THE BANKING SECTOR in Southeast Asia, together with the Philippines, could face asset high quality dangers amid rising family debt, Moody’s Scores mentioned.
“Excessive family debt amid elevated rates of interest have elevated asset dangers to a number of Affiliation of Southeast Asian Nations (ASEAN) banking programs and weakened their credit score professionalfiles,” it mentioned in a report.
“Most ASEAN economies noticed a large improve in family debt over the previous decade, supported by robust consumption spending and bettering financial inclusion.”
In its report, Moody’s Scores checked out six ASEAN economies together with the Philippines and assessed the general danger of the family sector to every nation’s banking programs. It studied danger components reminiscent of rate of interest atmosphere, retail lending progress, and capital and mortgage loss buffers, amongst others.
Utilizing this evaluation, the Philippines faces a “reasonable” danger, similar as Malaysia and Indonesia. Thailand and Vietnam had a “excessive” total danger, whereas Singapore obtained a “low” evaluation.
“In Indonesia and the Philippines, banks face a reasonable stage of danger on condition that households usually are not extremely leveraged and the secure working atmosphere of those banking programs will help total asset high quality,” Moody’s Scores mentioned.
“Family debt has risen steadily over the previous decade, with banks as the first lender to the family sector throughout ASEAN.”
Moody’s mentioned that the rise in family lending was pushed by robust non-public consumption prior to now decade. It famous family debt was increasing sooner than financial progress in a number of international locations.
“That is inextricably linked to the area’s strong financial progress, which is among the many highest globally, and in Indonesia, the Philippines and Vietnam, progress is in tandem with efforts to enhance financial entry,” it mentioned.
Financial institution lending rose by 10.7% 12 months on 12 months to P12.25 trillion in August, its quickest progress price in practically two years, the newest knowledge from the Bangko Sentral ng Pilipinas (BSP) confirmed.
Nonetheless, the expansion in client loans to residents eased to 23.7% in August from 24.3% a month prior. Slower mortgage progress was recorded in bank cards (27.4% in August from 28.2% in July), motor autos (19.3% from 19.9%), and salary-based basic function consumption loans (16.4% from 16.5%).
“Whereas family debt in Indonesia, the Philippines and Vietnam has grown at a sooner tempo, that is from a low base and total family leverage stays under regional friends,” it mentioned.
“We count on family debt progress will proceed to outpace gross home product (GDP) progress over the medium time period throughout most ASEAN economies, as credit score demand improves in tandem with the normalization of rates of interest and stronger financial progress throughout the area,” it added.
Moody’s Scores attributed the rise in family debt to bettering monetary inclusion, notably within the Philippines, Indonesia and Vietnam, citing the continued digitalization of banking providers.
“As monetary entry improves over time, we count on probably the most populous economies would be the important driver of progress in family debt within the area.”
The share of Filipinos with financial institution accounts reached 65% of the grownup inhabitants in 2022. The BSP needs not less than 70% of grownup Filipinos to be a part of the formal monetary system.
Moody’s Scores additionally famous that family funds within the area have been “underneath pressure” amid elevated inflation and excessive borrowing prices.
It famous that financial tightening was the “steepest” within the Philippines. The Philippine central financial institution raised borrowing prices by a cumulative 450 foundation factors (bps) from Could 2022 to October 2023 to tame inflation, bringing the coverage price to a 17-year excessive of 6.5%.
“Wanting forward, we count on the debt reimbursement capability of retail debtors to stay underneath pressure over the medium time period from the area’s excessive rate of interest atmosphere and modest revenue progress,” it mentioned.
“Whereas declining rates of interest and secure financial circumstances will alleviate asset high quality pressures, the general danger to every banking system will fluctuate based mostly on danger components such because the extent of family indebtedness and buffers maintained by banks.”
The pandemic additionally weakened households’ financial buffers in opposition to future shocks, which might then improve the asset dangers of ASEAN banks, Moody’s Scores mentioned.
“Consequently, the regional common of NPLs within the retail phase, as a proportion of gross loans, has elevated from 1.9% to 2.3% from 2019 to 2023 with a lot of the deterioration in Vietnam and the Philippines,” it added.
The most recent BSP knowledge confirmed that the Philippine banking trade’s gross nonperforming mortgage (NPL) ratio rose to three.59% in August, hitting a recent two-year excessive.
Moody’s Scores additionally famous that underperforming loans within the retail phase have additionally elevated in Thailand, the Philippines and Vietnam.
“Total loans in danger… are greater within the Philippines, Thailand and Malaysia, economies which have both greater ranges of family leverage or under common family revenue,” it mentioned.
If NPLs proceed to stay elevated, this might weigh on the asset high quality of banks within the area, Moody’s Scores mentioned.
“Banks in Vietnam and the Philippines have shifted their progress focus in the direction of retail loans, to optimize earnings and seize rising credit score demand within the phase.”
“In these economies, asset dangers from the speedy progress in retail loans will improve because the nominal revenue of particular person debtors shouldn’t be retaining tempo with will increase of their debt burdens, whereas excessive inflation has eroded actual revenue,” it added.
The report additionally cited the danger of a better proportion of unsecured retail lending of banks within the Philippines and Thailand.
“In accordance with the Financial institution of Thailand, private loans and bank cards accounted for round 20%-30% of whole family debt in 2023 whereas within the Philippines, bank cards alone shaped round 28% of whole retail loans.”
“In consequence, banks in these economies might want to keep extra capital given the upper danger weights for these merchandise relative to mortgages. They might additionally have to create extra provisions for delinquencies given the exposures to those portfolios are sometimes not collateralized.” — Luisa Maria Jacinta C. Jocson
