AN international credit watcher warned last Tuesday of “diminished revenue growth opportunities” and “worsening non-performing loans ratio” for Philippine banks as the economy continues to grapple from its recession.
Fitch Ratings Inc. cautioned that the prolonged downturn of the Philippine economy is expected to put pressure on local banks’ near-term business prospects and credit profiles.
“Banks face a challenging operating environment as the country enters a second year of heightened unemployment and economic downturn,” Fitch Ratings said in a statement. “This is reflected in significant deterioration in banking asset quality and very high credit costs over the past year, and a muted profitability outlook over the next 12 to 18 months.”
“Most of the major Philippine banks have weathered the crisis relatively well so far; but their viability ratings may come under pressure as the slowdown increasingly proves to be protracted,” it added.
Local banks will particularly be hit, according to Fitch Ratings, as the weaker economic outlook translates to diminished revenue growth opportunities for banks as credit demand remains muted and asset yields are capped by excess liquidity amid a dovish monetary policy.
Fitch Ratings also said revenue tail winds that underpinned banks’ pre-provisioning profits in 2020 are dissipating.
“We expect revenue growth to be lackluster until at least mid-2022,” the credit watcher said.
Apart from low revenues, Fitch Ratings said banks will also likely be burdened by larger non-performing loans (NPLs).
“We expect the system’s non-performing loan ratio to worsen to nearly 6 percent by end-2021 from 4.3 percent at end-March. Consumer and business sentiments remain dampened by high coronavirus infection rates and consequent social distancing measures, and we expect more business failures in the mid-market segment,” Fitch Ratings said.
The Philippine economy plunged into recession in 2020 due to the disruption caused by the global health crisis. Last year, the country’s gross domestic product shrank by 9.5 percent on average. For the first quarter of the year, the economy remained in recession with a contraction of 4.2 percent.
Fitch’s research unit, Fitch Solutions, also earlier cut their 2021 growth projection for the country again from 5.8 percent down to 5.3 percent. Just last month, Fitch Solutions already cut its previous forecast of 7.6 percent down to 5.8 percent.
On top of that, Fitch Ratings noted that the country’s unemployment rate continues to be the highest in Southeast Asia at 7.1 percent as of March.
“Economic performance has lagged regional peers’ since 3Q20 [third quarter of 2020] and fell short of our expectations in the past year. Fitch now expects a considerably shallower economic recovery in 2021 than in the early stages of the Covid-19 pandemic,” the credit watcher said.