By Luz Wendy T. Noble, Reporter
MOODY’S Investors Service expects bad loans to double on average across 14 Asia- Pacific economies, including the Philippines, by 2022 as the coronavirus crisis drags on.
“We expect banks’ asset quality to deteriorate through mid-2021 [in the Philippines], with most nonperforming loans coming from retail (unsecured consumer loans, credit card and automobile loans) and SME (small, medium-sized enterprises) clients,” Joyce Ong, an analyst of Financial Institutions Group at Moody’s Investors Service, said in an e-mailed reply to questions.
Ms. Ong said banks’ exposure to the hospitality and travel industries as well as to the retail real estate sector poses risks to its asset quality.
The credit watcher expects the bad loan ratio in the Philippine banking industry to hover above 2% from 2020 to 2021 and by about 4% by 2022.
“We project that India, Thailand, Hong Kong and the Philippines will face the most significant GDP (gross domestic product) contraction in 2020,” Moody’s said in a report on Monday, noting the economic recession will translate to higher asset risks for lenders.
Moody’s expects the Philippine economy to shrink by 7% this year, a more negative outlook compared with the 4.5% to 6.6% contraction estimate given by the government. The country slumped into a recession after GDP contracted by a record 16.5% in the second quarter.
Moody’s said they looked into cumulative outcomes in relation to bad loans given that loan moratoriums provided by governments will delay the emergence of problem loans.
In the Philippines, the banking industry’s gross NPLs jumped by nearly a third (32.1%) to P290.1 billion in July from P219.6 billion a year ago, data from the Bangko Sentral ng Pilipinas showed. This brought the bad loan ratio to 2.67%, the highest in six years or since 2.74% seen in August 2014.
In March, the government implemented a mandatory grace period for loan payments in view of the lockdown that has hit both consumers and businesses. Through Republic Act 6953 or the Bayanihan to Recover as One Act, another 60-day debt moratorium was mandated.
The BSP projects the bad loan ratio to rise to 4.6% by the end of this year due to the pandemic. The ratio surged to 17.6% in the aftermath of the Asian financial crisis in 2002.
Amid the projected rise in bad loans, Senate Bill 1849 or the proposed Financial Institutions Transfer Act is among relief measures seen to help lenders as it allows them to offload bad loans to asset management companies. The bill is pending in the Senate while its counterpart measure was already approved by the House of Representatives.
Aside from asset quality, banks will also face higher credit costs and lower profitability due to the crisis and as a result of some monetary easing moves, Moody’s said.
“While credit costs will increase as asset quality deteriorates, we estimate pre-provision income will decline 5%-10% in 2020 from 2019 due to falls in interest rates across APAC and a flattening of yield curves,” it said.
“As a result, banks’ profitability, as measured by return on tangible assets will deteriorate significantly across APAC in the coming years,” it added.
In the case of the Philippines, Ms. Ong said banks’ profitability will remain under pressure due to slower loan growth, higher credit costs and reduced loan yields.
“Higher trading income in the first half of 2020 and a reduction in the reserve requirement ratio will provide some temporary relief to banks’ profitability in 2020,” Ms. Ong said.
The Bangko Sentral ng Pilipinas has slashed rates by a total of 175 basis points (bps) this year to provide support to the economy during the crisis. This has lowered the overnight reverse repurchase, lending, and deposit rates to record lows of 2.25%, 2.75%, and 1.75%, respectively.
It has also reduced the requirement ratio by 200 bps for big banks to 12% while reserve requirements for thrift and rural banks were trimmed by 100 bps to 3% and 2%, respectively.