Higher cap on credit card charges to boost banks

THE HIGHER ceiling for credit card charges will support Philippine banks’ net interest margins amid rising rates, Fitch Ratings said. 

Fitch said in a commentary released on Thursday that a higher credit card cap will allow banks to apply better risk-based pricing for unsecured lending.

“The recent lifting of the interest rate ceiling on credit cards in the Philippines will buoy banks’ net interest margins, which we already forecast will rise on the aggressive monetary policy tightening in recent months,” Fitch said.

“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,” it added. 

The Bangko Sentral ng Pilipinas (BSP) has raised the monthly interest rate ceiling on credit card charges by 100 basis points (bp) to 3% from 2% previously. This is to reflect the BSP’s policy tightening and to mitigate the impact of inflationary pressures on banks and credit card issuers.

The BSP hiked its benchmark interest rate by 350 bps in 2022 to a 14-year high of 5.5%.

“We had projected the banking sector’s net interest margins to rise by another 30 bps in 2023 from (end-September) levels on the 350-bp policy rate hike since May 2022. We estimate that the newly announced rate ceiling could add about P30 billion to P40 billion in interest income for the banking sector, further widening margins by about 15 bps,” Fitch said. 

“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,” it added.   

Fitch noted that credit card receivables grew to 4.6% of total system loans as of November 2022 from around 2.8% at end-2017 as banks diversified their loans portfolios.

It expects this trend to continue rising as the product’s sector nonperformance ratio of about 5% is almost double that of business loan. However, this would potentially raise credit risks in the banking system.

It also noted that credit card borrowers in the Philippines have low minimum income requirements, with some smaller banks requiring yearly incomes of just $2,000.

“Nevertheless, we expect the banks’ exposure to the segment to remain manageable in the near term, as corporate finance is likely to remain the core of banks’ portfolios in the conglomerate-driven economy,” Fitch said.

“We also do not expect the policy easing to materially change Fitch-rated privately owned Philippine banks’ risk profiles, which we believe remain more conservative than the sector average, indicated by their significantly better nonperforming loan ratios relative to the industry,” it added. 

It said banks’ Issuer Default Ratings (IDRs) are driven by expectations of state support if needed, which means these are likely to reflect movements in the sovereign rating versus their Viability Ratings in the near term.

The credit rater earlier maintained the Philippines’ long-term foreign currency IDR at “BBB.”

It also kept its “negative” outlook on the country’s credit rating amid concerns over rising interest rates, soaring inflation and slowing global demand and their impact on the Philippine economy’s recovery. — Keisha B. Ta-asan