2021 recovery crucial for banks — S&P

by Luz Wendy T. Noble, 18 Nov 2020

A DEEPER-THAN-EXPECTED recession in the Philippines will increase the downside risks for the banking industry, S&P Global Ratings said.

“This year’s recession is likely to impair the debt-servicing ability of consumers, small businesses, and leveraged companies. The extent of the impact on banks depends on the economic recovery and stabilization of credit conditions in 2021,” S&P analyst Nikita Anand said in a note on Tuesday.

Ms. Anand said Philippine banks are facing a negative economic risk trend, as the economy remained in a recession in the third quarter. Gross domestic product (GDP) shrank by 11.5% in the July to September period, slightly easing from the record 16.9% decline in the second quarter as lockdown restrictions gradually loosened amid the coronavirus disease 2019 (COVID-19) pandemic.

S&P expects the Philippine economy to contract by 9.5% this year, before growing by 9.6% in 2021.

“We expect operating conditions for banks and borrowers in the Philippines to improve only gradually, on the back of 9.6% growth in the economy in 2021. These projections assume an eventual flattening of the COVID-19 curve,” Ms. Anand said.

The government expects the economy to bounce back to 6.5-7.5% growth in 2021.

Ms. Anand said local lenders can absorb credit losses since its “good capital position (15% Tier-1 ratio) and more than 100% provisioning of NPLs provide a cushion against challenging operating conditions.”

But a longer recession than the S&P forecast “could result in substantially higher credit losses for Philippine banks,” Ms. Anand said.

“We expect the banking sector’s credit costs to stay elevated at 1.5%-2.0% of gross loans over 2020 and 2021 compared with the five-year average of 0.4%. The consumer, micro, and SME (small and medium enterprises) portfolios will contribute to higher NPLs (nonperforming loan) in the coming quarters,” she said.

“Large conglomerates, with their strong business profiles by domestic standards and good access to liquidity, are better placed to weather the storm. If the recession is longer or deeper than our forecast, this could set off sharper asset quality deterioration for banks, due to potential stress in large corporate books.”

As of end-September, the gross NPL ratio of the banking system hit 3.4%, as soured loans climbed 60% year on year to P364.672 billion.

The central bank expects the NPL ratio to reach 4.6% by end-2020. It reached 17.6% in 2002, the aftermath of the Asian Financial Crisis.

Ms. Anand also noted regulatory forbearance will only delay the true recognition of NPLs. Republic Act No. 1494 or Bayanihan to Recover as One Act provided for a one-time 60-day debt payment moratorium.

“The effect on individual banks in the coming quarters will be uneven, hinging on their exposure to vulnerable segments and their accounting and provisioning standards,” she said.

Banks’ recovery to pre-COVID-19 levels will likely stretch beyond 2022, Ms. Anand said.