BMI hikes bank lending growth forecast for Philippines

BMI, a division of Fitch Solutions, has increased its forecast for bank lending growth in the Philippines for the current year, forecasting a 10% increase compared to the previously estimated 8.5%. The firm's report indicates that stronger-than-anticipated lending activity is driving this growth. Bank lending growth is measured by the annual increase in loans extended by banks to households and businesses.

According to the Bangko Sentral ng Pilipinas (BSP), outstanding bank loans expanded by 11.9% to P15.12 trillion in August 2024, surpassing BMI's prior expectations. However, BMI anticipates that lending growth will ease by the end of 2026 and further decelerate to 9% by the end of 2027 due to higher interest rates and a weakening economy.

The Bank of the Philippines has raised its benchmark interest rate by 25 basis points in each of its past three meetings, reaching a rate of 5%. BMI expects another 25-basis-point increase in October to combat inflation and prevent further cost escalations. The rise in government bond yields since the US-Iran conflict has also increased financing costs.

BMI warns that higher borrowing costs could compel banks to tighten lending standards to maintain loan quality, further curbing credit expansion. Consumer lending has already shown signs of moderation as rising food and energy prices reduce household spending power. Higher interest rates can discourage consumers from taking out new loans, especially as they allocate more of their income to essential expenses.

The firm also cautions that weak economic conditions could further burden banks' loan portfolios. The gross nonperforming loan (NPL) ratio, which indicates the proportion of bank loans that borrowers are having trouble repaying, has remained at around 3.4%, exceeding the 2.6% average of the decade preceding the pandemic. BMI argues that even though higher inflation and unemployment have strained borrowers' capacity to meet debt obligations, potentially leading to more delinquent loans, rapid credit growth has obscured the growing bad loan stock. However, this impact could diminish as lending growth slows.

BMI maintains that the Philippine banking system remains robust due to strong liquidity and adequate capital buffers. As of the second quarter of 2024, banks' capital adequacy ratio, which measures their financial cushion against potential losses relative to risk-weighted assets, is at 15.2%, well above the 10% minimum required by regulators. Nevertheless, BMI advises monitoring the ratio closely, particularly if it continues to decline in the remaining part of 2026 and into 2027.