Banks’ recovery seen beyond 2022

S&P Global Ratings expects the Philippine economy to contract by 9.5% this year. — PHILIPPINE STAR/ MICHAEL VARCAS

By Luz Wendy T. Noble, Reporter

THE Philippine banking industry may recover to pre-pandemic financial strength after 2022, although this will depend on the extent of the economic fallout from the coronavirus crisis, S&P Global Ratings said.

At the same time, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the local banking industry continues to have sufficient buffers to ensure its stability amid the crisis.

“The BSP’s stress tests point to favorable banking system prospects amid risks. Results show NPLs (nonperforming loans) will remain manageable, CARs (capital adequacy ratio) will stay above the 10% requirement, liquidity will be sufficient, and profitability will stay intact,” Mr. Diokno said in a speech at Standard Chartered Bank’s Sovereign Investor Forum held on Oct. 15.

S&P said downside risks dominate the Asia-Pacific banking industry for the rest of the year, as recovery will likely be slow and uncertain.

“The Philippine banking sector’s recovery to pre-COVID levels will stretch beyond 2022 like Australia, Japan and Indonesia, noting Philippine banks’ fairly strong performance prior to the crisis,” S&P analyst Nikita Anand said in an e-mail to BusinessWorld on Monday.

In a separate note, S&P said banks in China, South Korea, Singapore and Hong Kong may be among the first to recover to 2019 financial strength, but not before end-2022.

“We anticipate much uncertainty on the recovery pathway. A banking sector revival will not just depend on the economic recovery occurring broadly in accordance with our base case. Also key is the nature and extent of the economic damage affecting firms and households prior to the onset of the economic recovery, and the extent to which this will hit banks,” the debt watcher said.

For the Philippines, S&P reiterated that the economic risk trend for banks has turned negative.

“We believe the risk of credit losses soaring for Philippine banks is higher than we previously expected, given our view that the economy will contract 9.5% in 2020, compared to our earlier forecast of a 3% dip. In our opinion, weak economic activity and tough employment conditions will dilute the Philippine banking sector’s asset quality, earnings, and capitalization over the next two years,” S&P said.

This year, S&P expects the country’s gross domestic product (GDP) to contract by 9.5%, before growing by 9.6% in 2021. This compares with the government’s projection of -4.5% to -6.6% for 2020 and a growth of 6.5% to 7.5% next year.

“If the recession were more severe than our current expectation of 9.5% contraction or lasts longer, then it could cause further deterioration in banks’ financial profiles,” Ms. Anand said, noting stress in large corporates may further weaken banks’ asset qualities although it is not a base case scenario.

On the other hand, a faster rebound in consumption could accelerate the banking sector’s recovery, she added.

S&P last week revised its outlook to “negative” from “stable” for Bank of the Philippine Islands and Security Bank Corp., suggesting a rating downgrade within the next six months to two years.

“In our base case, credit costs (the ratio of provisions for bad loans to total loans) will stay elevated at 1.5%-2% in 2020 and 2021,” S&P said. “We estimate nonperforming assets (including restructured loans) for the sector could rise to 5.5%-7.5% of total loans, from 4.6% as of August 2020).”

Latest BSP data showed gross bad loans climbed 35% to P305 billion in August from P225.904 billion a year ago due to the impact of the pandemic on households and businesses. This caused the NPL ratio to hit 2.84%, the highest since the 2.87% logged in February 2014.

“We may see an uptick in the NPL ratio in the coming months as a result of the crisis, but we expect the increase to be manageable,” Mr. Diokno said.

He also noted NPL coverage ratio stood at 107.4% as banks beefed up loan loss provisions.

The local industry’s NPL ratio peaked at 17.6% in 2002 in the aftermath of the Asian financial crisis. The BSP expects the industry’s bad loan ratio to reach 4.6% by end-2020.

Mr. Diokno said banks’ capitalization is its safeguard despite headwinds caused by the pandemic.

The local banking industry’s capital adequacy ratio was at 15.3% on a solo basis and at 15.9% on consolidated basis as of end-March, going beyond the 10% minimum set by the BSP and the 8% under Basel requirements.

“This shows banks have ample capacity to absorb shocks,” Mr. Diokno said.