PHILIPPINE BANKS’ credit profile will face near-term risks as the prolonged coronavirus crisis affects their asset quality and profitability prospects, Fitch Ratings said.
“The weaker economic outlook translates to diminished revenue growth opportunities for banks, as credit demand remains muted and asset yields are capped by excess liquidity amid a dovish monetary policy,” the ratings agency said.
Fitch said it sees a “shallower economic recovery” for the Philippines compared with its previous estimate earlier in the pandemic.
Despite this, the debt watcher noted that most of the major players in the banking industry have been doing “relatively well so far” amid the crisis.
However, it said the impact of the economic downturn on lenders is already becoming more apparent in the “significant deterioration in banking asset quality and very high credit costs over the past year, and a muted profitability outlook over the next 12-18 months.”
The banking sector’s net profit declined by 3% to P53.982 billion in the first quarter from P55.684 billion a year ago, based on data from the Bangko Sentral ng Pilipinas (BSP). This was due to higher loan loss provisions and bad debts.
Meanwhile, banks’ capital adequacy ratio stood at 16.72% on a solo basis as of end-2020, above the 10% minimum required by the central bank.
Fitch said the factors that boosted banks’ pre-provisioning profits last year, such as major savings on cost of funds and the revaluation gains on their bond portfolios, are diminishing. This means revenue growth could be “lackluster” until at least mid-2022, the credit rater said.
Meanwhile, the debt watcher said the banking system’s nonperforming loan ratio may deteriorate further to nearly 6% by the end of the year.
Banks’ nonperforming loan ratio stood at 4.21% as of end-March. BSP Deputy Governor Chuchi G. Fonacier said they expect this to go up to a little over 5% by the end of the year.
“Consumer and business sentiments remain dampened by high coronavirus infection rates and consequent social distancing measures, and we expect more business failures in the mid-market segment,” Fitch said.
“The pace of credit deterioration and credit provisioning is likely to slow relative to 2020 levels as the economy recovers, but we expect credit costs to remain significantly above pre-pandemic levels this year,” it added.
Meanwhile, Fitch said the slower loan growth and profitability of major banks, which prevented capital impairment and increased balance sheet leverage, helped them stay resilient in terms of capitalization and liquidity buffers.
It noted that BDO Unibank, Inc., Bank of the Philippine Islands and Metropolitan Bank & Trust Co. continue to outperform their peers due to their dominant market positions, consistent execution and somewhat lower risk appetite.
Fitch expects the asset quality of these three banks to face the worst by end-2021 and then see some gradual recovery by 2022.
It, however, noted that persistent challenges in banks’ operating environment will put pressure on their viability ratings, which are based on industry profile and operating environment, company profile and risk management, financial profile, and management strategy and corporate governance. — L.W.T. Noble