-basis-point interest rate cut last week would not immediately impact loan growth, as the key policy rate is “still quite high” at 6.25 percent.

“We think that most of the loan growth pickup will only come in 2025. That’s when we forecast the policy rate will be cut to five percent by next year,” he said.

Tan said loan growth in the Philippines was mostly hovering at seven percent in 2023, significantly lower than the double-digit 10 to 12 percent growth before the pandemic.

Based on central bank data, loan growth hit 7.1 percent in end-2023, lower than the 13.7-percent expansion in end-2022 as the economy absorbed the BSP’s aggressive 450-basis-point rate cuts.

When a central bank hikes policy rates, commercial banks typically pass on the higher costs to borrowers through increased interest rates on loans. This makes borrowing more expensive for consumers and businesses, which often leads to reduced demand for credit.

However, bank lending growth has picked up this year amid resilient loan demand. Latest data showed that credit growth accelerated to 10.1 percent in June from 7.8 percent in the same month a year ago, marking the fastest in 15 months.

Loans disbursed by universal and big banks amounted to P12.09 trillion as of end-June, P1.11 trillion higher than the P10.99 trillion recorded in the same period last year.

Meanwhile, Tan said S&P has observed a risk-on behavior wherein Philippine banks maintain large corporate loans, but are also growing their higher yielding and higher risk consumer segment.

This may lead to a higher non-performing loan (NPL) ratio, especially in the consumer segment.

“So we are watching that very closely because that’s kind of a risk-on behavior,” Tan said.

“Philippine banks are growing consumer loans faster to improve the yield. It’s for yield enhancement purposes, but they are also taking on incremental risk in the process,” he added.

BSP data showed the banking sector’s NPL ratio eased to a two-month low of 3.51 percent in June from 3.57 percent in April. NPLs or bad debts refer to past-due loan accounts where the principal or interest is unpaid for 90 days or more after the due date.

Banks’ bad loans climbed by 14.8 percent to P502.4 billion in June from P437.6 billion in the same month last year.