MANILA, Philippines — Philippine banks stayed resilient amid headwinds as the economy continued to recover from the impact of the COVID-19 pandemic and Russia’s invasion of Ukraine, as well as the aggressive rate hikes delivered by the US Federal Reserve.

BPI president and CEO Jose Teodoro “TG” Limcaoco said that 2022 was a recovery year for the country’s banking sector.

“In one word, the past year was one of recovery. Our economy recovered and with consumer confidence returning post-pandemic,” Limcaoco told The STAR.

“We grew our loans and deposits faster than industry, we pulled in over a million new customers, we expanded our reach in the segments that would benefit most from financial inclusion. Our digital efforts are truly paying off, with new customers coming to us largely through our digital channels,” Limcaoco added.

The head of the 171-year-old bank believes that the banking industry will remain resilient in 2023 despite the global challenges.

“Interest rates have gone up, but the impact on economic activity and lending will not be disruptive. A manageable slowdown in loan growth may happen as businesses adjust to higher rates,” Limcaoco said.

The Bangko Sentral ng Pilipinas (BSP) raised key policy rates by 350 basis points, bringing the benchmark interest rate to a 14-year high of 5.50 percent from an all-time low of two percent to tame inflation and stabilize the peso.

Despite the series of aggressive rate hikes, credit growth accelerated further to 13.9 percent in October from 13.4 percent in September as big banks disbursed P10.55 trillion in loans from a year-ago level of P9.27 trillion.

“The fundamentals of the economy remain strong, and this will likely offset the impact of the rate hikes. As our country is expected to do well with the support of a young, confident, digitally oriented population, we expect that BPI will do just as well as we focus on this segment to help build a better Philippines,” Limcaoco said.

Fabian Dee, president and CEO of Metropolitan Bank & Trust Co. (Metrobank), said that 2022 was the year of recovery for businesses and the domestic economy, as mobility and consumer consumption went on full gear again.

“In the third quarter, we saw the domestic economy post a surprising growth of 7.6 percent. We see this as the start of a positive momentum for all businesses,” Dee told The STAR.

The country’s gross domestic product (GDP) grew by 7.7 percent between January and September, slightly higher than the 6.5 to 7.5 percent target penned by the Cabinet-level Development Budget Coordination Committee (DBCC).

“For 2023, we are confident that the Philippine banking industry will remain resilient enough to withstand any headwinds,” Dee said.

More rate hikes

Security Bank president and CEO Sanjiv Vohra told The STAR that the central bank is likely to deliver two 25-basis-point rate hikes in the first quarter of 2023 to match the increases to be delivered by the US Federal Reserve.

Vohra said inflation is likely to remain elevated in the first half of 2023 as the BSP raised its inflation forecast to 4.5 from 4.3 percent after breaching the government’s two to four percent at 5.8 percent in 2022.

According to Vohra, the country may post a GDP growth of between five and seven percent based on forecasts of various economists.

When asked to describe 2022 in one word, Vohra replied: “Fortitude.”

“Even with the simultaneous occurrence of significant events which significantly impacted the economy – Omicron at the beginning of the year, the outbreak of the Russia-Ukraine war (just when the world was recovering financially from the pandemic), commodity price spikes, global inflation, tightening of central banks, currency depreciation, revenge spending, China’s lockdowns and reopening, and others – the banking industry remained resilient,” he said.

According to Vohra, the theme is seen continuing in 2023 as the industry continues to evolve following the COVID-19 pandemic.

“Banks were quick to adapt to the increased adoption of digital technologies by customers, who were more comfortable using digital wallets and payment apps for most transactions. This opens up more opportunities for banking innovations and services in the coming year,” he said.

“The areas of concern for the banking industry would include the macroeconomic environment in terms of current account deficit, peso depreciation, higher inflation, which would all lead to higher interest rates, and leverage. Or the amount of borrowings relative to cash flow for business and individuals. Higher interest rates imply higher debt service cost. The risk lies in whether borrower cash flows are enough to allow them to maintain their payments,” Vohra said.

Limcaoco also sees the BSP hiking rates in the first half of 2023 and track the move of the US Fed.

“Inflation will likely remain elevated in the first half of 2023 amid the supply constraints in the global economy. However, the story could change in the second half of the year if a recession in the US happens. The Fed may cut its rates in this scenario, and the BSP will likely follow,” Limcaoco said.

Pre-pandemic levels

Eugene Acevedo, president and CEO at Rizal Commercial Banking Corp. (RCBC), described 2022 as extraordinary and transformational as the listed bank experienced many firsts, while surviving in an environment filled with new and persistent risks.

Aside from crossing the P1-trillion mark in total resources, the Yuchengco-led bank also booked an all-time high of P10.1 billion in consolidated net income as of end September.

“But we know we cannot rest on these laurels. We want to continue to be transformational as we are sure that the competitive atmosphere in the banking industry will continue. So we have to look at things differently – our business models, service delivery and customer behavior. While we do see opportunities in the horizon and have positioned ourselves in these areas to maximize the gains, we recognize the need to be agile in this constantly evolving environment,” Acevedo said.

Likewise, BPI also sees a steady rise in earnings in 2023 on higher lending and net interest margins (NIMs) as well as lower provision for bad debts.

“Our last few quarterly earnings results have demonstrated that BPI is well on its way to pre-pandemic earning levels. We are confident that we will also end 2022 strong. Broadly, we expect growth in 2023 to be driven by higher revenue from continued loan growth and expansion in NIMs, which should offset growth in operating expenses. Provisions are expected to trend closer to pre-pandemic levels,” Limcaoco said.

The Ayala-led bank sees asset quality remaining resilient, with non-performing loans (NPLs) remaining below three percent.

“Our coverage ratio will remain comfortable. We expect credit cost to decline, as provisions are expected to trend closer to pre-pandemic levels, which also bodes well for net income,” Limcaoco said.

For his part, Dee said   the return to pre-pandemic levels of profitability is dependent on several factors, including but not limited to clients’ appetite to avail of credit and investment instruments.

“As you can see from our performance in the nine months ending September, our loan growth is continuously led by corporate demand as a result of normalizing business activities. Meanwhile on the retail side, we saw a pickup in the number of applications and bookings. We see a good balance going forward, our fee-based income is consistent from recurring sources,” Dee added.

He said earnings and balance sheet would continue to be sensitive to the country’s GDP growth.

“It will track our growth so if the economy does well, we are also seeing rosy outlook. If it does not, we are well prepared for any possible downturn because we have already identified issues when the pandemic hit, and we are well covered for them now,” Dee said.

“If the market becomes better, we are well capitalized to grow with a good market scenario. If the market turns negative, we are also well prepared. we are in the best position to do well either in a good or bad market,” Dee added.

Source of strength for economy

BSP Governor Felipe Medalla earlier said in an online event that Philippine banks continue to be a source of strength for the economy.

“They have adequate capital buffers, sufficient liquidity, minimal exposure to bad debts, and growing assets, deposits, and loans. A sound regulatory environment—the result of decades of reforms – supports the country’s banking system,” Medalla said.

Latest data showed that the assets of the banking sector grew by 10 percent to P22.74 trillion as of end-October from P20.68 trillion in the same month in 2021.

The profit of banks operating in the Philippines jumped by 45 percent to P244.87 billion from January to September versus last year’s P169.09 billion.

The BSP chief reiterated that the country’s banking system is solid, stable and capable of supporting economic growth.