BSP expects asset quality of banks to deteriorate

MANILA, Philippines – Bank regulators said they expect some deterioration in the asset quality of the banking sector but not to the extent that would pose a systemic risk.

The Bangko Sentral ng Pilipinas (BSP) said over the weekend that the recent decline in the asset quality of banks had been anticipated, considering the decline in the global economy and the ensuing increase in bad assets in the banking sector.

BSP Deputy Governor Nestor Espenilla said this decline would be felt mostly in consumer lending as a result of declining incomes which would make it more difficult for consumers to service their debts.

The latest available data from the BSP showed that consumer loans continued to go up by 18.7 percent in the first quarter of the year but non-performing commercial loans also went up to nine percent of total consumer loans.

But Espenilla said there was no danger that the banking sector would face serious risks since they have not been over-lending. He said banks in the country have actually been more prudent than their counterparts elsewhere.

“The increase in bad loans recently has actually been small not statistically significant,” Espenilla said.

But Espenilla cautioned that banking was tied to the movements of the economy and was therefore very sensitive to the cyclical movements in economic activities.

“If the economy is good then banking is good,” he said.

As of April, the BSP reported that credit card loans, for example, have actually began to reflect the reluctance to spend in the first quarter that brought the growth in consumer spending to a halt as consumers feared the worst from the global recession.

BSP data showed that credit card receivables actually declined for the first time in the first quarter by 3.9 percent, reaching P125.7 billion when compared to P130.7 billion in the previous quarter.

Past due receivables, on the other hand, went up significantly by 30 percent annually, amounting to P15.4 billion. Non-performing credit card receivables in the previous quarter amounted to P15.3 billion and over the same period last year, it was P11.8 billion.

But Espenilla said banks factor in these risks and sensitivities when they price their loans, particularly to consumers.

“The characteristic of consumer loans is that they are small but many and have wider margins,” he explained. “In contrast, corporate loans are much fewer, with narrower margins but the transactions are much larger.”

But as consumers become more stressed while the economy was slowing down, Espenilla said it would be natural for banks to sustain some negative effects as well.

In the latest banking report, the BSP said the proportion of the industry’s non-performing assets (NPA) to their general assets went up to 4.51 percent from March level of 4.49 percent but improved from year ago’s 5.33 percent ratio.

In terms of provisioning for bad loans, the BSP said the NPL coverage ratio strengthened to 99.65 percent from 99.30 percent in March. In contrast, the NPA coverage ratio narrowed to 48.85 percent from 49.11 percent, driven by the 1.30 percent decline in NPA reserves to P111 billion.

Espenilla said a slight increase in non-performing loans and non-performing assets was to be expected but he said the asset quality of the banking system would remain sturdy.

The banking sector is expected to hit some difficult times as the country plowed deeper into the global financial crisis and the resulting widespread recession in the major trading economies around the world.

More importantly, the BSP said Philippine banks have already tightened their credit standards precisely to ensure that they would not end up accumulating bad loans. –Des Ferriols, Philippine Star