Philippine banks will struggle with risks to asset quality going into the first half of 2021, Fitch Ratings said.
“We expect significant credit stress to persist into at least the first half of 2021, but the significant credit provisions that major banks have set aside in the first nine months of 2019 ill provide some buffers,” Tamma Febrian, Associate Director, Banks-APAC (Asia Pacific) and Willie Tanoto, Director, Banks-APAC at Fitch Ratings said in an email to BusinessWorld.
Fitch said in a report on Monday that risks to the rating outlook hound banks in emerging market economies due to the asset quality deterioration caused by the coronavirus pandemic.
“A high 50% of emerging market bank ratings are currently on Negative Outlook, highlighting the risk of downgrades in 2021,” it said.
The debt watcher last month affirmed the ratings and assigned a stable outlook to BDO Unibank, Inc. (BBB-), BPI (BBB-), Metropolitan Bank & Trust Co. (BBB-) and Philippine National Bank (BB). However, it downgraded its rating outlook for China Banking Corp. (BB+) to negative.
Fitch warned that Philippine banks now need to face the consequence of the high credit growth they were seeing prior to the coronavirus disease 2019 (COVID-19).
“Sustained rapid credit growth often mask asset quality issues, and some of the recently disbursed loans may not have long enough of a repayment history to be sufficiently seasoned and are likely to be tested in the current economic downturn,” Mr. Febrian and Mr. Tanoto said.
Credit growth eased to 2.8% as of September, the slowest in more 13 years or since the 2.4% logged in 2007. This, as banks tightened credit standards while borrowers’ confidence remained low due to the pandemic.
As of end-September, banks’ non-performing loan (NPL) ratio reached 3.4%, a seven-year high since the 3.42 in May 2013, data from the Bangko Sentral ng Pilipinas showed.
Lenders prepared for a weakening in asset quality by setting aside higher allowances for credit losses, which surged 60% year on year to P334.57 billion. This took its toll on the banking system’s earnings, which inched down by 3.61% to P126.782 billion in the first nine months of the year.
The BSP expects the NPL ratio to reach 4.6% by end-2020. It reached 17.6% in the aftermath of the Asian Financial Crisis in 2002.
“The significant increase in NPL balances and ratio in recent quarters indicate that risks are materializing for these weaker borrowers and we think that there is more to come, especially after the debt moratoria lapsed by end of 2020,” Mr. Febrian and Mr. Tanoto said.
In Asia, growth opportunities have started to appear in countries that have better control of the pandemic, such as China and some parts of Southeast Asia.
However, banks in the region continue to suffer from weak operating environments brought about by the economic shock of the pandemic, Fitch said.
“Most banking systems have reported deteriorating asset quality and profitability since the onset of the pandemic, but policy responses have limited the impact so far,” it said.
Republic Act No. 11494 or the Bayanihan to Recover as One Act provided for a one-time 60-day loan moratorium following the initial debt relief mandated by R.A. 11469 or Bayanihan I. — L.W.T. Noble