Stress test shows Philippine banks remain stable, resilient

MANILA, Philippines — An analysis of the financial soundness indicators of the Philippine banking industry showed that it is stable and resilient despite the global uncertainties related to the extent and path of the pandemic, according to the Bangko Sentral ng Pilipinas (BSP).

Based on the report on the Philippine financial system for the second semester of 2020, the BSP said banks remained well capitalized as the capital adequacy ratio (CAR) of universal and commercial banks on solo and consolidated bases is well above the minimum thresholds set by the BSP at 10 percent and the Bank for International Settlements (BIS) at eight percent.

As of end-2020, the CAR of big banks improved to 16.6 percent and 17.1 percent on solo and consolidated bases, respectively, from the previous year’s 15.4 percent and 16 percent.

The BSP said the industry’s risk-taking activities were supported by adequate capital mainly composed of common equity and retained earnings.

Based on the BSP’s stress test exercise, big banks are also resilient to credit and market risk shocks,

The results showed that post-shock CAR of combined universal, commercial, thrift, and other banking groups remained comfortably above the 10 percent threshold under an assumed separate 20 percent write-off of loans to top 20 conglomerate groups and micro, small and medium enterprises (MSME) loans, additional five percent allowance for credit losses (ACL) on total loans, as well as simultaneous impact of increase in non-performing loans (NPLs) and ACL with corresponding disposal of a portion of soured loans.

According to the BSP, the COVID-19 pandemic tested the resilience of the banking system and the robustness of the financial ecosystem.

As the crisis significantly affected the banking operations, the BSP deployed targeted and time-bound regulatory relief packages that facilitated the uninterrupted flow of financial services in the country, especially during this challenging time of the pandemic.

“The relief packages strived to address the critical requirements of the economy while at the same time ensuring that financial stability is not compromised,” BSP Governor Benjamin Diokno said.

The total resources of the country’s banking system rose by 6.1 percent to P19.45 trillion, accounting for 80.7 percent of the nominal gross domestic product (GDP) sourced from deposits, bond issuances and capital infusion.

Loans held the largest share of the banking system’s total assets at 54 percent or P10.5 trillion, followed by financial assets other than loans with 23.6 percent or P4.59 trillion, as well as cash and due from banks with 18.4 percent or P3.58 trillion.

The industry’s loan disbursements slipped by 0.9 percent to P10.86 trillion due to limited corporate demand and weak economic activity during the lockdowns.

The BSP said the quality of the banking system’s loan portfolio remained satisfactory despite the rise in the NPL ratio to 3.6 percent in end-2020 from two percent in end-2019.

The increase in bad debts was matched by higher loan loss provisioning as the NPL coverage ratio increased to 92.9 percent from 92.6 percent as banks continued to increase provisioning in anticipation of the adverse impact of the pandemic on their loan portfolio.