Big banks face downgrades if GDP remains weak – Fitch – Manila Bulletin

Credit observer Fitch Ratings said the viability ratings (VR) of Philippine banks are vulnerable to downgrades if the economy does not take off this year, resulting in further deterioration of assets and loan quality amid from a weak operating environment.

“We see more prominent risks of a VR downgrade for the three largest banks as their VRs are currently higher than the assigned operating environment score of ‘bb +’,” Fitch said in its latest bank update report, ” Philippine Banks: 2020 Asset Quality Analysis “.

The three largest commercial and universal banks in the country are BDO Unibank Inc., Metropolitan Bank and Trust Co., and Bank of the Philippine Islands; All of these banks have “bb + / negative” scores, reflecting the impaired lending rate of banks affected by the pandemic.

“On the contrary, Fitch may revise the outlook for the bank’s asset quality scores to stable if we believe that a sustained economic recovery is more likely to persist beyond the short term. All IDRs (issuer default rating) of rated banks are driven by our expectation of sovereign support; therefore, a negative revision to VRs will not necessarily lead to a reduction in their IDRs unless our assessment of the likelihood of state support also weakens, ”Fitch explained.

Still, Fitch added, “we could downgrade banks’ asset quality scores in the coming quarters if weaker-than-expected economic conditions persist.” Fitch projects GDP to rebound to 6.9 percent this year from a 9.5 percent contraction in 2020.

Asset quality and banks’ risk appetite are “key rating drivers” for all local Fitch-rated banks. He noted in the report that negative reviews “would have a major influence on banks’ VRs, as weaker asset quality could result in further weakening financial performance and potentially loss-absorbing buffers.”

“Fitch takes a forward-looking approach when evaluating the quality of banks’ assets. Their asset quality scores have limited range, as we expect the NPLs for most banks to exceed three percent for an extended period of time. This supports our negative outlook on the scores, ”the credit rating agency said.

Meanwhile, Fitch said the recently signed Financial Institutions Strategic Transfer (FIST) law will reduce banks’ gross bad loans held on their balance sheets, “although the pace of disposals may continue to depend on the momentum of the economic recovery.”

“Losses from sales of bad loans to SPVs (special purpose vehicles) can be amortized in five years, softening the impact on the profitability of banks and allowing a faster recovery. 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 noted. “This could position banks for a faster post-crisis recovery if NPL transfers can be successfully executed at reasonable market prices.”

Fitch said that with borrowers struggling to repay their loans after the grace periods provided in the two Bayanihan laws, and given that, unlike other markets with “more aggressive fiscal stimulus (which) have resulted in higher donations of cash and increased employment support, “the situation in the Philippines is seeing a” potentially more pronounced deterioration in asset quality “in the first half of this year than in 2020.

Fitch said the delinquency rate could rise from 4.5% to 5% by the end of 2021. It noted that reported asset quality metrics “still underestimate the underlying deterioration in borrowers’ ability to pay, despite of the significant increase in NPLs in 2020 “from 3.7 percent compared to 2.1 percent in the pre-pandemic stage of 2019. The two Bayanihan laws” helped mask credit deficiencies. “

Fitch also expects the banking system’s NPL ratio, which includes real and other acquired properties or ROPA (foreclosed properties) to increase from 5.5 to 6 percent by the end of 2021 from 4.6 percent in 2020 and the 3.1 percent in 2019. “Most large banks in the Philippines increased their loan loss reserves in 2020 in anticipation of weakening asset quality, which should help limit further risk of impairment. We expect credit costs to remain high in the near term amid faster NPL recognition and higher write-offs, despite the likely decrease in impairment charges in 2021, ”Fitch said.