NPL ratio could double to 4-5% due to faltering economy – S&P
The banking industry’s non-performing loan ratio (NPL) could hit 4-5% due to the pandemic, which has weakened businesses and thrown many out of work.
“In our base case, we assume the NPL ratio for the Philippine banking system could double to 4%-5% from current levels,” Nikita Anand, analyst at S&P Global Ratings said in an e-mail.
Ms. Anand said both businesses and households will be hurt by the crisis, which in turn will raise bad-loan levels.
“We expect businesses and consumers to feel the pain from a weak economy, higher unemployment, and lower remittances from overseas Philippine workers,” she said.
FTamma Febrian, associate director of the Financial Institutions Group at Fitch Ratings, said segments such as the micro-, small, and medium-sized enterprises and consumer lending are “at most risk of deterioration.”
“We’re also closely monitoring the real estate sector, which will also be affected by weakened consumer spending and higher unemployment and is sensitive to dynamics in the POGO (Philippine Offshore Gaming Operators) sector,” he added.
According to the Bangko Sentral ng Pilipinas (BSP), te industry’s NPLs in May rose to 2.43% from 2.31% in April.
“The slight uptick in NPLs may be traced to borrowers from the real estate industry and individual borrowers who availed of motor vehicle loans,” BSP Managing Director for Policy and Specialized Supervision Lyn I. Javier said in an e-mail.
“This may be expected as there were minimal real estate business activities during the enhanced community quarantine and households’ paying capacity was impaired by the work and travel restrictions,” she added.
The bad loan ratio peaked at 17.6% in 2002 in the aftermath of the Asian Financial Crisis.
“We recognize that the COVID-19 pandemic may exert pressure on the current quality of bank loan portfolios, but we expect the impact to be manageable due to the banking system’s preparedness,” Ms. Javier said.
As of the end of 2019, the industry’s capital adequacy ratio was 15.4% on a stand-alone basis and 16% on a consolidated basis, which are both beyond the 10% minimum requirement by the BSP.
“Compared to regional peers, Philippine banks entered the pandemic with relatively strong asset quality and good loan-loss coverage, which has provided the banks adequate buffers to absorb further loan deterioration.” Joyce Ong, an analyst at Moody’s Investors Service, said.
Banks have also increased loan provisioning in the first quarter to factor in the potential fallout from the pandemic.
In May, bank allowances for credit losses rose 26.7% year on year to P253.4 billion
“In our opinion, Philippine banks’ good capital position and provisioning for NPLs put them on a relatively strong footing to manage rising risks from the economic slowdown driven by COVID-19,” Ms. Anand said. — Luz Wendy T. Noble
