THE BANKING SECTOR in Southeast Asia, including the Philippines, may face asset quality risks amid rising household debt, Moody’s Rankings said.
“High household debt amid elevated rates of interest have increased asset risks to several Association of Southeast Asian Nations (ASEAN) banking systems and weakened their credit profiles,” it said in a report.
“Most ASEAN economies saw a large increase in household debt over the past decade, supported by strong consumption spending and improving financial inclusion.”
In its report, Moody’s Rankings checked out six ASEAN economies including the Philippines and assessed the general risk of the household sector to every country’s banking systems. It studied risk aspects corresponding to rate of interest environment, retail lending growth, and capital and loan loss buffers, amongst others.
Using this assessment, the Philippines faces a “moderate” risk, same as Malaysia and Indonesia. Thailand and Vietnam had a “high” overall risk, while Singapore obtained a “low” assessment.
“In Indonesia and the Philippines, banks face a moderate level of risk provided that households should not highly leveraged and the stable operating environment of those banking systems will support overall asset quality,” Moody’s Rankings said.
“Household debt has risen steadily over the past decade, with banks as the first lender to the household sector across ASEAN.”
Moody’s said that the rise in household lending was driven by strong private consumption prior to now decade. It noted household debt was expanding faster than economic growth in several countries.
“That is inextricably linked to the region’s robust economic growth, which is amongst the very best globally, and in Indonesia, the Philippines and Vietnam, growth is in tandem with efforts to enhance financial access,” it said.
Bank lending rose by 10.7% 12 months on 12 months to P12.25 trillion in August, its fastest growth rate in nearly two years, the newest data from the Bangko Sentral ng Pilipinas (BSP) showed.
Nevertheless, the expansion in consumer loans to residents eased to 23.7% in August from 24.3% a month prior. Slower loan growth was recorded in bank cards (27.4% in August from 28.2% in July), motorized vehicles (19.3% from 19.9%), and salary-based general purpose consumption loans (16.4% from 16.5%).
“While household debt in Indonesia, the Philippines and Vietnam has grown at a faster pace, that is from a low base and overall household leverage stays below regional peers,” it said.
“We expect household debt growth will proceed to outpace gross domestic product (GDP) growth over the medium term across most ASEAN economies, as credit demand improves in tandem with the normalization of rates of interest and stronger economic growth across the region,” it added.
Moody’s Rankings attributed the rise in household debt to improving financial inclusion, particularly within the Philippines, Indonesia and Vietnam, citing the continued digitalization of banking services.
“As financial access improves over time, we expect probably the most populous economies will probably be the primary driver of growth in household debt within the region.”
The share of Filipinos with bank accounts reached 65% of the adult population in 2022. The BSP wants at the least 70% of adult Filipinos to be a part of the formal economic system.
Moody’s Rankings also noted that household funds within the region have been “under strain” amid elevated inflation and high borrowing costs.
It noted that monetary tightening was the “steepest” within the Philippines. The Philippine central bank raised borrowing costs by a cumulative 450 basis points (bps) from May 2022 to October 2023 to tame inflation, bringing the policy rate to a 17-year high of 6.5%.
“Looking ahead, we expect the debt repayment capability of retail borrowers to stay under strain over the medium term from the region’s high rate of interest environment and modest income growth,” it said.
“While declining rates of interest and stable economic conditions will alleviate asset quality pressures, the general risk to every banking system will vary based on risk aspects corresponding to the extent of household indebtedness and buffers maintained by banks.”
The pandemic also weakened households’ financial buffers against future shocks, which might then increase the asset risks of ASEAN banks, Moody’s Rankings said.
“Consequently, the regional average of NPLs within the retail segment, as a percentage of gross loans, has increased from 1.9% to 2.3% from 2019 to 2023 with a lot of the deterioration in Vietnam and the Philippines,” it added.
The newest BSP data showed that the Philippine banking industry’s gross nonperforming loan (NPL) ratio rose to three.59% in August, hitting a fresh two-year high.
Moody’s Rankings also noted that underperforming loans within the retail segment have also increased in Thailand, the Philippines and Vietnam.
“Overall loans in danger… are higher within the Philippines, Thailand and Malaysia, economies which have either higher levels of household leverage or below average household income,” it said.
If NPLs proceed to stay elevated, this might weigh on the asset quality of banks within the region, Moody’s Rankings said.
“Banks in Vietnam and the Philippines have shifted their growth focus towards retail loans, to optimize profits and capture growing credit demand within the segment.”
“In these economies, asset risks from the rapid growth in retail loans will increase because the nominal income of individual borrowers shouldn’t be keeping pace with increases of their debt burdens, while high inflation has eroded real income,” it added.
The report also cited the danger of the next proportion of unsecured retail lending of banks within the Philippines and Thailand.
“In line with the Bank of Thailand, personal loans and bank cards accounted for around 20%-30% of total household debt in 2023 while within the Philippines, bank cards alone formed around 28% of total retail loans.”
“In consequence, banks in these economies will need to take care of more capital given the upper risk weights for these products relative to mortgages. They’d also have to create more provisions for delinquencies given the exposures to those portfolios are typically not collateralized.” — Luisa Maria Jacinta C. Jocson
