THE Philippine banking sector is anticipating further deterioration in asset quality until next year as increasing bad loans hurt the borrowings portfolio.
According to Fitch Ratings director for Asia Pacific-Banks Willie Tanoto, the local financial system is seen to endure heightened nonperforming loan (NPL) ratio until 2021.
“Yes, we see asset quality weakening in the Philippines into 2021 and we expect the system NPL ratio to rise to at least 3 percent this year and to stay elevated next year, depending on how the pandemic and economic situation pan out,” he explained in an e-mail to the BusinessMirror.
The local banking industry’s current NPL ratio is nearing Tanoto’s projection for the year. According to the latest preliminary data from the Bangko Sentral ng Pilipinas (BSP), gross NPL ratio stood at 2.53 percent as of end-June.
S&P Global Ratings analyst Nikita Anand told this newspaper that the consumer and micro, small and medium enterprises (MSMEs) borrowings are likely to drive higher bad loans in the coming quarters. Earlier, she said that the local banking system’s NPL ratio could reach 5 percent.
Anand, on the other hand, explained that large conglomerates could remain relatively robust on the back of “good liquidity and access to funding.”
Nevertheless, she added, “we expect sectors like transportation, especially airlines, hotels, restaurants, non-essential retail, manufacturing and construction—which were badly hit by the pandemic—to be under pressure, as earnings recovery will take some time.”
Higher credit impairment, according to Tanoto, was only expected as the economy battles with recession and a major surge in joblessness in the past months.
The Philippines registered contractions in gross domestic product in the first two quarters, booking an average 9-percent decline in the economy for the first half.
Meanwhile, the latest labor market report revealed that 7.3 million Filipinos were unemployed as of April as many struggle to keep their jobs amid the lockdown measures. The Philippine Statistics Authority will be presenting the latest figures on the matter this week.
Citing a survey, BSP Governor Benjamin E. Diokno earlier said that NPLs are expected to double to 4.6 percent by the end of this year.
Debt moratorium
Joyce Ong, Moody’s Investors Service-Financial Institutions Group analyst, told the BusinessMirror in an e-mail that the lifting of grace period on loan principal and interest payments can result in more NPLs surfacing.
“We expect NPLs will continue to increase through early 2021 as problem loans materialize following the lifting of moratoriums in June,” she said. That was the time when many areas in the country shifted to general community quarantine, effectively ceasing the debt moratorium.
However, a longer grace period could also further increase the banks’ exposure to credit risks, Ong explained.
“At the same time, any further debt moratoriums would lengthen the asset quality down-cycle and further increase banks’ credit risks,” she said.
The discussion on Bayanihan to Recover As One Act or the Bayanihan II, which includes a 60-day debt moratorium, is nearing conclusion.
Previously, a yearlong grace period was proposed, which the BSP and organizations like Bankers Association of the Philippines and FintechAlliance.ph opposed.
All were concerned over the impact of the longer moratorium on the banking system’s liquidity.
Gearing up
The Fitch Ratings analyst observed that the local banks have been beefing up provisions against potential credit losses.
“The major banks have been guiding for higher NPL ratios and their setting aside much higher credit provisions in the first half indicates that they, too, anticipate loan losses to climb,” Tanoto said.
The banking industry in the first semester booked allowance for credit losses amounting to P300.35 billion, which is nearly P100 billion more than last year’s figure.
Major banks have shown decline in profits as a result of heavy provisioning. In the first half, the banking sector saw its net earnings drop by 22.46 percent to P86.05 billion from last year’s P110.97 billion.
Meanwhile, Anand pointed out that the “Philippine banks’ good capital positions and upfront provisioning in the first half of 2020 will partly mitigate the rising risks in the operating conditions.”
Capital adequacy ratio of the local banks stood at 12.73 as of end-June. It is above the minimum regulatory requirement.
NPLs grew nearly 27 percent to P273.6 billion as of end-June from P215.91 billion in the previous year for the same period. This, as total borrowings in the first half inched up by 5.15 percent to P10.82 trillion year-on-year.