Banks’ bad loans may rise until H1 next year

MANILA, Philippines — Banks’ bad loans are expected to pick up until the first half of next year as the country continues to struggle to contain the pandemic.

In a virtual media roundtable, Joyce Ong, analyst at Moody’s Investors Service, said the Philippine banking sector is expected to suffer from an elevated non-performing loan (NPL) ratio until June next year. The banking sector’s NPL ratio   is expected to rise to six percent this year.

“NPLs will continue to increase at least to the first half of 2022. What is rather uncertain right now is whether again things will start to pick up in the next few months,” Ong said.

She said the gross NPL ratio of Philippines banks has been rising steadily from a low base in 2020 and further more in 2021 with the expiry of the debt relief measures provided 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).

Preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed the gross NPL ratio of Philippine banks accelerated for the fifth straight month to hit the highest level in almost 13 years at 4.49 percent in May from 4.35 percent in April. This was the highest since the 4.52 percent recorded in September 2008.

The soured loans of the banking sector surged by 83 percent to P479.48 billion in May from P262 billion in the same month last year, while allowance for credit losses jumped by 50.4 percent to P383.39 billion from P254.94 billion.

Ong said the Philippine banking system is experiencing prolonged curtailment of business activities which affected the industry’s asset quality in the past 18 months.

“This really brings the question of whether prolonged disruption has eroded the progress that Philippines banks built up over the past decade. With the expiry of Bayanihan, we think that the asset quality will continue to weaken this year and NPL will increase to about six percent at the end of 2021,” Ong said.

According to Moody’s the prolonged curtailment of business activities, resurgence of COVID-19 infections, and the enhanced community quarantine in the National Capital Region (NCR) from Aug. 6 to 20 would continue to weigh on sentiments and strain the debt repayment capacity of borrowers, particularly small and medium enterprises (SMEs).

Ong said Moody’s now expect bank lending by Philippine banks to remain flat instead of growing by five percent this year with the reimposition of stricter lockdown and quarantine measures in the NCR to slow the spread of the more contagious Delta variant.

“Credit growth will likely remain muted below pre-pandemic levels as businesses halt their expansion plans amid the pandemic and internal capital generation by banks will keep with the medium term growth,” Ong said.

Latest data from the BSP showed bank lending shrank for the seventh straight month, albeit at a slower pace of two percent in June from four percent in May.

The debt watcher said it expects the profitability of Philippine banks to remain stable at lower levels, but would not return to pre-pandemic levels.

Ong said the strength of conglomerates that control most of the largest lenders in the country would cushion the impact of the pandemic.

“We still think that the large conglomerates would still perform well and that would definitely help them in terms of limiting the level of debt deterioration coming through their asset quality,” she said.