MANILA, Philippines — The Philippine banking system’s credit weakness is likely to persist with the non-performing loans (NPL) ratio further rising from 4.5 to five percent this year despite the recent enactment of a law aimed at resolving bad debts through special purpose vehicles (SPVs), according to Fitch Ratings.
In a report, S&P said it expects further deterioration in the industry’s credit portfolio as borrowers are seen having a harder time meeting their debt obligations.
“This suggests potentially steeper asset quality deterioration in the first half of 2021 than 2020. We expect the NPL ratio to rise to around 4.5 to five percent by end-2021,” Fitch said.
Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the NPL ratio of Philippine banks eased slightly to 3.61 percent in end- December 2020 from 3.78 percent in November last year, but higher than the 2.04 percent recorded in December 2019.
“The NPL ratio would have been higher if not for regulatory forbearance accorded by the BSP last year,’’ Fitch said.
According to the debt watcher, the extent of deterioration would largely depend on the momentum of the economic recovery, with exposures in the consumer as well as the small and medium enterprises (SME) sectors -- where banks have been focusing on growing -- likely to be the most tested.
It said the non-consumer NPL ratio went up to 2.2 percent in end- September from 1.5 percent in end- 2019 due to micro, small and medium enterprises (MSMEs) and middle-market companies particularly those in tourism, retail trade, and commercial property that were badly affected by the pandemic.
Fitch said banks have generally high credit exposures to large companies that were also affected by the pandemic as the drop in profit ranged from 60 to 80 percent last year.
The 30-debt relief under Republic Act 11469 or the Bayanihan to Heal as One Act and the 60-day moratorium under RA 11494 or the Bayanihan to Recover as One Act both expired last year.
“The expiry of the repayment grace periods should lead to higher credit impairment in the first half of 2021 and we expect the system’s total non-performing-asset ratio, which includes real and other properties acquired, to rise to 5.5 to six percent by end-2021,” Fitch said.
The credit rating agency said consumer loans, which account for 19 percent of total loans, exhibited the worst impairments as the effects of the crisis continued to ripple through the economy, with the overall consumer NPL ratio rising to a 10-year high of 8.5 percent in end- September las year, more than double the 2019 level of 4.1 percent.
The ratio, it said, was driven by a severe shock in the job market where the unemployment ratio spiked to 17.6 percent in April last year during the strictest lockdown before moderating to 8.7 percent in October last year.
However, Fitch said the improvement in the national jobless rate has not translated into better consumer loan asset quality.
“Employment should improve as economic activity recovers, but we expect the slack in the job market to persist for at least several quarters. 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.