Banks protecting credit portfolio vs increase in NPLs

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WHILE the fate of the Philippine economy amid the pandemic remains up in the air, the banking sector has taken a measure to protect itself from market volatility by hiking provisions for potential credit loss.

Bankers Association of the Philippines (BAP) President Cezar Consing, in a webinar on Thursday, said that local banks have been increasing their buffer for an expected hike in nonperforming loans (NPLs) due to the economic slowdown forced by the coronavirus disease 2019 (Covid-19) pandemic.

“All you have to look at to see that credit risks are actually rising is … what banks have taken as loan provisions,” said Consing, who is also the president of the Bank of the Philippine Islands (BPI). “They are all taking huge provisions for the potential of NPLs.”

Both local and international banks were gearing up for the expected increase in default, he added.

BPI, for example, recently reported that its loan loss provision was increased by more than twofold to P1.8 billion, prompting its first-quarter earnings to decline.

Security Bank set its loan loss buffer at P5.7 billion in the first three months, which already surpassed 2019 full-year provision of P4.2 billion.

Union Bank of the Philippines accrued P1.3 billion for potential loan losses in January-March period, up by over sevenfold from P174.6 million the previous year.

BDO Unibank Inc. allocated P2.3 billion for potential loan loss in the same period despite a stable gross NPL ratio of 1.3 percent and NPL coverage of 151.4 percent.

BDO Leasing and Finance Inc., meanwhile, earmarked a P29-million provision for credit and impairment losses.

“The banks are trying to figure out what this scenario [pandemic] is going to look like. And to be honest, we don’t know yet. We are only getting an inkling of that after the ECQ [enhanced community quarantine] is lifted [and] businesses go back to work,” he said.

Despite this, the BAP chief said the banking industry can withstand the adverse financial impact of the pandemic given its robust capitalization.

In its latest report, the Bangko Sentral ng Pilipinas (BSP) noted that capitalization of local banks rose by 14 percent to P2.07 trillion in 2018 from P1.76 trillion the previous year. Moody’s Investor Service, meanwhile, said that capitalization will remain stable given that rated local banks have an average common equity Tier 1 capital ratio of 13.7 percent as of end-2019.

BSP moves

Consing, meanwhile, acknowledged that the BSP’s monetary policy moves have been freeing up liquidity in the economy. “All the liquidity bazooka introduced by the BSP is working its way to the banking system and to the borrowing clients,” he said.

The Central Bank recently slashed rates by 50 basis points (bp) ahead of the policy meeting on May 21, bringing overnight repurchase rate to 2.75 percent.

The BSP also trimmed the reserve requirement ratio (RRR) on reservable liabilities of universal and commercial banks by 200 bp to 12 percent, which is seen to release around P180 billion worth of liquidity into the banking system. The Monetary Board said the RRR could be cut by another 200 bp before the year ends.

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