Credit watcher S&P Global Ratings said Philippine banks will get back its pre-pandemic profitability levels this year with a recovering economy and imminent resumption of business activity.

In its latest report, “Philippine Banking Sector Outlook 2022: Edging Closer To Pre-Pandemic Profitability”, S&P Global said that local banks’ return on assets (ROA) is predicted to “edge closer to the pre-pandemic level of 1.2 percent as credit costs continue to moderate.” The positive momentum for economic recovery is one of the main booster for this to happen, it said.

S&P Global also said that banks’ credit growth will increase by five percent up to seven percent in 2022 which will be supported by the economic recovery and improving business and consumer sentiments. In 2021, credit grew by 4.1 percent.

“Corporate, housing, and credit card loan demand has improved, showing a sharp pick-up in the fourth quarter of 2021,” the report said. It added that “asset quality will stabilize because banks have recognized the bulk of weak loans from COVID-19 fallout.”

S&P Global said that the industry’s “comfortable capitalization and stable funding profiles” will “underpin banks' credit profiles.”

The report also identified three key risks for banks for 2022, such as new COVID variants which could induce stricter lockdown measures and a faster-than-expected central bank policy normalization.

COVID-19 resurgence that derails economic recovery and a rapid rise in interest rates are two out of three risks to the banking sector this year. The third risk is property market disruptions that could also derail improving bank profitability in 2022, S&P Global added.

The key assumptions before banks’ profitability return to pre-pandemic levels include a real gross domestic product or GDP growth of 7.4 percent in 2022, an improvement in the unemployment numbers, and that the central bank will continue to hold off any rate hikes. S&P Global, however, expects the Bangko Sentral ng Pilipinas (BSP) to increase rates by 75 basis points in 2023.

“Improving vaccination coverage and calibrated restrictions will contain COVID-related disruptions (while) increased mobility and improved business and consumer sentiment will support a recovery in the banking sector,” said the credit watcher.

The BSP in its recent Monetary Board policy meeting has decided to maintain a low two-percent benchmark rate. The overnight reverse repurchase rate or the RRP has been at this level since November 2020 due to what BSP still considers manageable inflation path.

The BSP has affirmed that it could afford to keep a patient hand in terms of maintaining an accommodative monetary policy stance but signalled that they could begin normalization process or exit strategy within the year.

“We don't expect rate hikes until next year as domestic inflation is under control,” said S&P Global. It added that the “banking sector's limited reliance on external debt restricts direct impact of US rate hikes.”

“Bank profitability will benefit from rate hikes, but past data indicate that banks' ability to price up is suppressed by steep competition for loans to large conglomerates. We expect a gradual rise in interest rates to be manageable for borrowers as rates will be rising from low levels,” it added.

S&P Global also said that a “rapid rise can dampen credit demand, push some consumers to the edge of default, and pressurize small and midsize enterprises (SMEs) that are still healing from the impact of the pandemic.”

At end-2021, Philippine banks’ cumulative net profits increased by 44.09 percent year-on-year to P223.66 billion, based on BSP data.

In the second year of the pandemic, banks’ bad debts written off reached P7.49 billion in 2021, up by 17.21 percent from P6.39 billion in 2020. The large lenders accounted for bulk of the write-offs at P7.45 billion last year. Writing off bad debts which are non-performing loans clears banks’ balance sheets as these are considered uncollectable debts.

Meantime, banks’ provisions for credit losses on loans and other financial assets decreased by 50 percent in 2021 to P105.61 billion from P211.60 billion in 2020. The big banks’ share amounted to P93.97 billion of P105.61 billion.

Banks’ non-performing loans (NPL) increased by 15 percent year-on-year to P454.49 billion in 2021. This translated to a gross NPL ratio of 3.99 percent as of end-December 2021, higher than 3.63 percent in 2020.

Last year, NPL ratio reached a peak of 4.51 percent in July and August. NPLs are unpaid and impaired loan accounts for more than 30 days.

S&P Global in the report said the NPL ratio has peaked and “is likely to gradually decline, supported by recoveries and write-offs (and) most stressed loans have either been recognized or restructured.”