Banks face revenue headwinds, higher NPLs

MANILA, Philippines — Philippine banks are facing revenue headwinds and higher non-performing loan (NPL) ratios on the back of sluggish economic recovery from the pandemic-induced recession, according to New York-based Fitch Ratings.

The debt watcher said the COVID-19 pandemic would continue to affect the profitability of banks operating in the Philippines.

“Revenue headwinds will likely persist with lower market-related income and compressed margins,” Fitch said.

After plunging by 33 percent last year due to the impact of the global health crisis, the Bangko Sentral ng Pilipinas reported that the net income of Philippine banks declined by 5.7 percent to P52.52 billion in the first quarter from P55.68 billion in the same period last year.

The industry’s operating income declined by 3.7 percent to P212.39 billion in the three-month period from P220.52 billion a year ago as net interest earnings went down by 4.8 percent to P161.39 billion from P169.49 billion, while non-interest income was almost unchanged at P51 billion from P51.03 billion.

The non-interest expense of Philippine banks was also unchanged at P127.41 billion from January to March compared to P126.67 billion in the same period last year.

After a massive jump in allowance for bad debts as more borrowers defaulted on loan payments due to the impact of the pandemic, provisions for credit losses on loans and other financial assets declined by a double-digit 10 percent to P19.67 billion in the first three months from P25.75 billion a year earlier.

Fitch said the industry’s NPL ratio may rise to nearly six percent this year.

“The sluggish economic recovery is likely to continue to weigh on the banking system’s asset quality and financial performance in the near term,” it said.

The gross NPL ratio of Philippine banks accelerated for the fifth straight month to reach the highest level in almost 13 years at 4.49 percent in May from 4.35 percent in April as bad loans surged by 83 percent to P479.98 billion.

However, Fitch believes a majority of the banks in the country will remain sufficiently capitalized to withstand further stress amid the slower economic recovery.

The debt watcher said the implementation of Republic Act 11523 or the Financial Institutions Strategic Transfer Act would help the industry in unloading bad debts through FIST corporations or special purpose vehicles (SPVs).

”The recently enacted FIST (law), which allows banks to sell impaired assets to SPVs and amortize any losses from the sale by up to five years, could facilitate faster NPL resolution and allow the system to embark on a speedier recovery,” it said.

NPLs or bad debts refer to past due loan accounts where the principal or interest is unpaid for 30 days or more after due date. A high NPL ratio indicates weakness in the financial system and poor state of the economy.