Philippine banks could see another year of slow loan growth and uptick in nonperforming loans (NPL) as the Covid-19 risk looms over economic growth and financial markets.
S&P Global Ratings, the world’s leading provider of independent credit risk research, revised its 2020 GDP forecast for the Philippines to 5.8% from 6.2% due to the worldwide spread of Covid-19. This is less of a downward adjustment compared with Asia Pacific countries more exposed to people and supply-chain flows from China. It still has implications for the Philippines banking sector, however. “We expect trade and private investments to slow in the Philippines due to the global coronavirus outbreak, and this will drag on banks’ lending business,” said S&P Global Ratings credit analyst Nikita Anand.
The country’s banks could see a second year of single-digit growth after a long run of double-digit expansions in previous years. In 2019, credit growth slowed to 8.8% compared with 15% in 2018 as corporate loan demand softened due to a delay in passing the national budget and U.S.-China trade tensions. Covid-19’s impact could drag on demand for corporate loans—which make up 82% of the banking system’s loans—and stifle momentum in retail. Retail loans were a key growth driver last year, expanding 16% year-on-year.
The virus outbreak will disrupt travel, hospitality, restaurants, entertainment, and trade sectors short-term. Consumers are likely to avoid public spaces and restrict travel due to the heightened health risk; this, in turn, will hurt consumption spending.
Banking sector NPLs rose to 2.1% of outstanding loans, a 30 basis points (bps) increase during 2019. This was partly due to the large default by Hanjin Industries, as well as a rise in retail loans where credit quality is weaker than corporate loans. NPLs are likely to inch up further this year due to macroeconomic headwinds.
“Banks may offer moratoriums on repayments for badly hit sectors if the health situation escalates, similar to Singapore and Thailand,” noted Ms. Anand.
The local banking industry is believed to be able to manage the risk due to good capital buffers, with an average tier-1 capital adequacy ratio of about 14%. Philippine banks reported an average 20 bps improvement in return on assets to 1.3% in 2019 – despite slower growth – on the back of a 400-bp cut in their reserve requirement ratio and higher trading gains in a falling interest rate environment.
Less vulnerable to Covid-19
The Philippines is less exposed to tourism compared with neighbors such as Thailand and Singapore, where tourism has a large share of the GDP and tourists from China account for a large share of visitors. Tourism-related exports are only 3% of GDP for the Philippines, and less than a fifth of its visitors are from China.
The expected slowdown in global growth, however, could be a blow to trade and private-sector investments in the Philippines. China’s GDP is estimated by S&P Global Ratings to slow to 4.8% in 2020 compared with its pre-outbreak forecast of 5.7%. China contributed 15% of overall trade with the Philippines. Region-wide disruptions to the electronics sector and factory closures in China affecting the supply chain network will slow growth in the Philippines’ manufacturing sector.
There continues to be uncertainty about the rate of spread and timing of the peak of Covid-19, and modeling by epidemiology experts indicates a likely range for the peak of up to June 2020. The global outbreak is assumed to subside during the second quarter of 2020, consistent with the credit risk research provider’s report, “Global Credit Conditions: COVID-19’s Darkening Shadow,” published earlier this month.