Pressure on profitability of Philippine banks seen lighter this year

MANILA, Philippines — The pressure on the profitability of Philippine banks is expected to be lighter amid the accommodative policy stance of the Bangko Sentral ng Pilipinas (BSP) to help cushion the impact of the COVID-19 pandemic on the economy.

Paola Beatrice Lopez, analyst at Regina Capital Development Corp., said in an industry study the 200 basis points interest rate cuts of the central bank last year lowered funding costs and helped offset the impact of lower interest income and loan book contraction.

Nevertheless, Lopez said the aggressive frontloading of loan loss provisions still adversely impacted the banks’ bottomline.

“A silver lining, though, is that pressure on profitability will be alleviated to an extent this year. The consensus is that provisions will start to come down this year,” Lopez said.

Data from the Bangko Sentral ng Pilipinas (BSP) showed earnings of Philippine banks slumped to a four-year low after declining by 32.8 percent to P154.96 billion last year from the record P230.67 billion in 2019 as the industry’s provision for potential loan losses arising from the impact of the global health pandemic almost quadrupled.

As more borrowers default on loan payments due to the impact of the COVID-19 pandemic, banks have been sacrificing earnings to raise provisions for credit losses on loans, and other financial assets reached P210.89 billion last year or almost four times the P52.89 billion it allocated in 2019.

“Overall, earnings improvement is possible this year due to low base effects, the accommodative monetary policy, and expectations of better consumer and business confidence,” Lopez said.

Lopez said loan demand may pick up again this year after contracting for the second straight month at 2.4 percent in January as banks remained risk averse and absence of demand from borrowers due to uncertainties brought about by the COVID-19 pandemic.

“Nevertheless, downside risks are still present. It includes potential delays in the vaccine rollout, faster COVID-19 infection rates, and the reimposition of strict lockdown restrictions. These factors may hamper the recovery of consumer and business confidence and the economy as a whole,” Lopez said.

According to Regina Capital, the formation of the industry’s non-performing loan (NPL) ratio is likely to extend until the first half as the loan moratoria under Republic Act 11469 or the Bayanihan to Heal as One Act (Bayanihan 1) and RA 11494 or the Bayanihan to Recover as One Act (Bayanihan 2) lapsed last year.

“We see NPL ratios expanding during 1H21 too,” Lopez said. The Bankers Association of the Philippines (BAP) sees the banking sector’s NPL ratio peaking at six to seven percent this year from the current 3.7 percent in end January.

Lopez said several banks are already reviewing their portfolio of non-performing assets as Republic Act 11523 or the Financial Institutions Strategic Transfer (FIST) Act took effect last Feb. 18.

“Consumer banks are the ones that will likely benefit from the FIST Act the most, especially since corporate borrowers are more well-equipped to refinance their borrowings,” Lopez said.