Philippine banks are expected to report a bad loans ratio of six percent this year while a return to profits pre-health crisis could come as late as 2023, according to credit watcher S&P Global Ratings.
S&P Global in its latest report (Philippine Banks: Buffers Won’t Hold If COVID Comes Back) said if the domestic economy’s recovery is delayed or derailed, banks will not see its pre-pandemic financial performance in the next two or three years. And in the absence of a recovery, banks’ financial buffers would not be able to absorb the “rapid deterioration in asset quality”.
The credit watcher stressed that a more contagious COVID-19 variants is a major risk to normalization. Obviously, banks will be the first sectors to recover with a revived economy but it will not happen if herd immunity from massive vaccinations is not achieved. “Relaxation of restrictions in Manila will support stronger activity in the second half. We estimate the country’s GDP will soar 9.6 percent in 2021.
However, this is off a low base, given last year’s sharp contraction. In our view, the output gap won’t likely close over the next three years,” said S&P Global credit analyst Nikita Anand.
S&P Global predicted non-performing loans (NPLs) will “jump” in the first quarter as banks take stock of the impact of grace periods and loan moratoriums last year. They expect NPLs to reach its peak by the second half of 2021 with a recovering economy which contracted by 9.5 percent in 2020 from six percent in 2019.
It is going to be a “long road to recovery,” said Anand. “Asset quality will deteriorate further in the coming quarters as banks recognize the full brunt of COVID-19 on borrowers.”
S&P Global said the industry’s NPL ratio may rise to six percent this year from 3.6 percent during the first pandemic year. Credit costs which is a measure of provisioning for bad loans, will stay elevated at 1.5 percent to 1.8 percent, it added. “We expect sector-wide profits to improve slightly in 2021, with return on assets increasing to one percent on the back of relatively better growth and lower credit costs in 2021. (In our view) consumer and small business loans will continue to see high new NPL formation,” it said.
S&P Global also said that high provisioning in 2020 and capital buffers will “help banks maintain credit standing as they repair financial metrics, assuming the economic revival stays on track.”
However the persistent COVID-19 and new variants continue to cloud the economic and business future.
“(There) remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later.”