PROFITS and loans of Philippine banks will likely continue to grow as the economy recovers from the coronavirus pandemic, S&P Global Ratings said in a report on Thursday.

The banking sector is also seen to remain resilient amid shocks on the back of their strong capital positions, the ASEAN+3 Macroeconomic Research Office (AMRO) said in its annual consultation report on the Philippines for 2021.

“We forecast credit growth of 5-7% following better economic growth. Any reduction in banks’ regulatory reserve requirement could push credit growth toward the higher end of our forecast,” S&P Primary Credit Analyst Nikita Anand said in a report published on Thursday.

“Sector-wide profits are likely to return to pre-pandemic level in 2022, with the sector’s return on average assets increasing to 1.2-1.3%. This is on the back of higher credit growth, margin improvement from expected policy rate hikes, and lower credit costs,” Ms. Anand said.

S&P expects the economy to grow by 6.5% this year from 5.6% in 2021, which Ms. Anand said will support the banking sector’s continued recovery.

“The sector’s good capital position (16.4% Tier-1 ratio) and provisioning cushion against any moderate rise in credit stress from higher inflation and a rising interest rate environment,” she added.

S&P expects banks’ credit costs to drop to 0.6-0.8% of gross loans in 2022 from 0.9% in 2021 amid lower bad loans.

“By our estimates, the nonperforming loan (NPL) ratio has peaked and will continue to gradually decline to 3.8% by end-2022. This is because most weak loans have either been recognized or restructured,” Ms. Anand said.

She said these restructured loans, especially those from the services sector, pose a risk of slippage in bad loans, but banks’ disposal of NPLs to asset-management companies under the Financial Institutions Strategic Transfer Law could bring down the level of soured debt.

Banks’ loans expanded by 7.3% to P11.44 trillion as of May from P10.66 trillion a year ago. It also edged up by 0.4% from the P11.39 trillion seen at end-April, latest central bank data showed.

Meanwhile, the sector’s gross NPL ratio stood at 3.75% in May, falling from 4.49% a year ago and 3.93% in April.

Bad loans declined by 10.5% to P429.106 billion as of May from P479.481 billion a year ago. It was also 4.09% lower than P447.438 billion seen at end-April.

Loans are considered nonperforming once they are unpaid for at least 30 days after the due date.

Over the next year, higher inflation and rising rates could dampen demand for loans and increase defaults among consumers and small businesses, Ms. Anand said, but noted these risks are manageable.

“Banks will continue to increase investments in digital initiatives to

fend off competition from digital players set to launch their operations this year. Large universal and commercial banks should be able to defend their market share, given their wide resources and longstanding customer relationships,” she added.

The Bangko Sentral ng Pilipinas (BSP) last week raised benchmark interest rates by 75 basis points (bps) in a surprise move, bringing cumulative hikes for the year so far to 125 bps.

It is expected to continue its tightening cycle as it seeks to rein in rising inflation, which hit a near four-year high of 6.1% in June, bringing the first-half average to 4.4%. The BSP expects inflation to average 5% this year, above its 2-4% target.

STRESS TESTS
Meanwhile, AMRO report said results of a stress test showed that while credit losses of selected Philippine banks increase across various hypothetical scenarios, their strong capital positions make them resilient to shocks.

In the stress test, AMRO designed three adverse scenarios against its baseline macroeconomic outlook based on an International Monetary Fund template using a balance sheet approach: a recession, which assumes the nominal gross domestic product growth is two standard deviations below the baseline this year; an interest rate hike, as the short-term interest rate increases two standard deviations above the baseline; and a combined shock where scenarios the first two take place at the same time.

The stress test covered 17 banks whose loans make up over 50% of their assets. Big banks included were: BDO Unibank, Inc.; Bank of the Philippine Islands, Metropolitan Bank & Trust Co.; and Philippine National Bank.

There were eight medium banks included: Asia United Bank Corp.; Bank of Commerce; China Banking Corp.; East West Banking Corp.; Philippine Savings Bank; Rizal Commercial Banking Corp.; Security Bank Corp.; and UnionBank of the Philippines, Inc.

Lastly, five small banks were covered: CTBC Bank (Philippines) Corp.; Philippine Bank of Communications; Philippine Business Bank; Sterling Bank of Asia; and Robinsons Bank Corp.

AMRO said the results showed credit losses increase “significantly” under the recession and combined shock scenarios and “moderately” under the interest rate hike shock.

“Due to the economic recovery, the aggregate NPL ratio for the selected banks is expected to improve to 2.93%, from 4.34% in 2020 under the baseline scenario. The NPL ratio increases significantly by more than one percentage point to 4.04% in response to the recession shock. In the combined shock, the NPL ratio increases by another 42 basis points to 4.46%,” AMRO said.

“By comparison, the impact of the interest rate shock is milder, and the NPL ratio rises by only 31 basis points to 3.24%… The results suggest that the credit quality of Philippine banks is more sensitive to economic growth,” it added.

As for asset quality, AMRO said the banking sector remains resilient to shocks, with only one small-and-medium-sized bank failing to meet the regulatory minimum Tier 1 capital in the recession and combined shock scenarios.

“As shown in the forward-looking stress test results, all the selected banks are able to maintain their CARs (capital adequacy ratio) above the minimum regulatory requirement of 10%. The post-shock CAR is above 15% for all the selected banks at the aggregate level. For the Tier 1 ratio, only one small-and-medium-sized bank needs to increase Tier 1 capital to meet the minimum requirement of 7.5% under scenarios assuming economic recession,” it said.

“In contrast, the aggregate Tier 1 capital ratio of all the selected banks is still above 14% under shocks. The results confirm the resilience of Philippine banking system, because the sector as a whole could maintain stable CAR amid the pandemic, despite a few small and medium-sized banks being vulnerable,” AMRO added.

It said small- and medium-sized banks “need more attention” from the BSP “as they have less buffers and are less resilient to shocks, with relatively vulnerable balance sheets”, especially those focused on the sectors most affected by the pandemic, like trade, tourism and small firms.

“[The] BSP can consider strengthening the resilience of small- and medium-sized banks by providing guidelines and support for their recovery and potential resolution. This measure would minimize risks posed by any bank to the financial system, given that there might be a few small and medium-sized banks with relatively vulnerable balance sheets,” AMRO said.

It also recommended that the BSP provide banks guidance on formulating forward-looking risk assessment and management schemes so they can identify and deal with vulnerable borrowers and potential credit losses early. These measures could include requiring higher risk provisioning and retained earnings during crises.

“Furthermore, the BSP can enlarge the regulatory policy space to mitigate adverse effects of the potential shocks… Finally, strengthening the role of the credit bureau that consolidates the loan information of borrowers would enhance banks’ ability to conduct a comprehensive assessment of leverage,” AMRO said.

“In conclusion, while the stress-test shows that the Philippine banking system is quite resilient to shocks, there is room for more policies to support small and medium-sized banks as well as enhance the banking sector’s risk assessment and management,” it added. — KBT