Home Banking & Finance Banks’ profits, asset quality to weaken amid subdued outlook

Banks’ profits, asset quality to weaken amid subdued outlook

BANKS will continue to face weak profitability and an increase in soured loans as the pandemic clouds the Philippines’ economic outlook. — BW FILE PHOTO

THE PHILIPPINE BANKING industry will continue to see a rise in bad loans and weaker profitability as the coronavirus pandemic affects the country’s prospects, which could likewise affect its assessment of its rated lenders, Fitch Ratings said.

“The Issuer Default Ratings (IDR) of Philippine banks are sensitive to movements in the sovereign rating… We expect the COVID-19 (coronavirus disease 2019) pandemic will continue to challenge banks’ business prospects, loan quality and profitability over the next 12 months,” Fitch said in a note on Wednesday.

The debt watcher said pressures faced by the Philippine economy and the country’s rating due to the pandemic are key risks to its assessment of the banking sector, and any rating actions for the sovereign could affect banks’ grades as well.

Fitch last month revised its ratings outlook for its covered Philippine banks to “negative” from “stable” to reflect its assessment on the sovereign’s debt.

Its rated banks are government-owned Land Bank of the Philippines (LANDBANK) and Development Bank of the Philippines (DBP) and four commercial lenders: Bank of the Philippine Islands (BPI), Philippine National Bank (PNB), BDO Unibank, Inc. (BDO), and Metropolitan Bank & Trust Co. (Metrobank).

“The pandemic has put a strain on the sovereign rating… The number of new daily COVID-19 infections in the Philippines reached record levels in mid-August, prompting the authorities to reinstate lockdowns in the capital region and in a number of other cities and provinces. Extended mobility restrictions will dampen business sentiment and hamper recovery momentum,” Fitch noted.

“We believe there will be downside risks to the country’s medium-term growth prospects as a result of potential scarring effects, as well as possible challenges to unwinding the exceptional policy response to the health crisis and restoring sound public finances as the pandemic recedes. These factors may pressure the sovereign’s rating, as reflected by Fitch’s decision to revise the Outlook on the rating to Negative from Stable in July,” the debt watcher added.

The debt watcher said the pandemic could have potential scarring effects on the country’s medium-term growth potential and the banking system.

Due to this subdued economic outlook, Fitch said loan growth will likely “remain tepid” this year.

“We believe there could be a robust rebound when the pandemic subsides, due to the low base effect and banks’ appetite for growth. However, the timeframe is uncertain, especially as many large corporates are sitting on ample liquidity,” it said. “Household lending is also likely to remain challenged by the sluggish job market and weak property sector.”

Bank lending declined for the seventh consecutive month in June, although at a softer pace of 2%. Despite record low interest rates, banks remained risk-averse while borrowers veered away from credit due to the uncertainties caused by the crisis.

Fitch said that BDO, Metrobank, and BPI, which all hold a “BBB-” rating from the debt watcher, have “more established franchises, better management and stronger financial performance over time.” It downgraded these banks’ viability ratings to “bb+” from “bbb-” in July, although this was a notch higher than those of PNB, LANDBANK and DBP.

“[A]sset quality and profitability are unlikely to recover to pre-pandemic levels over the next 12-18 months in light of the pandemic’s prolonged economic fallout… We believe these banks maintain better underwriting standards and risk controls, complemented by more proactive credit provisioning, which underpin their stronger asset quality,” it said.

Meanwhile, the debt watcher said its rated state-owned lenders, LANDBANK and DBP, are most likely to receive government support among the six banks due to their full state ownership and their roles in the country’s policies. It particularly noted that LANDBANK has a high systemic importance as the country’s second-largest bank in terms of deposits. — LWTN