Consumer indebtedness to hang over banks despite FIST
MANILA, Philippines — The Philippines’ largest banks will remain heavily saddled in unpaid loans this year despite state intervention, reflecting broader weakness in the sector taking its queue from a still-anemic economy.
Fitch Ratings became the second debt watcher in 2 weeks to project non-performing loans (NPL) in local banks to continue crippling lenders’ ability to lend as the central bank would have wanted them to. S&P Global Ratings, in a report last week and this week’s webinar, also indicated that lenders will still be swamped with bad debts this year.
But unlike S&P that expects some turnaround by the second half of 2021, Fitch was more pessimistic, projecting NPLs to account for 4.5-5.5% of total loan books by yearend. That suggests the situation is only bound to worsen from 3.6% ratio last year.
NPLs are loans left unpaid at least 30 days past due date.
“We expect Philippine borrowers to have a harder time meeting their debt obligations after the expiry of the moratorium than borrowers in more developed markets where aggressive fiscal stimuli have resulted in larger cash handouts and stronger employment support,” Fitch said.
“This suggests potentially steeper asset quality deterioration in 1H21 (first half of 2021) than 2020,” it said. “We may downgrade the banks’ asset quality scores within the next few quarters if weaker-than-expected economic conditions persist.”
Fitch’s assessment was based on its ratings for four of the country’s largest private banks namely BDO Unibank Inc., Bank of the Philippine Islands, Metropolitan Bank & Trust Co. as well as Philippine National Bank.
In its report, the credit rater said not even a new law giving banks a venue to offload soured debts would relieve the indebtedness this year. Similar with S&P, Fitch also pinned the blame on the expiration of loan payment moratoriums mandated by law last year— which, in turn, means consumers limping through joblessness would see their debts fall due at a time their incomes have dramatically been reduced by the pandemic.
As a result, the Financial Institutions Strategic Transfer (FIST) law, while would alleviate some pressure on lenders, is hardly a magic bullet that will quickly swing banks’ balance sheet back to black.
“SPV law may help banks to offload NPLs, though pace of disposal will likely hinge on the implementation and economic recovery,” Fitch said.
While the impact of unpaid loans on lenders is obvious, Fitch warned bigger risks abound from the property sector mostly funded by larger loans. Absent demand from buyers, real estate prices have tanked, and developers who took out loans to build houses may have little cash to pay them up.
At the same time, property owners paying amortization may also delay settlements. “Banks that were actively underwriting mortgage loans at the height of the property boom in late 2019 and early 2020 are more vulnerable to heightened provisioning risks from the recent price correction…,” Fitch said.
Worse, the debt watcher does not expect things to get better for consumers who are also bank borrowers themselves. Unemployment is likely to remain elevated “for at least several quarters,” which means longer delays before loans may get paid.
“There will probably be lagged effects as lower incomes seep into consumer loan quality, suggesting that the NPL ratio is likely to remain high in 2021, even as banks write off soured loans more aggressively,” Fitch said.
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