Global credit watcher Fitch Ratings said the recent lifting of the interest rate ceiling on credit cards is seen boosting the banks’ net interest margins, which is already projected to rise due to the aggressive monetary policy tightening by the Bangko Sentral ng Pilipinas (BSP) in recent months.
Tamma Febrian and Willie Tanoto, directors for financial institutions and banks at Fitch, said the reversal of the rate cap first implemented in November 2020 should enable banks to apply better risk-based pricing on unsecured lending.
“Credit costs are likely to increase as banks expand in the segment, but we expect them to be manageable amid resilient economic growth in 2023 and to be offset by higher lending yields,” Febrian and Tanoto said.
Last January 13, the BSP Monetary Board raised the maximum interest rate that banks can charge on credit card rollover balances by 100 basis points to three percent from two percent per month or 36 per year from 24 percent.
The temporary cap was introduced in November 2020 to ease borrowers’ debt burden during the pandemic, but has become less relevant with the economy rebounding strongly since, in addition to interest rates that are now above pre-pandemic levels.
The credit rating agency sees the banking sector’s net interest margins rising by another 30 basis points in 2023 from end-September 2022 levels on the 350-basis point policy rate hike since May last year.
Fitch believes the newly announced ceiling could add P30 billion to P40 billion in interest income for the bankings, further widening margins by about 15 basis points.
“This benefit may be partly offset by the rise in credit costs if banks relax their standards or expand their credit card portfolios more aggressively, though we do not expect any increase to be material, provided there is no new shock in the economy, which suggests that the sector’s profitability could marginally surpass our base case,” Febrian and Tanoto said.
Credit card receivables rose to 4.6 percent of total system loans in November last year from 2.8 percent at end 2017, as banks rapidly increased their consumer credit, diversify their loan portfolios and boost returns.
“We expect this trend to continue, potentially raising credit risks in the system, as the product’s sector non-performance ratio of around five percent is nearly double that of business loans,” they added.
