COVID-related hits on local banks’ asset quality will critically affect their stand-alone credit profiles and viability ratings (VR), said Fitch Ratings.
The credit watcher echoed what it said last March that big banks are vulnerable to VR downgrades as the economy remains weak resulting to banks underperforming.
VR downgrades could impact the country’s largest banks but as of their latest assessment, the VRs of BDO Unibank, Bank of the Philippine Islands and Metropolitan Bank and Trust Company -- all rated “BBB-“ with stable outlook - are one notch higher than the operating environment score of “bb+”.
Fitch said the three big banks continue to have dominant market positions with a “somewhat lower risk appetite.”
“We expect the banks' asset quality stress to peak by end-2021 and their financial metrics may begin to gradually recover from 2022. However, challenges in the operating environment have intensified and persisted, putting pressure on their viability ratings,” said Fitch. It added that any VR downgrades “will not automatically influence their issuer default ratings as their high systemic importance drive our assumption that sovereign support is likely to be forthcoming, if needed.”
As of end-May, Fitch predicts that the banking system’s non-performing loan (NPL) ratio will peak at six percent by end-2021 from 4.3 percent at the end of the first quarter. This is higher what it said in March that NPL ratio could rise to 4.5 percent by end-2021.
“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,” it noted. “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.”
Fitch reiterated that 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.”
“Revenue tail winds that underpinned banks' pre-provisioning profits in 2020 - including major savings on cost of funds and revaluation windfalls on banks' bond portfolios - are dissipating and we expect revenue growth to be lackluster until at least mid-2022,” said Fitch.
So far, on the second year of the pandemic, the big banks’ capital and liquidity health are “resilient” with slower loan growth and continued profitability helping to “prevent capital impairment and increased balance sheet leverage.”
“We expect this to continue as our forecasts show banks staying profitable based on the current economic trajectory. Ample banking system liquidity gives banks some flexibility in asset liability management, but may also point to a longer runway before credit growth recovers, as businesses first tap on extant liquidity,” said Fitch.
For now, it added that local banks have a challenging operating environment with higher unemployment numbers and an economy still in recession. Fitch expects “muted profitability” in the next 12-18 months with problematic banking asset quality and “very high credit costs over the past year”.