Philippine banking sector outlook improving – Fitch

MANILA, Philippines — The outlook for banks in emerging markets in Asia-Pacific including the Philippines continues to improve, but risks are still present with the continuing COVID woes as well as the effect of the tightening by the US Federal Reserve, according to Fitch Ratings.

In a report, Fitch said the neutral sector outlook for banks in 2022 underlines a significant change in their operating environment.

“A year ago, the outlook was significantly more uncertain, particularly for emerging-market economies,” it said.

The credit rating agency said it expects business conditions for banks to be similar to those in 2021, as the global economy continues to recover, although at a slower pace.

It said banks’ asset quality would deteriorate moderately as fiscal and policy support wanes.

“However, we expect this to be offset by pre-impairment profitability, accumulated loan impairment allowances and capital buffers,” Fitch said.

For emerging markets in Asia-Pacific, Fitch cited stable or improved bank financial performance for this year, driven by economic and loan growth despite an uneven path to full recovery.

“Impaired loans uptick as support measures are unwound, but forbearance still prevails across much of the region,” it said.

Furthermore, it added banks have adequate provisioning in most markets.

For the Philippine banking sector, Fitch said the outlook continues to improve.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the gross non-performing loan (NPL) ratio of Philippine banks declined to an eight-month low of 4.35 percent in November from 4.42 percent in October as the industry’s asset quality continues to improve.

The ratio last November was the lowest since the 4.21 percent recorded in March last year, as the level of loans disbursed by Philippine banks continues to improve.

After hitting a 13-year high of 4.51 percent in July and August last year, the NPL ratio of banks steadily improved in September, October and November despite the reimposition of strict lockdown and quarantine measures amid the emergence of the Delta variant.

Preliminary data showed that the loans disbursed by banks rose by 4.3 percent to P11.08 trillion from January to November last year compared to P10.62 trillion in the same period in 2020.

Amid rising defaults due to the impact of the pandemic-induced recession, the allowance for credit losses increased by 19 percent to P419.86 billion from P352.73 billion for a higher loan loss reverse level of 3.79 percent.

This translated to an NPL coverage ratio of 87.13 percent in end-November last year.

In terms of profitability, the earnings of Philippine banks jumped by 35 percent to P168.21 billion from January to September last year versus the P124.55 billion booked in the same period in 2020, amid the sharp drop in provision for credit losses.

For this year, Fitch expects a deterioration in loan asset quality for banks and non-bank financial institutions as fiscal and policy support wane.

“However, we believe banks will offset these reductions with improved pre-impairment profitability and the reduction of loan loss allowances and excess capital buffers accumulated through the pandemic,” it said.