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Large banks under negative watch on pandemic financial strain

Large banks under negative watch on pandemic financial strain

MANILA, Philippines — A deteriorating economy is posing greater than expected risks on Philippine lenders, three of the biggest had been placed under negative watch by debt watchers in a sign of bleaker things to come for the local banking sector.

S&P Global Ratings announced early Tuesday morning placing into negative the outlook for credit ratings of Bank of the Philippine Islands (BPI) and Security Bank Corp. Hours after, Fitch Ratings did the same for China Banking Corp.

A negative outlook suggests a potential downgrade over the next 24 months. A downgrade would increase banks’ borrowing costs at a time most corporates are tapping the debt market to raise funding. This, in turn, could prevent lenders from lowering borrowing rates for clients in a bid to recoup costs.

“The economic risk for banks operating in the Philippines has turned negative, in our view. We believe the risk of credit losses soaring for the Philippine banks is higher than we expected, given challenging economic conditions,” S&P said. 

“We see at least one-in-three chance that economic risks facing the Philippine banking industry could increase over the next six to 24 months,” it added.

Credit raters have long warned against the repercussions of a pandemic-induced recession on local lenders’ financial stability, but this was the first time a concrete action against banks had been made. Announcements were made hours before trading begin at the local bourse where the banks are listed.

Both S&P and Fitch agreed that banks have come under intense financial pressure from the contraction of the economy, sapping consumer appetite. After entering a recession in second quarter with 16.5% drop in gross domestic product (GDP), Fitch expects GDP to shrink 9% on average this year, while S&P projects a deeper 9.5% slump year-on-year.

But the impact across individual banks differ in scale considering their size and stability. Fitch sees larger banks like BDO Unibank Inc., BPI, Metropolitan Bank & Trust Co. as well as Philippine National Bank more stable than smaller ones like China Bank. 

Lenders are also likely to enjoy government support, if needed, although Fitch noted that funds coming out from central bank decisions that lowered interest rates and mandated reserves are slowly having less of an impact.

“Weak domestic consumption and accelerating credit impairment are turning banks’ operating environment more challenging. Revenue tailwinds from aggressive monetary easing are also likely to dissipate by (second half of 2020),” Fitch said.

“We see further asset quality deterioration in 2021 after the debt moratorium lapses,” it added, pertaining to 60-day loan payment extensions provided under the Bayanihan to Recover as One Act.

S&P sees the same risks from rising bad loans for banks, although it expects even larger lenders like BPI and Security Bank to also have a difficult time. The lower interest rate regime also does not help. “This, along with high credit costs, will weigh on banks’ earnings over the next 18 months,” it said.

More specifically, Ayala-led BPI is seen enjoying the backing of a large conglomerate, healthy capital and several branches to cope with the pandemic, although danger lies on weak “credit cycle” in the broader economy. 

Security Bank is also seen benefiting from strong capital and good funding source. However, a steady increase in unsecured consumer loans before this year now increases risk default from jobless borrowers.

Overall, S&P expects a long road to recovery for local banks to their pre-pandemic financial conditions, likely stretching beyond 2022. “We expect operating conditions for banks and borrowers in the Philippines to improve only gradually,” the credit rater said.

Fitch's and S&P's announcements were made hours before trading begin at the local bourse where banks placed in negative outlook are listed. As of 9:36 a.m. Tuesday, shares at BPI were trading down 0.62% to P64.60 each, while those in Security Bank were down 0.60% to P91.50 apiece. China Bank stocks were trading up 0.23% at P21.65 each.