Bank profits under threat from COVID-19, lower interest —Fitch
MANILA, Philippines — The rapid spread of the new coronavirus would test the resiliency of Philippine banks this year as drastic containment measures disrupt business operations while falling interest rates put a strain on bank profits, debt watcher Fitch Ratings said Tuesday.
In a statement sent to reporters, Fitch downgraded its outlook on the local banking sector for 2020 from “stable” to “negative" on account of a "deteriorating operating environment" as a result of local lockdowns that forced them to stop operations and tepid economic activity that discourages lending. Combined, the two can put pressure on lenders' profitability.
“Prolonged business disruptions could expose the banks to lumpy asset impairments,” Fitch said. “Lower revenue, in conjunction with slower credit growth, will weigh on banks' profitability this year.”
Last March 13, President Duterte placed the main Luzon island under a month-long “enhanced community” quarantine that ends April 12 to arrest the spread of the virus, which has infected more than 501 people in the country as of Tuesday morning.
The drastic step to combat the outbreak is expected to deal a major blow on an economy that generated 73% of its output from Luzon in 2018, the latest year on which data is available.
Since the island was sealed off, major business hubs have been deserted while lenders have scaled down operations by shortening banking hours and opening select branches.
This, in turn, could hurt loan quality of banks, especially those with higher exposures to small and medium-sized business that are struggling to service their debts amid crashing sales, Fitch said. Meanwhile, banks with “outsized” exposure to tourism and hospitality industry could face “extra pressures.”
The decision by the Bangko Sentral ng Pilipinas (BSP) to aggressively cut its benchmark rate would also hurt lenders. While benefiting consumers through lower bank interest rates, the 50 basis-point rate cut last March 19 means lower profits for banks for every peso they lend out.
On the flip side, BSP's latest decision to slash bank reserves by 200 bps starting March 30 is positive for banks looking to lend more.
"More (rate) cuts are likely in the next few months, although further cuts in the reserve requirement...will offset the compression in yields to some degree," the credit rater said.
On the flip side, large corporations with healthy balance sheets, which account for the bulk of loans, could help soften the blow of sluggish business operations on asset quality. But Fitch warned that a default of big companies could be devastating on the banking industry.
“The strength of large corporates is therefore a key factor in assessing banking-system asset quality,” the debt watcher said.
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