‘Banks’ credit portfolio quality to worsen’
Credit weakness in the Philippine banking system is likely to continue despite the anticipated economic rebound from the coronavirus pandemic and the implementation of Republic Act 11523, or the “Financial Institutions Strategic Transfer Act” (FIST), according to Fitch Ratings.
In a report on Thursday, Fitch Ratings analysts Tamma Febrian and Willie Tanoto said the New York-based credit rating agency “expects the quality of Philippine banks’ credit portfolios to deteriorate further in 2021.”
The expiration of the debt moratorium under Republic Acts 11469 and 11494, or the “Bayanihan to Heal as One Act” and “Bayanihan to Recover as One Act,” respectively, would cause soured loans to grow, they warned.
The industry’s nonperforming loan (NPL) ratio is projected to soar to about 4.5 to 5 percent by end-2021 from 3.6 percent at end-2020.
“We expect Philippine borrowers to have a harder time meeting their debt obligations after the expiry of the moratorium than borrowers in more developed markets, where aggressive fiscal stimuli have resulted in larger cash handouts and stronger employment support,” the analysts said.
This would result in nonperforming-assets (NPAs) to rise to about 5.5 to 6 percent by yearend from 4.6 percent at end-2020 and 3.1 percent at end-2019.
“The extent of [the] deterioration [would] largely depend on the momentum of the economic recovery, with exposures in the consumer and SME (small and medium enterprises) sectors — where banks have been focusing on growing — likely to be the most tested,” Febrian and Tanoto said.
They noted, however, that FIST might help banks offload these bad loans and assets.
Signed by President Rodrigo Duterte on February 16, FIST provides a legal framework and tax incentives for banks and other financial institutions to transfer their NPAs to special-purpose firms, called FISTCs.
“This could position the banks for a quicker recovery after the crisis if the NPL transfers can be successfully executed at reasonable market prices,” the analysts said.
Despite this, the pace of these loans’ disposal was likely to hinge on FIST’s implementation and the country’s economic recovery.
Fitch forecasts Philippine gross domestic product (GDP) to grow by 6.9 percent this year, reflecting a low-base effect as the economy shrank by 9.5 percent in 2020.
The outlook compares with the government’s official target range of 6.5 to 7.5 percent.
The debt rater expects the country’s recovery “to remain sluggish relative to regional peers,” with domestic output likely falling at a cumulative rate of 1.6 percent annually from 2019 to 2021, compared with Vietnam’s +5.1 percent growth, Indonesia’s +1.9 percent, Singapore’s +0.3 percent, Malaysia’s +0.1 percent and Thailand’s -1.7 percent.