Debt watchers flag risks from consumer, SME loans

By Luz Wendy T. Noble, Reporter

THE asset quality of local banks is expected to deteriorate in the coming months, as the consumers and small businesses struggle during the economic slowdown, global debt watchers said.

“The Philippine banking sector’s asset quality is likely to deteriorate amid the economic slowdown, weighing on profitability. Consumers and businesses will feel the pain from a weak economy, rising unemployment, and declining remittances from overseas…. We expect the consumer and SME (small and medium enterprises) loan portfolios to contribute to higher NPLs (nonperforming loans) in the coming quarters,” S&P Global Ratings said in a report.

In a separate note, Fitch Ratings noted the Philippines saw rapid loan growth in the last decade “which will now put the quality of lending over the period to the test, especially in the more vulnerable consumer and SME segments.”

Gross NPLs in the local banking industry climbed by 32.1% to P290.1 billion in July, data from the Bangko Sentral ng Pilipinas (BSP) showed, bringing the gross bad loan ratio to a six-year high of 2.67% as of end-July.

The country’s jobless rate was at 10% in July, equivalent to 4.571 million unemployed Filipinos.

Remittances are also taking a beating as more Filipino workers are repatriated. Year-to-date remittance inflows fell by 2.4% to $16.802 billion in the first seven months of 2019.

“Support measures from the government and the central bank should reduce the risk of defaults. Forbearance on loans will provide a breather, especially for rural and thrift banks that typically lend to weaker quality borrowers,” S&P said.

The central bank has been encouraging lenders to support small businesses through regulatory relief measures — this includes allowing MSME (micro-, small-, and medium-sized enterprise) loans as alternative reserve compliance and reducing the credit risk weight for borrowings disbursed to the sector.

“We expect large conglomerates, which account for the bulk of the banking sector’s loans, to weather the challenging operating conditions because of their strong business profiles, diversified revenue streams, solid liquidity buffers, and moderate leverage,” S&P said.

However, S&P warned a deeper recession could mean bigger damage for Philippine banks.

“A longer or deeper economic slowdown in the Philippines than our current forecasts could set off a sharper deterioration in the banking sector’s asset quality due to potentially higher large corporate defaults,” it said.

S&P expects the economy to shrink by 9.5% this year, much steeper than the 4.5% to 6.6% contraction estimate by the government.

HIGH CREDIT COSTS
Most banks in emerging markets in the Asia Pacific (APAC) have seen an increase in credit costs as of end-June, with the Philippines seeing the steepest rise, according to Fitch.

“This partly reflects the severe economic impact the pandemic has had in the country,” Fitch said.

In July, banks’ provision for credit losses surged by 59% to P321.85 billion from the P202.22 billion they have set aside in the same month of 2019.

Fitch pointed out Philippine banks opted to have general provisioning rather than specific provisioning for loans that are already underperforming.

“The rise in general provisioning is a reflection of banks preparing themselves for tougher times ahead,” Dan Martin, Regional Credit Officer for APAC at Fitch Ratings, said in an e-mailed reply to questions.

Mr. Martin said there is also the possibility that these expected credit losses will not materialize in case of a strong recovery and the reversal of expected credit losses would even bolster banks’ profitability.

“Equally, if banks have underestimated the future deterioration in asset quality, they’ll continue to face elevated credit costs in coming quarters,” he said.