Long road to recovery for Philippine banks – S&P

MANILA, Philippines — Philippine banks are on a long road to recovery as the banking sector’s non-performing loans (NPL) may rise further to six percent this year from 3.6 percent in 2020, according to S&P Global Ratings.

In a report titled “Philippine banks: Buffers won’t hold if COVID comes back,” S&P primary credit analyst Nikita Anand said the Philippine banking industry’s asset quality would deteriorate further in the coming quarters as banks recognize the full brunt of the pandemic on borrowers.

The debt watcher does not expect the industry to reach pre-pandemic financial performance until 2023.

“This year, banks will grapple with a sluggish revival of credit demand and increasing NPLs. We expect only a mild recovery in profitability,” Anand said.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the NPL ratio of Philippine banks eased to 3.61 percent in December last year after accelerating for 11 straight months to 3.78 percent in November last year.

This was the highest gross NPL ratio since the 3.48 percent recorded in January 2013. Data prior to 2013 are not consistent with the Department of Supervisory Analytics as the financial reporting package started in that year.

NPLs or bad debts refer to past due loan accounts where the principal or interest is unpaid for 30 days or more after due date.

Soured loans of the banking industry surged by 74.8 percent to P391.66 billion in end- 2020 from P224.1 billion in end- 2019. This was slightly lower than the record P404.69 billion in end-November last year.

“We expect NPLs to spike in the first quarter of 2021 as loan moratoriums and fiscal support are phased out. Moratoriums and restructuring helped borrowers with liquidity shortfalls and prevented defaults. Moreover, banks have actively restructured loans to help small businesses and consumers,” Anand said.

She also said consumers, which corner 19 percent of total loans, as well as micro, small and midsize enterprises would continue to see high new NPL formation.

S&P said many small businesses have had to close shop as revenues plunged, while household incomes have been disrupted due to job losses and salary cuts as the country imposed the longest lockdown in the world.

“Most new NPLs since COVID-19 have come from the consumer segment, reflecting the loss of household incomes from the sharp economic contraction,” she said.

Likewise, earnings of banks slumped to a four-year low after falling by 32.8 percent to P154.96 billion in 2020 from a record high of P230.67 billion in 2019 as provision for potential loan losses quadrupled to P210.89 billion from P52.89 billion.

Anand said higher provisioning would help the industry absorb the jump in the NPL ratio as capital buffers are sufficient if recovery stays on track and is supported by improving profitability.

“High provisioning in 2020 and capital buffers can buy the sector time, assuming the economic revival stays on track. Our negative outlook on rated banks reflects our view that financial buffers could not absorb the rapid deterioration in asset quality likely to ensue if the recovery is derailed,” Anand said.

Credit costs, as measured by annualized loan loss provisions, are set to stay elevated this year at 1.5 to 1.8 percent of total loans.

Anand said S&P sees a credit growth of five to eight percent this year after contracting for the first time in 14 years at about one percent last year despite the aggressive easing measures of the BSP.