THE Philippine banking sector could potentially see a significant erosion of asset quality post-pandemic, as the country’s economic resilience to Covid-19-related shocks is now classified as a “very high risk” to the lending industry.
In S&P Global’s recent Asia-Pacific Financial Institutions Monitor for the fourth quarter, the international credit watcher said the economic risk trend of banks in the Philippines has turned negative. In its key banking sector risk assessment, the Philippines’s economic resilience is the biggest risk for banks in the coming years. The Philippines shares the same assessment with Asian countries like Bangladesh, Cambodia, Sri Lanka and Vietnam, whose economic resilience was also rated as a “very high risk” for their banking system.
Also deemed “high-risk” threats to Philippine banks were credit risk in the economy and institutional framework. Competitive dynamics and system-wide funding carry intermediate risks while economic imbalances carry a low risk.
S&P earlier said it expects the Philippines to post a 9.5-percent contraction this year. This is the biggest forecasted contraction in the Asia-Pacific region.
As such, S&P said their overall assessment pointed to higher-than-expected risk of credit losses for local banks, given their expectation of a poor economic performance.
“In our opinion, weak economic activity and tough employment conditions will dilute the Philippine banking sector’s asset quality, earnings, and capitalization over the next two years,” S&P said.
The S&P model shows credit cost—or the ratio of provisions for bad loans—will stay elevated at 1.5 to 2 percent for this year up until 2021.
Also, the credit watcher warned that banks’ nonperforming assets including restructured loans could rise to 5.5 percent up to 7.5 percent of the banks’ total portfolio.
S&P’s forecast is significantly higher than the Bangko Sentral ng Pilipinas’s (BSP) assessment that nonperforming loans will only reach about 4.6 percent of the banks’ total portfolio by the end of the year.
For the rest of the region, S&P said downside risks will continue to dominate this year, and bank recoveries to pre-Covid-19 levels will likely be slow and uncertain.
“A banking sector revival will not just depend on the economic recovery occurring broadly in accordance with our base case. Also key is the nature and extent of the economic damage affecting firms and households prior to the onset of the economic recovery, and the extent to which this will hit banks,” S&P said.
The credit watcher said that in the region, China, South Korea, Singapore and Hong Kong may be among the first in Asia-Pacific to recover to 2019 financial strength, potentially by the end of 2022. Australia, Japan, and Indonesia may be among those to recover next; by year-end 2023.
S&P did not give a forecast on when Philippine banks are expected to regain their pre-Covid performance.
Image credits: Roy Domingo