With non-paying borrowers affected by the public health crisis, banks are braced for an increase in non-performing loans (NPL) but Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno assured that this will be manageable.
“The crisis has led to concerns that banks may suffer from a sharp rise in NPLs (however) based on our assessment, this will not be the case. We expect any increase in NPLs to be modest,” said Diokno in a virtual investor conference.
A number of big commercial banks have already set aside billions of pesos to provide for non-performing loans
Diokno also said that the BSP has a fresh list of regulatory reliefs for banks that they will be releasing soon.
“We have implemented numerous relief measures. And more are being considered,” he said. “In particular, we are looking at additional regulatory enhancements that will enable our regulated entities to focus their resources on addressing the impact of the pandemic on their operations and the financial consumers. We will announce the additional relief measures once finalized.”
Diokno cited a BSP survey that indicated that banks anticipate their NPLs – which are unpaid loans for more than 30 days after due date – to expand from 2.4 percent in March which was the start of the COVID-19 lockdowns, to 4.6 percent by December this year.
“This likely increase is manageable,” he said. The survey included the country’s top 20 universal and commercial banks, as well as the top 20 thrift banks and rural and cooperative banks.
Diokno said the quality of the large banks’ loan portfolio “remained satisfactory.” He said the NPL ratio is still low at 2.1 percent as of end-June 2020, despite that it is more than same time last year of 1.6 percent.
As of March this year, the big banks’ capital adequacy ratio was at 15.3 percent on a solo basis, higher than the BSP threshhold of 10 percent. The liquidity coverage ratio, in the meantime, was 171 percent, also higher the requirement of at least 100 percent.
Diokno reiterated to investors his confidence that the local economy – currently in recession due to the pandemic — will bounce back in the near term.
The BSP, in helping the government cope with the pandemic, has done the following: ensure sufficient liquidity; maintain stability of the financial system; ensure continued delivery of financial services to the public; and shore up confidence and cushion economic activity.
The central bank has infused about P1.25 trillion liquidity in the financial system and this includes a P300 billion advance to the National Government via a repurchase agreement. This is a limited advance and will expire next month but the government can renew the agreement.
The BSP also bought government securities in the secondary market and ensured banks’ funds will be channeled in the debt market. “This helped boost market liquidity—cash that may eventually be used by banks to lend to consumers and businesses affected by the pandemic,” said Diokno.
In a commentary, ING Bank senior economist Nicholas Mapa said that by keeping the bond purchase window open, the central bank has “flooded” the market with liquidity and “kept a lid on bond yields, preventing any flare ups in rates during the pandemic.”
Mapa said right now, the BSP dominates the market with P800 billion worth of bonds, about 30 percent of total local government securities transactions. “(It is) also equivalent to 15 percent of total outstanding bonds which makes the BSP a major player in the bond market, a game changer and a market mover. For as long as BSP keeps the window open, we can expect bond yields to remain floored, which will keep the environment conducive for financing as borrowing costs across the curve remain subdued.”
“The big question now is on how or if the BSP will be able to exit from the current practice of soaking up bonds in a big way,” said Mapa. “(The) BSP has repeated it would retain an accommodative stance and be part of the economic recovery but with P800 billion on its books, the biggest game in town remains to be the central bank with the BSP almost singlehandedly keeping the economy afloat with analysts and Diokno alike looking to the fiscal cavalry to ride finally ride in.”
According to Diokno, the BSP has indeed “done quite a lot.”
“Even so, our tool kit is far from being exhausted,” he said during the investor forum. He also noted that after cutting the key policy rate by 175 basis points (bps), the monetary policy stance remains appropriate with a benign inflation environment.
“With the policy rate at 2.25 percent and inflation well within target, there is room for further adjustment in the key rate,” he said. “Also, there is room to further reduce the reserve requirement.” The BSP reduced the reserve requirement ratio by 200 bps in March, and Diokno could still lower the reserve ratio by another 200 bps which will release an additional P200 billion liquidity.
He said the BSP “is prepared to do more if warranted” but their actions will be “disciplined- and evidenced-based”.