‘Bank profits, loans at risk from COVID-19’

MANILA, Philippines — Banks in Southeast Asia, including the Philippines, face rising bad loans and weakening profitability as businesses grapple with the economic fallout from the pandemic, according to  Moody’s Investors Service.

In a report, Moody’s said the Philippines, with Singapore and Malaysia have the best asset quality and low non-performing loan (NPL) ratios among member countries of the Association of Southeast Asian Nations (ASEAN). But their asset quality and profitability may deteriorate amid the challenging economic and credit conditions in the region.

The debt watcher expects the Philippine economy to contract by 4.5 percent this year, ending more than two decades of positive growth. The last time the Philippine economy contracted was in 1998 with 0.5 percent due to the Asian financial crisis.

The projected slowdown in the Philippines this year is  faster that Indonesia’s 0.8 percent, Malaysia’s 1.8 percent, but slower than Singapore’s five percent and Thailand’s 5.5 percent. Vietnam is the only ASEAN member that is expected to post a positive GDP growth of 2.5 percent this year.

“Relaxation of lockdowns and resumption of economic activity will be key drivers of recovery,” Moody’s said.

Moody’s said the extent of loan deterioration would depend on the pace of economic recovery, efficiency of government support and regulatory forbearance.

It added recognition of problem borrowers is likely to accelerate next year as loan payment moratorium are lifted or relaxed. According to Moody’s, share of loans under moratorium is highest in Malaysia and lowest in Vietnam.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the NPL ratio of Philippine banks rose for the fifth straight month to hit a five-year high of 2.43 percent in May from 2.31 percent in April due, to the sharp rise in past due, as well as restructured loans as businesses grappled with the effects of the hard lockdown.

Moody’s said net interest income of banks may decrease due to margin contraction, while credit costs are expected to rise due to weaker asset quality.

Earnings of Philippine banks grew by 9.3 percent to P59.66 billion in the first quarter from P54.59 billion in the same quarter last year despite higher provisioning to prepare for the onslaught of bad loans due to the pandemic.

The debt watcher said government support would help alleviate some pressure on banks. Support packages, including moratorium on debt payments, monetary policy easing, liquidity injections or relaxation of bank reserves, small and medium enterprises credit guarantees, cash to households and relaxation of capital norms, are unprecedented in the regional trade bloc.

For one, measures undertaken by the BSP, including the 175 basis points cut in interest rates to a record low of 2.25 percent and the lowering of the reserve requirement ratio, have unleashed P1.3 trillion into the financial system.