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Big loan books keep Philippine banks on alert amid pandemic
Ian Nicolas Cigaral (Philstar.com) – September 30, 2020 – 1:04 pm
MANILA, Philippines – Philippine banks are leading their Asia Pacific counterparts in setting aside funds to cover the potential backlog of bad loans during the coronavirus pandemic, an inevitable consequence of rapid loan growth in recent years.
Fitch Ratings, a debt watcher, now believes that domestic banks ‘sterling loan books are ready for a’ test ‘of a coronavirus pandemic that has damaged borrowers’ ability to pay off their debts.
“Most of the increase in borrowing costs is related to general provisions rather than specific impairments and appears to be in line with the sharp decline in economic activity,” Fitch said.
From the end of last year through June, local banks raised borrowing costs – an indicator of how much banks expect to lose on loans – to 2.38% of their gross loan portfolio from just 0.41%, according to data from Fitch who also cited bank reports.
The lenders’ decision to build their war chest reflects a struggling economy highly dependent on consumers who ended up being “vulnerable” to the health crisis and movement restrictions. The impact could be severe, especially among small and medium-sized businesses, which account for 98% of local businesses and may find it difficult to pay off debt amid cash flow problems.
Property prices, which rose to a record in the second quarter, are also expected to fall, Fitch said. A “severe housing stress scenario” would likely leave mortgage-dependent banks burdened with $ 13.8 billion in losses against an estimated $ 2.1 billion in bad loan coverage.
“Philippine banks are allowed to amortize provisions over a period of up to 5 years, but require case-by-case approval from the central bank,” Fitch said.
“We understand that some banks are exploring this option, but adoption so far has been rare,” he added.
In fact, official central bank data showed growing tension over unpaid debts, albeit still at manageable levels. In July, large banks increased non-performing loans (NPL), or loans that were unpaid 30 days after the due date, by 47.8% year-on-year to Q224 billion. Compared to all of its loan portfolios, non-performing loans represented 2.26%, with expectations of increasing to 4.8% by the end of the year.
At the same time, however, banks anticipated rising bad debts, with loan provisions rising from 69% yoy to P279 billion.
South Korea lowest; India follows the Philippines
Across Asia Pacific, a similar trend of higher provisioning was observed among banks, although lenders in emerging markets did so faster than their developed counterparts. That said, Fitch cautioned that credit losses can be underestimated as some governments ordered deferrals, delaying the recording of bad loans.
Among 79 banks in 16 countries surveyed, South Korean lenders incurred the lowest cost of credit at 0.22% of gross loans as of June, up from 0.08% at the end of 2019.
India joined the Philippines at the other extreme with the highest provisioning equivalent to 2.35% of total loans, albeit less than 6 months ago. “The country’s (Indian) sourcing appears to be out of line with the scale of its economic contraction, which will be among the most pronounced in ASPAC,” Fitch said.
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