NUMBERS are heartless; but are scary sometimes. P2 trillion and 30 million. The former is the estimated cost to the economy of the coronavirus disease 2019 (Covid-19) pandemic. The latter is the number of Filipinos that government officials said could be out of jobs.
Think about it: the total labor force is pegged at between 40 million to 45 million. The jobless figures could mean more than half of Filipinos aged 15 years old to 65 years old would be unemployed after a 75-day lockdown.
These are not just merely statistics; these figures illustrate the gravity of the pandemic and its impact on businesses and households as the country faces an economic downturn.
For smaller firms, this can mean scaled-down operations—filing for bankruptcy at worst. For low-income households, this can mean drained savings, which ultimately puts stress on their cash flows.
They, along with big businesses, are seeking relief as the flow has been constricted.
The government’s response was the “Bayanihan to Heal as One” Act. The law mandates banks and financial institutions to implement 30-day grace period for all loans with principal and/or interest falling due during the enhanced community quarantine (ECQ). The ECQ, which began mid-March, was extended until May 31.
Government’s move is, however, a double-edged sword: providing relief for the borrowers while constricting the liquidity of banks and financial institutions.
In a battle between showing compassion and staying afloat, the banking industry is trying to find a middle ground to not lose the war.
Delayed payments
THE law, nonetheless, leaves banks to deal with potential impairment loss.
This means a reduction in the carrying amount of an asset—which is loan receivable in this circumstance—due to extension of debt payments, Isla Lipana & Co. Assurance Partner Zaldy D. Aguirre told the BusinessMirror.
“Delayed loan payments can give rise to an impairment loss unless the bank is compensated for the time value of money during the extended payment period,” he said. “Postponing the collection also distorts the cash flows in duration.”
The Isla Lipana official explained that the delay in loan payments can give rise to asset-liability mismatch, leading to concerns over liquidity and adverse impact on income statement.
“Delays in receiving payments for amortization from customers will constrain banks to find funds to offset these obligations as cash flows remain frozen,” ING Bank Manila Economist Nicholas Antonio T. Mapa said in an email to the BusinessMirror.
Along with this, banks will be on the lookout as well for spikes in nonperforming loans (NPLs) as these can burn the bottomline.
The Bankers Association of the Philippines (BAP) has warned that NPLs may surge to approximately P240 billion to P300 billion in the coming months. The BAP also expects that 50 percent to 80 percent, or P120 billion to P240 billion, will be written off.
Expanding NPLs
THE Bangko Sentral ng Pilipinas (BSP), meanwhile, recently forecast that bad loans may reach P556.6 billion this year, or 5 percent in NPL ratio.
According to data from the BSP, gross NPLs of the Philippine banking system stood at P172.38 billion as of February, which is 2.93 percent higher than the P167.48 billion recorded in January.
Gross NPLs, in the past three years, have been growing on the back of increasing loans, averaging at P122.53 billion.
In 2019, gross NPLs rose by 37.89 percent to P156.53 billion from P113.52 billion the previous year. Gross NPLs, meanwhile, stood at P97.53 billion in 2017.
It is more noteworthy, however, that NPL ratio—portion of gross NPL in the total loans—of the local banks has been stable during the period, Aguirre said. This means that the sector has a low exposure to default loans.
He noted that NPL ratio has been below 2 percent for the past three years, among the lowest in the region.
RCBC Chief Economist Michael L. Ricafort noted this was an improvement from 20 percent registered nearly two decades ago.
As of latest data, NPL ratio stood at 1.74 percent in February.
Framework alignment
WITH bad loans on the rise, experts advised banks to be more discerning of the situation.
Mapa said that even borrowers with good credit standing can be cash-strapped due to the pandemic, which obligates the bank to carefully assess the clients’ profiles before tagging a borrowing as NPL or default.
“Banks now have the difficult task of gauging which creditors can remain to be good credit after the lockdown and which ones will truly struggle to make payments,” Mapa said.
Effective communication is key to managing NPLs and maintaining good customer experience during this pandemic, said Alden Basbas, country manager for the local unit of California-based analytics firm Fair Isaac Corp. (Fico), in an email to the BusinessMirror.
This means that banks will be dealing with numerous inbound customer calls, Basbas said, suggesting that automating the process can ease the burden. The Fico country head said that the firm has an artificial intelligence (AI)-driven digital collections system that allows banks to manage the volume and complexity of inbound communications.
He stressed the need to identify “which consumers will catch up with payments and which ones will default.”
Ricafort expressed confidence that local banks are equipped to evaluate credit standing, noting that regulators are requiring them to “have credit risk weights on various loans, depending on the risk profile of borrowers, under the risk-based capital adequacy frameworks that are aligned with global best practices.”
Expanding buffers
PREPARING for the inevitable, banks have been gearing up by increasing buffer for potential loan losses.
“In 2020, due to the pandemic, the banking industry is bracing for a dramatic surge in past due accounts after the moratorium period. This could cause a spike in the NPL ratio as well as sharp increase in loan loss provisions,” Aguirre warned.
Bank of the Philippine Islands (BPI) recently reported that its loan loss provision was increased by more than twofold to P1.8 billion.
Security Bank Corp. set its loan loss buffer at P5.7 billion—already surpassing its 2019 full-year provision of P4.2 billion—in the first three months.
Metropolitan Bank & Trust Co. (Metrobank) allocated P5-billion reserves in the first three months, significantly higher than P2.4 billion for the same period in 2019.
Union Bank of the Philippines (UnionBank) 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. BDO Leasing and Finance Inc., meanwhile, earmarked P29-million provision for credit and impairment losses.
The Philippine National Bank (PNB) said its loan provisions reached P3.4 billion during the period, higher by P3.0 billion compared to the P346 million during the same period last year.
As of writing, other listed banks have not yet disclosed the recent figures of their loan loss reserves.
BSP data show that loan loss provision of the local banking sector reached P181.14 billion as of end-February, higher than January’s P178.42 billion. Provision for potential default rose by nearly 15 percent to P170.52 billion last year from P148.34 billion in 2018. Loan loss buffer was earmarked at P145.84 billion in 2017.
Not last resort
BANKS may opt to facilitate debt restructuring to cut losses from loan defaults.
“Debt restructuring is a strategy to improve the chances of collection, thus, mitigating the risk of the loan defaulting and becoming completely worthless,” Aguirre explained.
He said this process allows extending the terms of the debt and even reducing original interest rate.
Aguirre warned, though, that debt restructuring could drag a bank’s bottomline.
“Accounting-wise, debt restructuring can result in undesirable P&L [profit and loss] effects due to changes in cash flows between the original debt and renegotiated debt unless there is proper compensation for the time value of money,” he said.
UnionBank Chief Economist Ruben Carlo O. Asuncion, in an email to the BusinessMirror, agreed that debt restructuring could ease the consequences of NPLs. Asuncion added that debt restructuring “may potentially help both private companies and financial institutions if done correctly.”
Demand for borrowings
PRIOR to the Luzon-wide lock down, demand for borrowings registered an uptick.
The Central Bank reported that outstanding loans of universal and commercial banks, net of reverse repurchase placements, picked up pace to 12 percent in February from 11.6-percent expansion the previous month.
Majority of the loans—which comprised 86.4 percent of the total—were for production activities, registering 9.4 percent in February from the 8.8 percent notched in January.
The growth was driven by activities from real estate; financial and insurance; electricity, gas, steam and air conditioning supply; information and communication; and construction.
Household loans, meanwhile, slid to 37.7 percent in February from 40.1 percent the previous month, recently adjusted BSP figures showed.
Bank lending even further grew in March at 12.9 percent, according to recent BSP data, driven by loans for production activities.
As of February, total outstanding loans provided by universal and commercial banks stood at P9.88 trillion, a little higher compared to P9.87 trillion a month ago, according to preliminary report by the BSP.
Positive effects
LOOKING at a three-year history, borrowings rendered by the banks have been on an uptrend, averaging at P8.95 trillion, per calculations by the BusinessMirror based on BSP data.
BusinessMirror computations revealed that total loans grew by 14.63 percent to P9.02 trillion in 2018 from P7.87 trillion in 2017. In 2019, this further rose by 10.38 percent to P9.95 trillion year-on-year.
Asuncion attributed the increasing loans in recent years to robust economic growth which encourages and allows businesses to borrow and fund expansion.
“The consequent increase of economic activities does not assure the success of all these expansions. Some make it; and some do not,” he pointed out.
Gross domestic product (GDP) growth last year registered at 6 percent—from 5.9 percent previously—after revising calculations using 2018 as base year instead of 2000. This means that the country’s economic growth has been growing by at least 6 percent since 2012.
Rising demand
ASUNCION said that demand for loans would only surge in the next few months amid lower policy rates.
“With interest rates declining, the expectation is for loans to increase,” he said. “Demand may simply come from the fact that rates are ultra-low.”
The Central Bank recently cut rates by 50 basis points (bp), bringing overnight repurchase rate to 2.75 percent ahead of the May 21 policy meeting. It has also brought down the reserve requirement ratio on reservable liabilities of universal and commercial banks by 200 bp to 12 percent.
Aguirre said that demand for new loans in the coming months are likely to be driven by the micro, small and medium enterprises (MSMEs) to acquire immediate liquidity and address concern on cash flows.
“Due to the ongoing lockdown, most companies are not able to sell their goods and services and collect their receivables, yet they continue to shell out cash for some important bills,” he said. “This condition results in depletion of cash reserves and tightening of liquidity of businesses.”
Expecting improvement
ACCORDING to the BSP’s Senior Bank Loan Officers’ Survey, most respondents were expecting a steady demand for loans coming from firms and household in the second quarter.
Using diffusion index approach—or a condition where there is net tightening of overall credit standards for loans—the BSP revealed a disparity.
Loan demand coming from businesses is expected to improve in the second quarter due to higher working capital requirements, a decrease in internally generated funds and more inventory financing needs.
Demand for household loans, meanwhile, is traversing the opposite path this quarter because of “less attractive financing terms” and availability of other fund sources, the survey noted.
In the first quarter, loan demand for enterprise increased due to higher investment in plant or equipment, lower interest rates and inventory financing needs. Household consumption and housing investment, meanwhile, drove the demand for household loans during the period.
The BSP conducted the survey from February 28 to April 7.
Stable to negative
ULTIMATELY, the pandemic-induced market volatility, coupled with delayed loan payments, can drag the profits of the banks, Aguirre said.
“The grim economic outlook on account of the pandemic is currently rattling the market. Many economies (including the Philippines) are projected to shrink due to reduced consumer spending and slowdown in business activities,” he explained.
GDP contracted 0.2 percent in the first quarter, the first time since 1998, due to the pandemic.
Banks increasing their loan loss reserves did not help either as the move pulled earnings, which is the case for many banks during the first quarter.
Philstocks Financial Inc. Analyst Piper Chaucer E. Tan, meanwhile, noted that he was expecting a U-shaped recovery for banks’ earnings, noting that those with good digital banking and online presence are likely to better weather the storm.
In the first quarter, total earnings of local banks rose by 9.29 percent to P59.66 billion from P54.59 billion the previous year for the same period, according to BSP data.
The banking sector’s profits climbed by 28.35 percent to P230.67 billion last year from P179.71 billion in 2018. The bottom-line of local banks reached P168.07 billion in 2017.
Nonetheless, debt watcher Moody’s Investors Service revised its outlook for the Philippine banking system to “negative” from “stable” in April due to possible decline in profits amid the pandemic.
While it believes most large companies could withstand the disruptions, the prolonged lockdown, however, would be a bane for smaller firms’ debt payment capacity.
Saving on costs
STILL, analysts say robust capitalization can cushion the hits from Covid-19 as well as government measures to contain its spread.
Data from the Central Bank showed that the capitalization of local banks rose by 8.3 percent to P2.32 trillion in March from P2.14 trillion the previous year for same month. Moody’s, meanwhile, said that capitalization of the industry 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.
Still, Aguirre said that banks should focus on cutting costs to improve profitability because they are likely to miss revenue targets this year.
“Potential cost savings can also be derived via simplification of products and services and the underlying processes,” he said, noting that digitalization is one such measure.
“While the digitization program may require sizable initial investments, huge cost savings in the long run can be achieved through reduced manpower requirement in back-office and support functions,” Aguirre explained.
Banks can also rethink their dividend distribution plans for the year to increase capital buffer, he added.
Apart from the banks’ financial position, their share performance has also been affected by the pandemic.
First-quarter bloodbath
THE first quarter was undoubtedly a bloodbath for the local bourse, registering a whopping 32.15-percent drop as the coronavirus pandemic prompted investors to stay at the sidelines.
“As Covid-19 pandemic disrupts our healthcare system, it also [wreaks] havoc [on] our economy not just for the Philippines, but as the global economy actually goes into a recession, ending the economic prosperity and bull run for the market for the past 11 years,” Philstocks’ Tan told this newspaper.
Financial stocks were no exception, he added, noting that this sector was one of the worst performers in the counter during the first quarter.
Tan noted that financial stocks recorded a 34.34-percent drop in shares, the sharpest next to the mining and oil sector at 48.57 percent. Shares in the industrial sector fell by 33.97 percent; property, 33.85 percent; holding firms, 31.07 percent; and, services, 21.99 percent.
In the first quarter, shares in the financial sector bottomed on March 19 when it settled at 1,090.95—just a few days after the lockdown was announced—showing a 15.48-percent plunge from previous trading day.
Reduced strength
THE Philippine Stock Exchange index (PSEi), that day, slipped by 13.34 percent to 4,623.42—its lowest as well for the January-to-March period. The main index was able to inch up to 5,000 after a few days of bargain-hunting.
Financial stocks, prior March 19 were averaging at 1,715.05 while the PSEi was at 7,221.11.
For the rest of the quarter, the average daily posting of the financials counter and the PSEi went down to 1,165.99 and 5,007.57, respectively.
Tracking earlier movement in the first quarter, financial stocks closed at 1,649.56 on February 26 when the PSEi broke below 7,000 for the first time this year. The shares in the financial sector further declined to 1,364.01 when the index slid beneath the 6,000 territory for the first time on March 12.
To recall, financial stocks finished at 1,832.01 while the PSEi ended at 7,742.53 at the first day of trading this year.
Year-to-date, financial stocks and PSEi have gone down by 36.53 percent and 27.33 percent, respectively.
Engaged in tech
WHILE all the financial stocks were in the red during the first quarter, one was able to distance itself from the pack, showing the least decline for the period.
UnionBank was the best-performing in the said counter given the situation, Tan said. It only declined by 7.97 percent in the first quarter, lowest among the financial stocks.
He attributed this to the bank’s “business transformation that has started [in] 2018 by strengthening its online banking presence and rebranding of its banking service.”
“Transformation of its branches, tapping the digital banking and focusing the target market of UnionBank—which is, in the retails side—[are] what I think [account for] why the Q1 [first quarter] performance of UnionBank shot up,” Tan added. The Aboitiz-led bank’s net income soared by 22 percent to P2.6 billion in the first quarter on the back of robust revenue growth.
Meanwhile, Tan said that Security Bank had the steepest decline among financial stocks in the first quarter, falling by 45.13 percent, which he blamed on the massive foreign fund outflows.
“The global sell-off occurred on February 21 when the market went to a free fall, breaking the 7,000-psychological support for the market as Covid-19 cases outside China rose and, weeks later, Philippines reported its first case,” he recalled.
In the first quarter, shares in BDO slid 37.22 percent; BPI, 31.63 percent; China Banking Corp., 19.56 percent; East West Banking Corp., 36.15 percent; Metrobank, 39.67 percent; PNB, 41.88 percent; and, Rizal Commercial Banking Corp., 25.65 percent.
Expect the worse
INVESTORS have become worried over the increase in NPLs as borrowers become cash-strapped since the lockdown was enforced amid the pandemic, Axiory Global Ltd. Director of Research and Education Tomasz Wisniewski said, noting that this weighed on market sentiment in the first quarter.
“Let’s not forget the lack of spending and decreased amounts of loans due to the lockdown. In addition, the pandemic [and the actions of government against it have] caused a huge rise in unemployment, which means individuals and companies are behind on their payments, creating bad loans and that spooks investors out,” Wisniewski told the BusinessMirror in an email.
Tan pointed out that higher NPL is likely should the pandemic linger until the third quarter. However, he emphasized that banks’ balance sheets have remained strong to face the downturn.
Wisniewski noted that interest cuts made by the Central Bank were also a bane for the investors given these could drag banks’ bottom-line figures.
The lower policy rates “will put pressure on [the banks’] NIM [net interest margin] since lower rates, meaning interest payments from loans, will crunch, thus giving narrower NIM’s for the banks,” Tan explained.
Discounted impact
THE Axiory analyst is optimistic that the investors were able to discount already the adverse impact of the pandemic on the financial stocks and local bourse in general.
The shares in financial sector were already battered and it could not get any worse than that, Wisniewski said.
“When the dust settles, many countries will see that the impact of Covid-19 is not as significant as previously assumed,” he added.
In addition, he said that banking and financial institutions could ride the wave once the economy begins recovering.
“Unlimited printing and purchasing programs from major central banks all over the world lead us to believe that the stock exchange has many bullish days ahead.”
For the second half, Tan is seeing a V-shaped recovery for the share price performance as market remains volatile, with any lead about Covid-19 drug or vaccine as a potential positive catalyst.
Optimistic anchors
TAN and Wisniewski both agreed that finding the cure for the virus would be the main catalyst for recovery of the local bourse, including financial stocks.
“[H]aving a vaccine [or] cure for Covid-19 will be a game-changer not just for the economy but for the health care system as well,” the Philstocks analyst said.
Tan added that developments in Wall Street should also be considered because majority of the funds in the local bourse come from foreign inflows. The Philippine stock exchange is taking cues from the US markets, he said, noting that the latter’s market rally could spill over locally through extended investor confidence.
Wisniewski said it would also be helpful if the interest rates would not go any lower.
“For banks and financial institutions this is the ultimate bullish sign that they need,” he said.
This, in addition to borrowers starting to pay back their loans could aid in improving market sentiment, he said.
Monitor liquidity
RCBC’s Ricafort said that banks should continue improving their management of market risks, credit risks and other risks as part of their business continuity plans.
“Thereby ensuring the readiness/preparedness of the banking industry at all times and for different economic conditions,” he added.
The FICO country head said that AI-enabled solutions could help businesses, including banks, to operate more efficiently during the pandemic.
“Businesses will benefit from being able to ramp up quickly, especially while many call centers are disrupted by the lockdown, technology and privacy issues around remote workers and sick staff,” Basbas explained.
Aguirre advised banks to regularly monitor liquidity to ensure there are enough funds to finance both depositors and borrowers.
While banks play a major part in recovery, Mapa is calling for a multisectoral approach to recover from the current economic atrophy.
Only then could the numbers, heartless at times, offer a glint that could lift market confidence.
Image credits: AP/Aaron Favila