Philippines banking sector strong – IMF

But flags real estate, consumer credit risks

MANILA, Philippines —  The International Monetary Fund (IMF) has expressed confidence in the strength of the Philippine banking sector over the next two years but warned of possible vulnerabilities, particularly in the real estate sector and growing consumer credit.

In a press briefing, IMF mission chief Elif Arbatli-Saxegaard said the country’s banking sector has robust capital and liquidity buffersm, but advised continued vigilance from the Bangko Sentral ng Pilipinas (BSP) against risks.

“Systemic risk within the financial system remains moderate, with a banking sector characterized by strong capitalization, liquidity and profitability,” she said.

“(But) continued vigilance is warranted against pockets of vulnerability in the real estate sector and a fast-growing consumer credit market.”

Saxegaard said the real estate sector underwent significant shifts during the pandemic, including the rise of work-from-home arrangements and changes in business process outsourcing (BPO) operations.

There are some segments in the commercial real estate market where vacancy rates remain quite high and this should be monitored carefully, Saxegaard said.

The IMF also called attention to the fast-growing consumer credit market. Although credit expansion in this sector started from a low base due to the pandemic, its rapid increase raises concerns about the quality of borrowing.

“Whenever we see credit growth picking up very strongly in one segment, this is typically a sign that you should look at it more carefully and ensure that the strong pickup in credit remains healthy and it’s going to the healthy borrowers,” Saxegaard said.

IMF resident representative Ragnar Gudmundsson said the non-performing loan (NPL) level in the residential real estate market is high at seven percent. The current industry level is only about 3.5 percent.

“This is precisely one of the reasons why we’re saying that effective supervision and monitoring is important to address some potential vulnerabilities there,” Gudmundsson said.

But Philippine banks may continue to enjoy high profitability, aided in part by the BSP’s recent reduction in the reserve requirement ratio (RRR). This move is expected to support credit growth and bank margins as interest rates decline over the next two years.

“Right now, credit growth is more or less comparable to its pre-pandemic averages, so we don’t anticipate a huge pickup above those levels, but we do expect to see healthy credit growth,” Saxegaard said.

Lending growth rose to 10.4 percent in July from 10.1 percent in June, the highest level in 19 months. Loans disbursed by big banks amounted to P12.14 trillion in end-July, P1.14 trillion higher than the P11 trillion recorded in the same period last year.

Saxegaard also said that adjusting government policies as credit growth picks up will help mitigate the build-up of vulnerabilities. Ongoing efforts to revise the bank resolution framework will be strengthened by simultaneous efforts to improve emergency liquidity assistance and lender of last resort frameworks.

“Establishing a credible yield curve and restoring the interest rate swap market, including by making the reverse repurchase rate the official reference rate for interest rate swaps, are significant steps toward enhancing the Philippines fixed income securities and money market,” she said.

The current momentum of the country’s exit from the Financial Action Task Force’s gray list should also be maintained, she added.