THE PHILIPPINE BANKING INDUSTRY, which has not been spared from the global pandemic, is expected to recover moderately next year amid improving loan growth and as bad debts decline, Fitch Ratings said on Monday.

“Loan growth is likely to accelerate with the resumption of business and consumer spending, buoying revenues and offsetting the pressure on margins stemming from excess liquidity,” it said in a report. “This, along with lower — albeit still elevated — impairment charges, should lead to better net overall profitability.”

Local lenders’ net income had increased by 35% year on year to P168.213 billion as of end-September, based on central bank data. Lower losses on their financial assets have helped temper the profit decline.

Bank lending increased for the third straight month — by 3.5% — in October, mainly fueled by borrowings for productive activities, while consumer loans continued to shrink.

Lending had shrunk from December to July as banks and borrowers shied away from giving and taking credit even as the central bank infused about P2 trillion in liquidity to the financial system as part of its relief measures.

“Capitalization should remain stable, as improved profitability is offset by faster loan growth as banks ramp up lending once again,” Fitch said, noting that lending growth this year could hit 3%.

By 2022, credit growth could reach 8%, supported by a low base and economic recovery, the rating company said. It added that excess liquidity could help fuel loan growth next year.

A law that will help banks get rid of their bad loans and assets could also help ease their bad loans, Fitch said.

“We expect the largest banks to use the Financial Institutions Strategic Transfer (FIST) Act tactically in most cases, disposing of modest packages of nonperforming loans that have poor prospects of recovery so as to reduce their operational burdens,” it added.

Meanwhile, smaller and state-owned lenders would probably sell their bad assets more aggressively to improve their balance sheets and regain financing capacities.

The FIST law, which was enacted in February, allows financial institutions to sell their bad assets to asset management companies that are registered with the Securities and Exchange Commission.

Latest central bank data showed that the bad loan ratio had eased to 4.43% in September from a 13-year high of 4.51% in August. Soured loans held by banks fell by 1.3% year on year to P485.532 billion, but it rose by 30% from a month earlier.

The local banking industry’s assets had increased by 7.2% year on year to P20.079 trillion as of end-September.

Earlier, Fitch warned that the banking sector could face risks from their property exposures amid declining real estate prices.

The debt watcher has downgraded its outlook for six Philippine banks to “negative” after changing its credit rating outlook for the country to “negative” from “stable” in July.

A negative outlook means that ratings could be lowered within the next 12 to 18 months. — Luz Wendy T. Noble