LOCAL lenders believe they are well-equipped to handle the economic fallout of movement and operational restrictions due to the pandemic, as they continue to have adequate loan loss provisions, capital and liquidity nine months into the global health crisis.
In a recent Bangko Sentral ng Pilipinas (BSP) survey, most bank industry leaders said they intend to keep important bank health gauges within local and international standards in the next two years.
“The Philippine financial system is projected to withstand the legacy risks and challenges posed by the Covid-19 pandemic within the next two years on account of its relatively stable and sound capital, leverage and liquidity buffers, ample loan loss reserves and buoyant earnings performance,” the BSP said in a statement.
In the survey, banks said they will still be able to set aside loan loss provisions despite the pandemic’s hampering their operations.
“This is important because the projected NPL coverage ratio will indicate the banks’ perceived ability to absorb future losses,” the BSP said.
About 44.3 percent of banks in the country said they project their NPL coverage ratio of between 51 and 100 percent while 48.9 percent said their NPL coverage ratio will likely be less than or equal to 25 to 50 percent of total NPLs.
NPL are also known as soured loans, as these are credits that remain unpaid 90 days after their due date while NPL coverage ratio is the amount of provisions banks set aside to cover for unpaid loans so their balance sheets and operations won’t be gravely affected by the consumers’ inability to pay.
Broken down, 85.7 percent of universal and commercial banks expect the NPL coverage ratio to hover between 76 percent and 100 percent. Meanwhile, around 88.9 percent of thrift banks said their NPL coverage ratio will be 26 percent and 100 percent in the next two years. Meanwhile, 86.1 percent of rural and cooperative banks are tilted towards the NPL coverage ratio range of less than or equal to 25 percent to 75 percent.
Banks also expressed determination to keep their capital levels high despite expected losses due to the effect of pandemic-induced restrictions.
“Cognizant of the importance of capital to protect the banks from unexpected losses, the Philippine banking system has been maintaining risk-based capital at levels higher than domestic and global standards, and intends to do so in the next two years,” the BSP said.
The BSP maintains a Capital Adequacy Ratio (CAR) standard of 10 percent while global standards are lower at 8 percent.
The survey revealed that the projection of CAR is more prudent for this year as 80.5 percent of the respondents expected their CAR to hit more than 14 percent. The BSP also reported that industry data showed that banks’ CAR consists mostly of high-quality common equity Tier 1 (CET 1) capital.
The survey also revealed that banks are seeing no problems in their liquidity profiles amid the pandemic. Bank leaders also expect strong liquidity positions to be maintained up to 2022 as banks continue to project healthy liquidity metrics under the Basel III liquidity coverage ratio (LCR) and the respective metrics for universal, commercial, thrift, rural and cooperative banks.
The LCR mandate of the BSP requires local banks to hold sufficient High Quality Liquid Assets (HQLAs) that can be easily converted into cash to service liquidity requirements over a 30-day stress period. This provides banks with a minimum liquidity buffer to be able to take corrective action to address a liquidity stress event.
“[These] liquidity buffer serves as defense for banks to thrive amid a volatile market environment while enabling them to take advantage of business opportunities presented by the growing economy and the country’s pursuit of better infrastructure to support domestic economic expansion,” the BSP said.