Amid slowing economy – IMF urges stress-test for RP banks

AMID a slowing economy, the International Monetary Fund (IMF) has called on the Bangko Sentral ng Pilipinas (BSP) to undertake a “stress test” of local banks, similar to what its US counterpart, the Fed, did for American lenders that saw their capital erode due to the global financial crisis.

In its Staff Visit Mission, Il Houng Lee, IMF advisor for Asia and Pacific Department, warned that Philippine banks will see their credit quality weaken despite high capitalization rates and low bad loans.

“Although banks benefit from high capitalization and low non-performing loan ratios, credit quality could be adversely affected by the slowing economy, especially in the segment of consumer loans and real estate,” Lee said.

“To manage these risks, rigorous stress testing, close monitoring of banks and providing supervisors protection from litigation without further delay will be important,” he said.

In its most recent report, the BSP said consumer loans accelerated mainly on higher auto loans and credit card receivables.

For this year, banks’ profitability will be driven by their lending business, an increase in fee-based income due to rising bond issues, and a reduction in interest rates, which will improve their securities portfolios.

As of April, bank lending grew by 19 percent. This is higher than the 17.8 percent in March as production and consumer loans increased at a faster rate. Analysts however had warned that bank-lending growth would decelerate starting this month due to high base effects last year.

Most of the major banks registered higher profits in the first quarter due to the recovery in trading gains and greater lending activity.

In March, banks saw their bad loans fall, indicating a further improvement in asset quality.

Their bad loan ratio declined to 3.56 percent from 3.73 percent in February and 4.52 percent in March last year.

Bad loans refer to past due loan accounts whose principal and/or interest is unpaid for 30 days or more after due date while the non-performing loan ratio is the contribution of bad loans to banks’ total lending portfolio.

The local industry’s capital adequacy ratio stood at 15.25 percent on a consolidated basis at end-June last year, lower than the 15.49 percent in March. The BSP minimum is set at 10 percent.

The decline was due to the adoption of stricter capital standards under Basel 2 in July last year, requiring the assignment of higher risk weights to certain assets and allocation of capital charge for operational risk.

The BSP plans to require a higher capital ratio for banks exposed to greater risks on unsecured loans.

The IMF projected the Philippine economy to contract by 1 percent this year due to declining remittances and the overshooting of savings.

In the first quarter, the country’s gross domestic product (GDP) slowed sharply to 0.4 percent.

A proxy for a country’s economic performance, GDP represents the amount of goods and services produced locally.

The Development and Budget Coordinating Committee (DBCC) recently downgraded its growth forecast for this year to between 0.8 percent and 1.8 percent as a result of the disappointing first-quarter GDP results.

Economic managers also raised the government’s budget deficit ceiling to P250 billion this year, from an earlier program of P199 billion.

At end-April, the deficit hit P111.8 billion due to weak tax collections. –Maricel E. Burgonio, Senior reporter, Manila Times