Bankers see bumpy road ahead

MANILA, Philippines — Philippine banks expect another challenging year for the industry as uncertainties brought about by the pandemic translated to higher loan defaults and a sharp slump in credit growth.

Bank of the Philippine Islands president and chief executive officer Cezar Consing described 2020 as “shattering“ and expects 2021 to continue to be challenging for the banking sector amid the global health crisis.

“Shattering, in that it shattered all notions of what we consider to be normal – how we work, how we play, how we relate to one another, and what we can count on. Fortunately, the word resilient is a close second,” Consing told The STAR.

Consing said the industry’s soured loans would probably peak sometime during the year and the banks would probably not have the trading gains that they had this year to cushion credit losses.

“But the economic recovery will begin, and banks will play an important role in ensuring that happens,” Consing said.

Consing, who is also president of the Bankers Association of the Philippines (BAP), said almost all sectors have taken a hit, with the air transport and tourism sectors being the most badly affected.

The president of the Ayala-led bank said the pandemic stressed the importance of a credible digital capability that is important in a low touch world, as well as the well-being of the workforce. “The excesses of the good times will cause problems in the bad times,” Consing said.

Consing said the COVID-19 pandemic is not a result of too much leverage in the system, unlike the Asian financial crisis caused by countries and many of their companies taking on too much debt, with a significant amount of that debt denominated in dollars, as well as the global financial crisis caused by US banks being overly aggressive and making bad loans.

“Today’s crisis is pandemic related. The lockdowns have reduced production and aggregate demand, causing falling incomes and job losses,” Consing said.

Consing emphasized the country and the Philippine banks are in a much better position now because of better debt ratios, as well as stronger capitalization.

Nestor Tan, president and chief executive officer at BDO Unibank Inc., told The STAR, 2020 was unprecedented not only for the banking industry in the country.

“I would describe 2020 as unprecedented, and a very challenging period,” Tan said.

Soured loans have yet to peak

Tan expects the non-performing loans (NPL) of Philippine banks to peak in the second quarter of next year.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the gross NPL ratio of the industry accelerated for the 10th straight month to hit the highest level in more than seven years at 3.69 percent in October from 3.47 percent in September due to the economic fallout caused by the pandemic.

The NPL ratio of Philippine banks ranged from three to 3.4 percent in the first half of 1997 or prior to the Asian financial crisis, but peaked at 18.6 percent in 2001. The level declined to 3.6 percent as of end 2009 or after the global financial crisis as the BSP adopted the Basel standards and pursued reforms, as well as initiatives on credit risk-taking activities.

The industry’s bad debt level surged by nearly 70 percent to hit a record P391.42 billion in October from P230.39 billion in the same month last year, while the sector’s total loan book inched up by 1.2 percent P10.61 trillion from P10.48 trillion.

Restructured loans more than tripled to P136.16 billion from P42.06 billion, while past due loans referring to all types of loans left unsettled beyond payment date jumped by 64 percent to P507.56 billion from P309.26 billion.

Philippine banks sacrificed earnings as provision for loan losses surged by 64.4 percent to P347.7 billion from P211.54 billion in the same month last year.

“The amount of provisioning depends on a bank’s level of conservatism. Some banks, like BDO, anticipate and expect the worst, while other banks will take it as they come,” Tan said.

Despite interest rates at record lows after a cumulative 200- basis- point rate cut by the BSP, the growth in loan disbursements by big banks hit the lowest level in 14 years at 1.9 percent in October from 2.6 percent in September, with total releases amounting to P8.96 trillion.

What debt watchers say

Moody’s Investors Service and Fitch Ratings immediately downgraded the outlook of the Philipines’ banking sector to negative from stable amid heightened asset risks and increased pressure on profitability due to the impact of the pandemic.

“Key asset risks stem from concentrated exposures to large domestic conglomerates. These business groups may withstand immediate disruptions but if the situation persists for a prolonged period, debt payment capacity of weaker companies will deteriorate materially,” Moody’s said.

It pointed out most conglomerates have significantly increased investment in the past few years, resulting in higher debt.

“Because banks’ loans are heavily concentrated on them, even a default by one of them will weaken asset quality in the overall banking system,” it said.

In addition, Moody’s said the quality of loans to small and medium-sized enterprises (SMEs) as well as retail borrowers would weaken because they have limited buffers against stress.

The debt watcher said profitability of Philippine banks would also weaken as higher credit costs amid weaker asset quality.

“Philippine banks credit costs have been among the lowest in Asia, benefiting from healthy economic conditions, and this has supported profitability despite low pre-provisioning profit as a percentage of assets compared to banks in other emerging markets in the region,” it said.

Fitch also said key asset risks stem from concentrated exposures to large domestic conglomerates.

“These business groups may withstand immediate disruptions but if the situation persists for a prolonged period, debt payment capacity of weaker companies will deteriorate materially,” Fitch said.

It pointed out most conglomerates have significantly increased investment in the past few years, resulting in higher debt.

“Because banks’ loans are heavily concentrated on them, even a default by one of them will weaken asset quality in the overall banking system,” it said.

S&P Global Ratings also raised a red flag over the potential impact of the pandemic on Philippine banks, as deeper economic recession could impair the industry’s asset quality, capitalization, and profitability.

S&P said the economic risk trend for banks operating in the Philippines turned negative from stable as the Philippine economy is expected to contract deeper at 10 percent from January to September.

“We believe the risk of credit losses soaring for Philippine banks is higher than we expected, given challenging economic conditions,” S&P said.

S&P warned stress in large corporates could set off a sharper deterioration in the banking sector’s asset quality than its base-case forecast due to significant concentration in the corporate book.

“We see at least a one-in-three chance that economic risks facing the Philippine banking industry could increase over the next six to 24 months. We could lower our economic risk assessment for the banking sector if the recession is longer and deeper than our forecast,” S&P said.

As a result, S&P said the banking sector’s credit costs could stay above 2.5 percent over the next 12 to 24 months.

“Banks’ recovery to pre-COVID-19 levels will likely stretch beyond 2022, noting their fairly strong performance prior to the crisis,” S&P said.

Lessons learned

Tan said the most important lesson learned from the COVID-19 pandemic is to always prepare for the worst.

“We do not know when or where the next crisis will come from, but we know it will come. Given this backdrop, ensuring a strong and conservative balance sheet, as well as preparing for business continuity and operational resiliency is paramount,” Tan said.

Security Bank president and CEO Sanjiv Vohra said the ongoing pandemic taught the banking industry the importance of ensuring business continuity and crisis management, as well as properly securing the safety and health of employees and customers.

“The current situation is unprecedented in the sense that it negatively affects both the demand and supply sides of the economy. The lockdown measures imposed by government are necessary to contain the transmission of the coronavirus, which would have severe consequences to people’s health and the economy if not controlled,” Vohra said.

Vohra said the credit outlook for the Philippines would depend on the easing of mobility and consequently opening of economic activity, the extent of additional fiscal stimulus, and uneven, inconsistent of K-shaped growth.

“What I mean by that is that the crisis induced by COVID-19 is vastly different from any recession that we have seen in the past. So, it’s not going to behave like a normal recession on the economy. Instead, we feel that it is more akin and similar to a war economy in which some sectors will thrive, others will struggle, and some will have to reinvent themselves,” Vohra said.

Promising prospects for 2021

The BSP extended regulatory relief to the industry to enable them to grant equivalent financial relief to their borrowers, including micro, small and medium enterprises (MSMEs).

These include incentivized lending to promote financing to MSMEs and enable these enterprises to carry on with their businesses during the COVID-19 crisis, as well as hasten recovery and sustainability of their operations, during the post-crisis period as well as other policies to ensure access to formal financing channels by retail clients.

The regulator also granted operational relief measures to assist BSP- supervised financial institutions in focusing their limited resources on the delivery of financial services to financial consumers and supported domestic liquidity and extend cheaper financing to borrowers.

Vohra said more promising prospects in commercial lending in industries of fast moving consumer goods, healthcare, and non-mall based electronics retails are seen next year after an unprecedented 2020.

“Our generation has witnessed a second black swan event in a decade. A very rare occurrence and we hope it is the last,” Vohra said.

For his part, Tan also expects things to normalize in the banking sector next year.

“Things should normalize for the banking industry on the assumption that the health issue is addressed by early 2021, with the availability of a vaccine or therapeutics,” Tan said.

Tan said the earnings of Philippine banks may recover in two years as provisioning normalizes and banks benefit from the expected economic rebound.

Bankers are expecting a more bumpy road ahead, but expect the industry to survive the COVID-19 pandemic as the country is in a better position versus the previous shocks.