Big loan books keep Philippine banks on their toes amid pandemic
MANILA, Philippines — Philippine banks lead Asia Pacific counterparts in setting aside funds to cover potential build-up of bad loans during the coronavirus pandemic, an inevitable consequence of rapid loan growth in recent years.
Fitch Ratings, a debt watcher, now believes the sterling loan books of domestic banks are up for a “test” from a coronavirus pandemic that has damaged borrowers’ ability to settle their debts.
“Most of the increase in credit costs relates to general provisioning, rather than for specific impairments and appears in keeping with the sharp drop in economic activity,” Fitch said.
From end last year to June, local banks increased credit costs— a gauge of how much banks expect to lose from lending— to 2.38% of their gross loan portfolio from just 0.41%, according to Fitch data which also cited bank reports.
Lenders’ decision to build their war-chest reflects a struggling economy highly dependent on consumers that ended up “vulnerable” to the health crisis and movement restrictions. The impact could be severe especially among small- and medium-sized firms which account for 98% of local companies and may encounter difficulty paying debts amid cash flow problems.
Property prices, which rose to a record-high in second quarter, are also still expected to tumble, Fitch said. A “severe property sector stress scenario” would likely leave banks relying on mortgage payments saddled with $13.8 billion in losses against an estimated $2.1 billion in bad loans cover.
“Philippine banks are permitted to amortize provisions over as long as 5 years, but require case by case approval from the central bank,” Fitch said.
“We understand some banks are exploring this option, but take-up has so far been rare,” it added.
Indeed, official central bank data showed rising strain from unpaid debts, albeit still at manageable levels. As of July, big banks increased non-performing loans (NPL) — or credit that went unpaid 30 days after due date— 47.8% on-year to P224 billion. Against their entire loan books, NPL accounted for 2.26%, with expectations to rise to 4.8% by yearend.
At the same time however, banks anticipated the increase in bad debts, with loan provisions up 69% on-year to P279 billion.
South Korea lowest; India follows Philippines
Across Asia Pacific, a similar trend of bigger provisioning was noticed among banks, although lenders in emerging markets did so faster than developed counterparts. That said, Fitch warned loan losses may be underestimated since some governments ordered payment deferrals, delaying the recording of NPLs.
Among 79 banks in 16 countries surveyed, lenders in South Korea incurred the lowest credit cost at 0.22% of gross loans as of June, up from 0.08% from end-2019.
India joined the Philippines at the other end with the largest provisioning equivalent to 2.35% total loans, albeit down 6 months ago. “The country’s (India’s) provisioning seems at odds with the scale of its economic contraction, which will be among the steepest in ASPAC,” Fitch said.
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