Philippine banks in the time of Covid-19

IN times such as these, everyone is trying to figure out what is happening and what the future will hold. This includes disciplines from psychologists to transportation analysts and everything in between. But the truth is that almost everyone knows nothing, and almost everything is just a guess.

Obviously, at the forefront are those in all aspects of the medical profession, followed closely by those wanting to decipher the economics of the Covid-19 pandemic. One group that completely knows the situation is the conspiracy theorists. Are we sure that this is not a prelude to an invasion by a nasty group of outer space aliens intent on taking over planet Earth?

On the economic front, at least there is a little hard evidence that we can deal with. If a nation’s businesses are nearly all closed, it is easier to peek into the economic future. If the largest mall operator in the Philippines has about 85,000 direct employees and many malls are closed, the economic multiplier effect is fairly easy to calculate.

However, the two current unknowns are the questions of how long the business shutdown will last and how long it will take to get the economy running near full speed again.

The most critical foundation of an economy alongside the government is the banking system. Businesses and consumers need banks, and banks need their business and consumer-clients to make profits. Government fiscal and monetary policies can help improve economic conditions. But no government can force you to buy that new refrigerator or get a bank to loan money to a potentially failing business even in these times.

The financial services company Moody’s Investors Service is one of the “Big Three” in the field of ascertaining the health of the banking industry. Moody’s outlooks for the Australian, Chinese, Indian, Indonesian, Korean, Malaysian, New Zealand, Philippines, Singapore, Taiwan, Thailand and Vietnam banking systems are now changed to “negative.” But what the “outlook” means must be fully understood.

While Moody’s is certainly considering the underlying financial stability and condition of the bank, it is the operating concerns that are potentially most important.

There are several key points for the Philippine banks. “Operating environment will weaken. The coronavirus outbreak will result in a material slowdown in economic growth in 2020.” That is self-explanatory, as lending will be reduced.

Further, as a result of the economic slowdown, “asset quality will deteriorate as economic growth slows sharply. Key asset risks stem from concentrated exposures to large domestic conglomerates.” Missing, though, is the fact that our large conglomerates are part of the mother companies that own the largest banks.

But some, if not many, second-tier borrowers from the SME level will experience problems in repaying loans. Yet the banking system is strong because of conservative lending practices, current low levels of nonperforming loans, and “capitalization will be stable at strong levels even as growth in both retained earnings and loan growth slows.”

While profits are going to be negatively affected, “Philippine banks’ credit costs have been among the lowest in Asia, benefiting from healthy economic conditions.” Also, “Government support will remain strong, prioritizing systemic stability and support for rated banks when needed.”

Philippine banks will remain strong, but it certainly would help if you start looking at new refrigerators once the lockdown is lifted.

Image Credits: Jimbo Albano