THE BANKING INDUSTRY may see slower loan growth and an uptick in bad loans amid the economic impact of the coronavirus disease 2019 (COVID-19), with their credit ratings also likely to take a hit along with other banks in the region, according to S&P Global Ratings.

In a note sent to reporters on Monday, S&P noted banks’ exposure to the most vulnerable sectors that will be hit by COVID-19.

“We expect trade, tourism, private-sector investment and consumption in the Philippines to be affected. This will drag on banks’ lending,” S&P said.

Local lenders will not be spared from the COVID-19 risks that will affect Asia’s banks, according to the global debt watcher. Across the region, S&P estimates that nonperforming assets and credit losses will hit $600 billion and $300 billion, respectively, due to the pandemic, paired with oil price shocks and market volatility.

“Region-wide disruptions to the electronics sector and factory closures in China affecting supply chains will also slow growth in Philippine manufacturing (10% of banking sector’s loans),” it said.

“While many Asia-Pacific banks will exhibit resilience, negative rating momentum is inevitable,” it said.

Moody’s Investors Service and Fitch Ratings last week downgraded their outlook on the Philippine banking sector to “negative” from “stable,” saying the Luzon lockdown will hit banks’ assets and profitability.

In the report, S&P noted the regulatory relief extended by the Bangko Sentral ng Pilipinas (BSP) to lenders as the government imposed a lockdown in Luzon, which has caused business disruptions.

“We believe these measures will alleviate pressure on the banks but also delay the true recognition of bad loans,” S&P said.

Among the relief measures available to banks are the staggered booking of allowance for credit losses, non-imposition of penalties on legal reserve deficiencies, non-recognition of certain defaulted accounts as past due, a higher single borrower’s limit of 30% (from 25%) and the removal of penalties for reserve deficiencies, among others.

S&P said they see banks’ bad loans and credit costs rising by about 50 basis points (bps) to 2.7% and 1%, respectively, this year.

This will be fueled by more soured debt from industries such as hotel and catering, wholesale and retail and transport, where the banking sector’s exposures amount to two percent, 12% and three percent, respectively.

“We note that moratoriums and regulatory forbearances should stabilize borrowers’ creditworthiness and prevent some defaults,” S&P said.

Despite the possibility of higher bad loans and credit costs, S&P said local lenders have enough buffers to withstand risks from the pandemic.

“Philippine banks have good capital buffers, with an average Tier 1 capital adequacy ratio of about 14%, and this will help them manage the rising risks,“ it said.

The report also noted that the BSP could ease key rates further following the 75 bps in cuts it implemented in the first quarter.

After a 25-bp rate cut in February as a preemptive measure amid risks from the COVID-19 outbreak, the BSP slashed policy rates by 50 bps in March as the country saw more infections, which caused the government to place Luzon under a month-long lockdown, which is seen as a major risk to growth prospects.

This brought the overnight reverse repurchase, lending and deposit rates to 3.25%, 3.75%, and 2.75%, respectively.

“This will support borrowers’ credit quality. However, the pressure on net interest margins will weigh on banks’ profitability, as will higher credit costs,” S&P said. — L.W.T. Noble

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