S&P: ‘Long road to recovery’ for PHL banks

THE local banking system’s financial performance is not expected to “return back to normal” in the next two years, as bad loans are expected to start rising in the first quarter of 2021, an international credit watcher said.

In a recent assessment on the Philippine banking sector, S&P Global Ratings said they expect non-performing loans to “jump” in the first three months of this year as loan moratoriums and fiscal support are phased out.

In particular, S&P forecasts NPLs to hit 6 percent of the local banking system’s total loan portfolio in 2021, almost double the 3.6-percent NPL ratio seen at the end of 2020.

NPL are also known as soured loans as these are credits that remain unpaid 90 days after their due date while NPL coverage ratio is the amount of provisions banks set aside to cover for unpaid loans so their balance sheets and operations won’t be gravely affected by the consumers’ inability to pay.

“Philippine banks are on a long road to recovery. Asset quality will deteriorate further in the coming quarters as banks recognize the full brunt of Covid-19 on borrowers,” S&P Global Ratings credit analyst Nikita Anand said.

Meanwhile, S&P said credit cost, a measure of provisioning for bad loans, is likely to stay elevated at 1.5 percent to 1.8 percent in 2021.

On a positive note, Anand said they expect sector-wide profits to improve slightly in 2021, with return on assets increasing to 1 percent on the back of relatively better growth and lower credit costs in 2021.

High provisioning in 2020 and capital buffers is also expected to help banks maintain credit standing, Anand said, as they repair financial metrics, assuming the economic revival stays on track.

According to S&P assessment, Philippine banks are likely to benefit from reviving economic activity and progress in vaccination rollouts.

“Relaxation of restrictions in Manila will support stronger activity in the second half,” S&P said.

Strong downside risks

Amid early signs of revival, S&P said vaccination will be key for a sustaining trend.

“S&P Global Ratings does not expect the country’s banks to reach pre-pandemic financial performance until 2023. 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.

“The emergence of yet more contagious Covid-19 variants with the potential to evade vaccine-derived immunity presents a major risk to normalization,” the credit analyst said.

In a recent survey conducted by the Bangko Sentral ng Pilipinas (BSP), however, local banks said they believe they are well-equipped to handle the economic fallout of movement and operational restrictions due to the pandemic, as they continue to have adequate loan loss provisions, capital and liquidity.

About 44.3 percent of banks in the country said they project their NPL coverage ratio of between 51 and 100 percent while 48.9 percent said their NPL coverage ratio will likely be less than or equal to 25 to 50 percent of total NPLs.