Philippine banks' defenses would bow to second pandemic shock

Philippine banks' defenses would bow to second pandemic shock

MANILA, Philippines — Philippine banks' defenses will not be able to absorb a fresh pandemic shock if and when it happens, making it crucial that further reopening does not lead to a jump in infections that can trigger disruptive lockdowns. 

“Early signs of revival” is benefiting lenders which are seeing credit growth picking up and bad loans that stopped them from extending credit peaking by the second half, S&P Global Ratings, a debt watcher, said in a report on Monday.

But the recovery is so slow that the ratings agency “does not expect the industry to reach pre-pandemic financial performance until 2023.” “Philippine banks are on the long road to recovery,” it said.

On top of that, progress can get derailed if economic activity sputters and reopening halts. As it is, vaccination “will be key for a sustaining trend,” something that does not give so much optimism for the Philippines that has yet to inoculate anyone unlike neighboring countries Thailand, Bangladesh and even India.

S&P’s warning that lenders' buffers “won’t hold if COVID comes back” shows the vulnerability of the overall economy to second-wave infections that other nations had also struggled to contain. At home, the impact is expected to be severe if it materializes considering that the government has overly relied on banks to lend and restart economic activity without a corresponding fiscal push.

As it is, lenders are already getting a headache from a surge in bad loans. Non-performing loans, which are credit left unpaid at least 30 days past due date, is seen to shoot up to 6% by the second half from 3.6% as of end last year. 

As a result, banks will set aside more resources to cover profit losses from NPL, which in turn would sideline lending. Credit set aside for this purpose will reach 1.7% of total loans this year, down from 2% last year, but much higher than the historical average of 0.4%.

Also, more real estate loans could turn sour in the coming months as moratorium in debt payments mandated by Republic Act 11494 or the Bayanihan to Recover As One Act expired last year. Earlier, the central bank had said it is indeed monitoring the impact of the reprieve’s removal on banks’ balance sheets.

At the onset however, S&P warned commercial real estate loans, which account for 12% of total loan books, are at higher risk of default than other bank credit as retail establishments that halted operations last year struggle to regain profit.

“Although immediate risk appears manageable, the pandemic might bring structural changes to the commercial real estate segment via shifts in consumer preferences towards online shopping, more flexible work arrangements and cost-cutting measures from consumer driven businesses,” S&P explained.

With economic momentum unfolding slowly, bank profits would do so too, absent one-time spending from last year’s digital push, some of which came in unexpectedly. Loans, which contracted for the first time in over 14 years in January, may also swing back to the green to 5-8% growth this year. 

All these, however, are predicated to a continuous easing of restrictions that would allow mobility to gain pace. Wallowing into pandemic longer would create the opposite effect and hurt banks and ultimately the economy’s defense against the crisis. 

“Weaker than anticipated economic recovery, in the event of prolonged COVID-19, is a key downside risk,” S&P said.