Banks’ loan loss provisioning to remain high next year

MANILA, Philippines — Provisioning for bad loans by most banks in Asia-Pacific (APAC) is expected to remain elevated until next year, with the Philippines booking the highest increase as the economic downturn amid the COVID-19 pandemic continues to strain borrowers’ repayment capacity, according to Fitch Ratings.

In a report titled “APAC bank provisioning set to remain elevated in 2021,” the debt watcher said the Philippines experienced the highest jump in bank credit costs in June, with the credit cost in the region surging to an average of 1.26 percent of gross loans from 0.84 percent in the same period last year.

Credit costs in the Philippines surged to 2.4 percent in June from only about 0.4 percent in end-2019 compared to Indonesia’s two percent, Thailand’s 1.9 percent, Vietnam’s 1.4 percent, Malaysia’s 0.9 percent, Singapore’s 0.8 percent and Taiwan’s 0.2 percent.

“The Philippines recorded rapid loan growth in the decade leading up to the pandemic, which will now put the quality of lending over the period to the test, especially in the more vulnerable consumer, as well as small and medium enterprise (SME) segments,” Fitch said.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the increase in bank lending slowed for the third straight month to a single-digit level of 9.6 percent in June

from 11.3 percent in May as the country imposed one of the longest and strictest lockdowns in the world to slow the  spread of the virus.

The local banking sector’s total provisioning stood at $2.1 billion from January to June.

“Most Asia Pacific emerging markets reported significant increases in bank credit costs as of end-June  against end-2019 level, with the Philippines experiencing the highest jump. This partly reflects the severe economic impact the pandemic has had in the country and that it hit at a late stage of the credit expansion cycle,” Fitch said.

Provisioning is expected to remain elevated in the second semester and next year as the lingering fallout from the economic downturn could strain borrowers’ repayment capacity in many markets as authorities wind back relief measures.

Preliminary data from the Bangko Sentral ng Pilipinas showed provisioning made by the banking sector for credit losses on loans and other financial assets amounted to P103.77 billion in the first semester,   more than five times the P19.75 billion allocated in the same period last year in anticipation of higher defaults due to the economic fallout.

As a result, the industry’s earnings slumped by 29 percent to P86.05 billion from January to June compared to  last year’s P110.97 billion.

“Regulators may look to cushion the impact on profitability, but 2020 net profit for the sector is likely to fall year on year,” Fitch said.

The gross non-performing loan (NPL) ratio of Philippine banks picked up for the seventh straight month to hit the highest level in almost six years at 2.67 percent in July from 2.53 percent in June.