Banks’ outlook still cautiously optimistic – BSP survey

Published July 21, 2021, 4:48 PM

by Lee C. Chipongian

Philippine banks continue to have an optimistic outlook in terms of double-digit growth in assets, loans, deposits, net income, money and capital market investments for the next two years, according to the Bangko Sentral ng Pilipinas’ (BSP) first semester Banking Sector Outlook Survey (BSOS), one of its surveillance tools.

However, since the economic and business environment is still mired in COVID-19 pandemic concerns, banks expect bad loans or non-performing loan ratio (NPL) to exceed five percent, also in the next two years. The surveyed big banks estimate an NPL of as high as 6.5 percent.

“The banks’ projections are consistent with the BSP’s NPL estimates for the year 2021,” said BSP Governor Benjamin E. Diokno in a statement Wednesday. He reiterated that the enactment of the Financial Institutions Strategic Transfer Act and the issuance of its implementing rules and regulations will “help limit build-up of NPLs in the financial system.”


The BSOS results said banks are prepared to match the rising bad loans with a higher NPL coverage ratio and to exercise prudence in their credit risk controls. About 75 percent of the universal and commercial banks expect a higher NPL coverage ratio of 50 percent to 100 percent in the next two years, some estimate 76 percent.

As for restructured loans, banks have mixed projections, noted the BSP. “More banks anticipate that the ratio of their restructured loans to total loans to increase,” said the BSP. About 43.5 percent of banks, mostly thrift banks, foreign banks, and rural and cooperative banks said the ratio of restructured loans to total loans could hit more than five percent or up to 15 percent for small banks. Some banks have a conservative restructured loan ratio estimate of between one percent and two percent.

“Overall, asset quality and credit risk emerged as the top-most risk to the banks’ operations,” noted the BSP, adding that risks common to most of the surveyed banks are macroeconomic risks and operational risk. “Enhancing risk management systems was considered by majority of the respondent banks as the primary tool to strengthen the bank against external headwinds. Likewise, strengthening client relationships, keeping a high level of liquid assets, and upgrading personnel capabilities were also deemed important by the respondents in order to protect their respective banks against internal and external shocks,” said the BSP.

Generally, the BSOS which provides insights of bank management on their strategic plans and emerging risks and trends, indicated that while banks expect GDP to grow by five to six percent within the next two years, the consumer loan segment will remain “vulnerable and prone to weakening” and that the hospitality/tourism, as well as the transportation sector will be the hardest hit sectors.

“The upbeat expectations of the banking system based on the results of the BSOS for the first semester of 2021 is testament to its confidence in the strong medium-term prospects of the country’s economy,” said Diokno.

Despite its “subdued optimism” about growth prospects, the overall banking outlook is still stable with 76.3 percent of the surveyed banks projecting a stable banking system in the next two years. About 18.3 percent which was mostly rural and cooperative banks, expect a weaker banking system in 2022 to 2023.

The BSP said banks will survive the legacy risks and challenges of the global health crisis within the next years because of its healthy capital and liquidity buffers, ample loan loss reserves, good earnings performance and prudent risk governance.

And, to ensure their optimistic view is sustained, banks will maintain their Basel capital and liquidity ratios at levels that exceed both domestic and global metrics, said the BSP.

“The Philippine banking system also intends to maintain the Basel ratios (risk-based capital, leverage, and liquidity ratios) at levels higher than domestic and global standards to promote institutional stability,” said the BSP. “In line with the emerging market trends and evolving client needs, banks have recognized the need to integrate technology in achieving business objectives. Thus, respondent banks disclosed that they will continue to prioritize the digitalization of products and services for strategic efficiency in the next two years,” the report added.

The survey results likewise showed what BSP describes as a “distinct shift” towards sustainable financing or the “greening “ of banks.

“A high proportion of banks consistently view sustainable financing as an important strategic objective. As such, around 71.3 percent of respondents plan to finance sustainable projects on agriculture, transportation, water supply management, and solar power in the next two years,” said the BSP.

The BSP has recently issued a draft guidance which aims to further integrate climate change and other environmental and social risks in the enterprise risk management frameworks of banks, particularly on credit and operational risks.