Banks' bad loans to peak only by next year — Fitch
MANILA, Philippines — Banks in emerging Asia, including those from the Philippines, would continue their accumulation of bad debts until next year when several reprieve extended to lenders and cash-strapped borrowers lapse, Fitch Ratings said Monday.
While some governments in the region have extended relief measures for banks and borrowers until 2021, Fitch said such a move only masked the rising credit risks that lenders are facing amid the coronavirus pandemic, adding that such risks would only show when regulators pull out the support.
"The fiscal responses of EM Asia governments have included relief measures that have supported bank performance, such as have repayment holidays, loan guarantees for SMEs and delayed NPL (non-performing loan) recognition of restructured loans," the global debt watcher said in a report.
"Such measures have generally been extended into 2021, but at the expense of transparency on credit risks, which will increase only when they are wound back. Fitch does not expect asset quality deterioration to peak until well into 2021," it added.
Central bank data showed local banks' NPLs, or those unpaid at least 30 days past due date, soared 60.2% year-on-year to P364.67 billion in October. That brought NPL to account to 3.4% of the entire loan books, the highest since May 2013.
NPL increased as 60-day grace periods on loan payments under the Bayanihan to Recover As One Act began to taper off. That said, banks have also stepped up defenses from potential build-up of unpaid debts, increasing buffer funds to 91.75% of bad loans, albeit down from 107.4% in August.
The good news is legislators passed earlier this month the Financial Institutions Strategic Transfer Act, which aims to absorb lenders’ bad loans so they can proceed with lending. House and Senate leaders would have to meet to harmonize their versions of the measure before it can President Rodrigo Duterte’s desk for enactment.
Moving forward, Fitch said a wave of unpaid loans as a result of stoppage of relief measures would require "greater provisioning expenses" that could weigh on banks' balance sheets.
"Most banking systems have reported deteriorating asset quality and profitability since the onset of the pandemic, but policy responses have limited the impact so far. We expect further deterioration once forbearance measures are scaled back or end...," the credit rating agency said.
"The extent of deterioration still depends on the trajectory of economic support/recovery. We see a gradual path back to pre-crisis activity levels even though banks will benefit from a recent bottoming-out of business conditions, with more green shoots as they eke out top-line growth," it added.
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