By Melissa Luz T. Lopez
Senior Reporter

SOURED DEBTS held by big banks continued to rise in January, but maintained a modest share even as loans surged by nearly a fifth from last year, latest central bank data showed.

Non-performing loans (NPLs) hit P101.391 billion as the year opened, according to the Bangko Sentral ng Pilipinas (BSP). This spelled a 6.5% increase from the P95.172 billion in bad debts recorded in January 2017, and inched up from the P97.531 billion tally as of end-December.

NPLs refer to debts left unpaid for at least 30 days beyond due date. These are considered as risky assets given the slim chance of borrowers actually settling their outstanding balances.

The slight pickup in bad loans held by universal and commercial banks compares to a surge in total lending, which jumped 18.3% to P7.827 trillion from P6.615 trillion the prior year.

The bad debts only accounted for 1.3% of the banks’ total loan portfolio, a marked improvement coming from a 1.44% share in January last year. This also signalled improving asset quality, as this meant that banks are still able to generate returns from lending activities.

The banks decided to set aside P148.978 billion as reserves versus potential credit losses, which is higher than the P136.929 billion allowance a year ago. The amount is more than enough to cover the entire NPL stash held by the banks as of January, giving lenders a degree of comfort.

On the other hand, non-performing assets held by the lenders steadied at P77.252 billion. This includes real property and other items of value which were seized from clients for failing to pay their dues.

Banks also remained fairly liquid as deposits grew by 13.5% to P10.635 trillion. Loans accounted for just 73.6% of this sum, data showed. Liquid assets also totalled P5.215 trillion.

The BSP requires big banks to set aside 20% of deposits as reserves as a buffer against a potential funding crunch. The figure has been trimmed to 19% effective March, following an “operational” adjustment announced by the Monetary Board last month. This essentially leaves banks room for even greater lending.

Big banks operating in the Philippines raked in a cumulative P146.33 billion in net profits last year, up by 6.8% from the P136.956 billion they made in 2016. This came on the back of a 17.3% increase in bank credit to reach P7.867 trillion.

Still, soured debts settled at just 1.24% of the loan portfolio at P97.531 billion.

The central bank monitors the NPL ratios of banks and financial firms in order to monitor asset quality and maintain the soundness of the financial system.

THE BANKERS Association of the Philippines (BAP) reelected its current president Nestor V. Tan for another term.

In a statement on Tuesday, BAP said Mr. Tan, who is also the president and chief executive officer of BDO Unibank, Inc., will serve another term as the president of BAP.

This will be his third term as the BAP president since his first election to the post in 2016.

During his term, the BAP introduced the central bank-backed Philippine Banking Roadmap, which provided a more convenient and faster way of delivering banking services.

This led to the development of a prototype for a digital banking identification registry, allowing member banks to allow storage and exchange of data.

BAP also adopted the Government Securities Roadmap which made the trading of fixed-income instruments more cost-efficient.

“We have finished the term strong through our collective efforts and partnerships, and we will continue to perform our best in pursuing the road map,” Mr. Tan said.

Looking forward, Mr. Tan added that the association will rationalize and upgrade its utilities and operations and purse industry positions for the welfare of the Philippine banking industry.

Established in 1949, BAP consists of 21 local banks as well as 20 foreign bank branches. — KANV

EQUITY INVESTORS grappling with a technology selloff, trade tensions and hawkish monetary chatter have a new foe to contend with: growing angst in credit markets.

After resisting the full force of the gales that swept through markets earlier this year, corporate bonds are sending ominous messages. Traders are jumping out of the asset class as investment-grade spreads sit near their widest in six months and yields rise to the highest in more than six years — just as stock investors seek to recover from the first S&P 500 correction in two years.

“If credit spreads widen, the equities with bad balance sheets will underperform,” said Louis de Fels, a Paris-based fund manager at Raymond James Asset Management International. “We’re quite cautious on the quality of the assets.”

Corporate bonds held by smart money have historically proven a leading indicator for the direction of stocks. That may spell disappointment for investors heeding Wall Street advice to shift towards equity, a late-cycle outperformer.

“Credit leads equities and will underperform,” said Andrew Brenner, the head of international fixed-income at Natalliance Securities in New York, citing Federal Reserve hikes, signs of softer US output and corporate sales of short-term US debt. “We expect equities to catch up on the downside.”

For now, stock investors appear sanguine. US equity funds took in a record $34.5 billion in the week to March 14, compared to just $2.4 billion for bonds, according to Stanford C Bernstein & Co. That brings the quarterly total for debt funds to $37.3 billion, the slimmest quarterly addition since the three months ending in December 2016, the data show.

Credit softness first emerged in some of the world’s most popular exchange-traded funds (ETF) and has continued to worsen. Short interest on the iShares iBoxx Investment Grade Corporate Bond ETF, ticker LQD, relative to its US equity ETF counterpart is now at its highest on record.

“When we see a widening of credit spreads, it’s always a problem,” said Matt Maley, a Miller Tabak equity strategist. “The cost of carrying leverage goes up and people’s models say that they need to unwind.”

While credit weakness and a junk bond selloff in November proved to be a headfake, “this time around, I’m more nervous about some weakness in investment-grade credit seeping into big-cap stocks,” Peter Tchir, the head of macro strategy at Academy Securities Inc., wrote in a note.

The telltale sign? Underlying corporate bond spreads have widened while credit default swaps have stayed largely steady. Higher dollar funding costs are now beginning to curb appetite for credit risk — a bearish signal missing from derivatives, for now likely thanks to technical factors, Tchir noted.

Add weakness in the primary market, and pressure on credit markets is likely to endure, he said. That increases the prospect of a risk-off trade that would weaken stocks and lift government bond prices.

In any case, equity investors had better make peace with cracks in credit markets and any ensuing increase in debt financing costs for companies.

Money managers in high-grade credit have pared their exposure to the lowest since October 2010 as they brace for interest-rate increases, according to a Bank of America Corp. survey this month. Funds that reported inflows fell to a net 29%, the lowest in two years, the survey found.

“We are seeing clear signs that US credit is in the midst of the transition away from global QE as inflows to high-grade continue to decline,” strategists at the bank led by Hans Mikkelsen wrote in a note Sunday. — Bloomberg