Gotianun-led East West Banking Corp. (EastWest Bank) expects a significant improvement on its bad loans and returns this year that would likely generate them earnings in the same level in 2021 at P4-5 billion.

“We will be close to 2021 levels,” EastWest Bank president and CEO Antonio C. Moncupa Jr. said when asked about his income guidance in an online press briefing after the bank’s annual stockholders’ meeting on Friday, April 22.

“It will take time for us to rebuild (and) we have started to rebuild. We’re booking much bigger portfolio now relative to 2021. But we’re not back to the level of 2019 yet, fully, but we’re getting there,” said Moncupa.

The bank’s positive outlook is tied to the performance of the economy because EastWest Bank, compared to other banks, have a much larger stock of consumer loans, accounting for 70 percent of their portfolio.

“Getting there is not entirely up to us. It depends on the economy because if consumers don’t buy cars, there’s no car to finance, even if you want to finance them. Consumer behavior will depend on their state, whether they have a job (or if) they have a positive outlook on the future and that dictates the economic condition. But, we’re getting there, there’s a palpable increase in demand for consumer durables or big ticket items that consumers buy,” Moncupa told reporters.

On the bank’s income expectation for 2022, Moncupa said the bank’s unique model of 70 percent consumer to business loans ratio is significant in that during a recession as what happened in 2020 and the early part of 2021, consumer loans tend to perform “a little worse” but “performs very, very well during growth periods.”

“When people lose their jobs and lose their business, one of the first to go are consumer loans like those that are unsecured – credit cards, personal loans. They tend to protect mortgages. That’s why our provisions for bad loans in 2020 and 2021 were much higher compared to pre-pandemic levels,” he said.

Moncupa said consumer loans tend to run on fast. “In business loans, provided the assets (goods, raw materials) are there, the loans don’t get paid off or it will move from one bank to the other. But if you look at the nominal loan portfolio, it’s hardly moving (and) it’s not growing but it’s not declining significantly,” he said.

However, consumer loans will show a large drop when it is being paid off and there is no replacement or renewal. “Since we’re 70 percent consumer, we’re more affected with this. Our loan portfolio is higher on average than the rest of the industry,” said Moncupa.

Moncupa also said the bank has sufficient funds and capital to finance their growth this year, and their balance sheet shows adequate liquidity.

While the above-target inflation rate is a worry, Moncupa said most bankers are prepared for the Bangko Sentral ng Pilipinas’s (BSP) eventual policy rate adjustment, possibly in the second half of 2022. The BSP rate is still as its low of two percent for the past 16 months.

Moncupa is confident that credit will grow “very well” this year, driven by the growth in the economy, despite inflation concerns. He expects more business activities and the return of borrowers seeking working capital with the reopening of the economy. However, rising inflation is a downside, but could be well-managed with the increase in consumer spending and lending opportunities.

As for the non-performing loans (NPL) ratio, EastWest Bank expects an improvement this year that will likely mirror 2020 levels at best.

The banking sector’s NPL ratio was between two percent and three percent in 2020. The industry NPL ratio started climbing in the last quarter of 2020 and reached a peak of 4.51 percent in July and August last year. As of end-February this year, it stood at 4.24 percent.

Moncupa said NPL formation will abate and slowdown, much lower than the previous two years. “After 2020 and 2021, technically, we should see the NPL ratio to be better. It’s close (and) should not be far from 2020 levels,” he said, adding that NPL is a tricky subject as it is an accounting entry.

“NPL ratio is only important in so far as it affects the returns of a business,” explained Moncupa. He said the purpose of the NPL ratio is to guide how a bank’s income will turn out. “It’s significant in a sense that it leads to consequences,” he added. Based on accounting rules, companies especially the heavily-regulated banks, will have to reflect their provisions in the state of their loan portfolio. Eventually, it will be reflected on the return on equity (ROE) and net margins, said Moncupa.

“On ROE outlook for 2022, I think the industry will get better. There will be less provisions for bad loans and there will be more income on bigger business,” he said. Core banking business is also expected to better by end-2022.

EastWest Bank does not plan to increase their branch network anytime soon but will invest more in digitalization. Moncupa said his target was always 400 branches and they will stop at this number. “The digital age is coming. If we need to expand to 1,000 (branches) we will but maybe we don’t need to. At this time, 400 is more than sufficient to cover the Philippines. It’s already too much (with the digital age),” he said.

In 2021, the second year of the pandemic, EastWest Bank reported a net income of P4.5 billion, it was down from P6.5 billion in 2020.

Its ROE was at 7.7 percent and its net interest margin stood at 6.6 percent end-2021. Meantime, its capital adequacy ratio improved to 15.6 percent while its common equity Tier ratio was at 14.5 percent. The bank plans to use its excess capital to boost its loan portfolio this year.

EastWest Bank is the country’s 11 largest lender out of 46 big banks, based on BSP data.