THE BANKING SECTOR in South East Asia, including the Philippines, could face asset quality risks due to rising household debt, Moody’s Ratings said.
“High household debt amid high interest rates has increased asset risks for several Association of Southeast Asian Nations (ASEAN) banking systems and weakened their credit advantages.Files,” a report said.
“Most ASEAN economies saw significant increases in household debt over the past decade, supported by strong consumer spending and improving economic conditions. Ffinancial inclusion.”
In its report, Moody’s Ratings looked at six ASEAN economies, including the Philippines, and assessed the overall household sector risk to each country’s banking systems. It studied risk factors such as the interest rate environment, private credit growth and capital and credit lossesFfers, among other things.
Based on this assessment, the Philippines is at “moderate” risk, along with Malaysia and Indonesia. Thailand and Vietnam had a ‘high’ overall risk, while Singapore was rated ‘low’.
“In Indonesia and the Philippines, banks face moderate levels of risk as households are not highly indebted and the stable operating environment of these banking systems will support overall asset quality,” Moody’s Ratings said.
“Household debt has risen steadily over the past decade, with banks as the main lender for the domestic sector across ASEAN.”
Moody’s said the increase in household lending was driven by strong private consumption over the past decade. It noted that household debt was growing faster than economic growth in several countries.
“This is inextricably linked to the region’s robust economic growth, which is among the highest in the world, and in Indonesia, the Philippines and Vietnam, growth is paralleling the growth of the economy.Fimprove forts Ffinancial access,” the report said.
Bank lending rose 10.7% year-on-year to $12.25 trillion in August, the fastest growth rate in nearly two years, the latest data from the Bangko Sentral ng Pilipinas (BSP) showed.
However, growth in consumer loans to residents fell to 23.7% in August from 24.3% a month earlier. Slower credit growth was recorded in credit cards (27.4% in August, compared to 28.2% in July), motor vehicles (19.3% compared to 19.9%) and salary-based consumer loans (16.4 % versus 16.5%).
“While household debt has grown faster in Indonesia, the Philippines and Vietnam, this is from low levels and overall household debt remains below that in the region,” the report said.
“We expect household debt growth to continue to outpace gross domestic product (GDP) growth in most ASEAN economies over the medium term, as credit demand improves in tandem with the normalization of interest rates and a stronger economic growth in the region,” it added.
Moody’s Ratings attributed the rise in household debt to improving financial inclusion, especially in the Philippines, Indonesia and Vietnam, citing the continued digitalization of banking services.
“As financial access improves over time, we expect the most populous economies to be the main drivers of household debt growth in the region.”
The share of Filipinos with bank accounts reached 65% of the adult population by 2022. The BSP wants at least 70% of adult Filipinos to be part of the formal financial system.
Moody’s Ratings also noted that household finances in the region are “under pressure” amid the mounting economic crisisFand high financing costs.
It noted that monetary tightening was the “steepest” in the Philippines. The Philippine central bank raised borrowing costs by a total of 450 basis points (bps) between May 2022 and October 2023 to curb inflation, pushing the policy rate to a 17-year high of 6.5%.
“Looking ahead, we expect private borrowers’ debt servicing capacity to remain under pressure over the medium term due to the region’s high interest rate environment and modest income growth,” the report said.
“While falling interest rates and stable economic conditions will ease pressure on asset quality, the overall risk to each banking system will vary based on risk factors such as the size of household debt and the growth of the economy.Ffers maintained by banks.”
The pandemic has also weakened the situation of households. Ffinancial buFprotects against future shocks, which would subsequently increase ASEAN banks’ asset risks, according to Moody’s Ratings.
“As a result, the regional average of retail NPLs, as a percentage of gross loans, increased from 1.9% to 2.3% between 2019 and 2023, with the greatest deterioration occurring in Vietnam and the Philippines,” said the report.
The latest BSP data shows that the Philippine banking sector’s gross non-performing loan (NPL) ratio rose to 3.59% in August, marking a new two-year high.
Moody’s Ratings also noted that underperforming loans in the retail segment have also increased in Thailand, the Philippines and Vietnam.
“Overall, loans at risk are higher in the Philippines, Thailand and Malaysia, economies that either have higher levels of household debt or are below average household income,” the report said.
If NPLs remain high, it could weigh on the asset quality of banks in the region, Moody’s Ratings said.
“Banks in Vietnam and the Philippines have shifted their growth focus to retail lending to optimize profits and meet growing credit demand in the segment.”
“In these economies, rapid private loan growth will increase asset risks as individual borrowers’ nominal incomes fail to keep pace with increases in their debt burdens, while high inflation has eroded real incomes,” the report said .
The report also mentioned the risk of a higher share of unsecured retail loans from banks in the Philippines and Thailand.
“According to the Bank of Thailand, personal loans and credit cards accounted for about 20% to 30% of total household debt in 2023, while in the Philippines, credit cards alone accounted for about 28% of total retail loans.”
“As a result, banks in these economies will need to hold more capital given the higher risk weights for these products compared to mortgages. They should also make more provision for delinquencies as exposures to these portfolios are generally uncollateralized.” — Luisa Maria Jacinta C. Jocson