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DEEPER THAN EXPECTED The recession in the Philippines will increase downside risks for the banking industry, S&P Global Ratings said.
“This year’s recession is likely to affect the debt service capacity of consumers, small businesses and leveraged businesses. The extent of the impact on banks depends on the economic recovery and stabilization of credit conditions in 2021, “S&P analyst Nikita Anand said in a note Tuesday.
Ms Anand said that Philippine banks face a negative economic risk trend as the economy remained in recession in the third quarter. Gross domestic product (GDP) contracted 11.5% in the July-September period, easing slightly from a record 16.9% drop in the second quarter as lockdown restrictions were gradually relaxed amid the coronavirus disease 2019 (COVID-19) pandemic.
S&P expects the Philippine economy to contract 9.5% this year, before growing 9.6% in 2021.
“We expect the operating conditions of banks and borrowers in the Philippines to improve only gradually, thanks to the 9.6% growth of the economy in 2021. These projections assume an eventual Floridaattenuation of the COVID-19 curve, ”said Ms Anand.
The government expects the economy to recover to growth from 6.5% to 7.5% in 2021.
Ms Anand said that local lenders can absorb credit losses as their “good capital position (15% Tier 1 ratio) and more than 100% NPL provisions provide a cushion against difficult operating conditions” .
But a recession longer than S & P’s forecast “could result in substantially higher credit losses for Philippine banks,” Anand said.
“We expect the banking sector’s borrowing costs to remain elevated at 1.5% -2.0% of gross loans during 2020 and 2021 compared to a five-year average of 0.4%. Consumer, micro, and SME (small and medium-sized companies) portfolios will contribute to higher delinquencies (non-performing loans) in the coming quarters, ”he said.
“Large conglomerates, with their strong business profiles by national standards and good access to liquidity, are in a better position to weather the storm. If the recession is longer or deeper than we forecast, this could trigger a sharper deterioration in asset quality for banks, due to the potential stress on the corporate big books. “
At the end of September, the banking system’s gross delinquency rate reached 3.4%, as impaired loans increased 60% year-on-year to P364.672 million.
The central bank expects the delinquency rate to reach 4.6% by the end of 2020. It reached 17.6% in 2002, as a consequence of the Asian financial crisis.
Ms Anand also noted that regulatory tolerance will only delay the true recognition of NPLs. The Republic Law No. 1494 or Bayanihan to Recover as One Act provided a single 60-day debt payment moratorium.
“The effect on individual banks in the coming quarters will be uneven, depending on their exposure to vulnerable segments and their accounting and provisioning standards,” he said.
Banks’ recovery to pre-COVID-19 levels will likely extend beyond 2022, Anand said. – Luz Wendy T. Noble
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