Fitch Ratings: PH banking system's credit to further weaken in 2021

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Metro Manila (CNN Philippines, March 5) — Fitch Ratings expects the credit portfolios of Philippine banks to worsen even more this year as the country continues to reel from its pandemic-induced economic downturn.

"This is driven by the expiry of a debt moratorium that will prompt more non-performing loans (NPL) to be recognized and lingering challenges in the operating environment amid an anaemic economic recovery," the global credit rating agency said in a special report released on Friday.

The government had put in place grace periods for loan payments to help Filipinos better cope with the pandemic under Bayanihan 1 and 2. However, the latest debt deferral already lapsed last December.

On this note, the international debt watcher expects the Philippine banking system's non-performing-asset ratio to rest within the 5.5-6% range by the end of 2021, up from the 4.6% logged at end-2020 and 3.1% during the year prior.

"We believe the reported asset quality metrics still understate the underlying deterioration in borrowers' repayment capacity, despite the significant increase in NPLs in 2020," Fitch Ratings further explained.

Data from the Bangko Sentral ng Pilipinas revealed banks' NPL ratio surged to 3.7% by the end of 2020, wherein gross NPL, net of interbank loans receivables stood at ₱391 billion. End-2019’s ratio stood at 2.1%, with total loans resting at ₱223.5 billion.

Borrowers are expected to find it more difficult to fulfill loan obligations after the debt moratorium's expiry compared to customers in more developed markets, which are characterized as having "aggressive" stimulus measures which led to bigger cash doleouts and stronger employment support.

Fitch Ratings said this suggests a possible steeper deterioration of asset quality, adding it projects the banking system's NPL ratio to grow to 4.5-5% by the end of the year.

On the flipside, it expects NPL ratios to improve beginning in 2022, but that's assuming economic recovery and a sufficient vaccine rollout are achieved this year.

The Philippine economy plunged by a record 9.5% in 2020, the worst full-year performance ever logged since the government began collating data on annual growths in 1946. Officials are banking on the country's vaccine rollout, which began this March, to propel the economy back on the road to recovery.

The credit rating agency likewise flagged how consumer loans were hardest hit by the health crisis. Many Filipinos went out of work as the Philippines went into lockdown early into the pandemic, with unemployment rate surging to 17.6% in April.

While the country's joblessness figure improved in October as the government eased quarantine rules, this still wasn't enough to translate into better consumer loan asset quality, noted Fitch Ratings.

"This was partly because the unemployment ratio within the National Capital Region, where most of the banks' customers are concentrated, remained stubbornly high at 12.4%," it said. The region's prolonged quarantine restrictions disproportionately affected the Philippine service sector, the NCR’s largest economic driver.

President Rodrigo Duterte signed the Financial Institutions Strategic Transfer or FIST Act into law last February, which allows banks to unload bad loans to asset management companies. While this might help banking institutions dispose of such loans, Fitch Ratings noted the rate at which this can be implemented is anchored on the speed at which the local economy bounces back.

"The major banks continue to be adequately profitable in their core operations and will be able to employ more aggressive write-offs and sell their bad assets to these SPVs," Fitch Ratings said. "This could position the banks for a quicker recovery after the crisis if the NPL transfers can be successfully executed at reasonable market prices," it added.