RP banks least profitable in AsPac — survey

The country’s banking sector is forecast to retain its anemic 10 percent return-on-equity (ROE) performance while loan growth is projected grow by a measly four percent in 2002.

The Philippine banking system’s ROE is the lowest in the Asia Pacific region and well below the cost of capital, according to a study prepared by global investment banker Salomon Smith Barney Ltd. (SSB).

"We remain underweight (towards) Philippine banks in 2002, with the sector expected to lag (behind) any broad-market recovery. Increasing credit concerns imply downside risk to bank earnings and valuation," it said.

SSB looks at certain aspects of the banking system, such as debts, loans, interest rates, rationalization of operations, and fiscal policies.

It sees recovery to occur in the third quarter this year although it is dependent on the recovery of the US economy. Domestically, it depends on how the banks undertake stiff cost cutting, cope with bearish consumer spending, and return to healthy lending.

The bad debt, or non-performing loans (NPLs) ratio of Philippine banks is forecast to peak in August or September this year at 20.7 to 21 percent, which poses a real downside risk to bank earnings and valuations.

Likewise, the pace of growth in both restructured and foreclosed loans is also cause for concern. Restructured loans now account for 6.9 percent of total loans, while foreclosed loans are at 9.5 percent.

"We believe that the Bangko Sentral ng Pilipinas’ (BSP) plan to require banks to make provisions of five percent against restructured loans by 2002 will further encourage loan foreclosure over restructuring," it said. Loan growth in 2001 was flat overall with negative registers in the latter part of the year.

If added: "While easing monetary policy should limit systematic risk of rising NPLs, it is unlikely to generate a meaningful recovery in loans. We watch for an earnings recovery and possible re-rating by the fourth quarter of the year."

Bradford K. Ti, vice president for equity research of Salomon Smith Barney Asia Pacific Ltd. In an interview said that the system must keep the interest rate as low as possible at the longest possible period.

"We feel that the interest rates will not move away from the 7.5-percent level as interest rates have already bottomed up," Ti added.

Also working against the banking sector is the view that cash-rich companies or those with access to external funding may not necessarily tap the banking system at the onset of any recovery.

The SSB vice president added that low interest rates may not be significant without an improvement in the NPLs as banks may not be aggressively lending without a relief of their bad assets. Likewise, one has to consider the weak economic activities especially the export and import markets, and the US-Japan economies, which are the country’s leading trading partners.

Another major concern for the banking system is operational rationalization. With the net interest margins (NIM) still under pressure, banks are expected to continue focusing on costs, particularly in increased efforts to rationalize branches and manpower.

"Given these concerns, there is still a downside risk to bank earnings and ROE, if asset quality deteriorates even further as a result of a more protracted slowdown in the local economy," the SSB report said. "Taking into account all system distressed loans (the sum of NPLs, foreclosed and restructured loans) and assuming an ultimate average recovery rate of 60-70 percent, we expect "clean" book values (adjusted for loss rates) to be between five percent and 25 percent lower than reported values.