The Philippines is grappling with one of the worst Covid-19 epidemics in Asia, and the strict restrictions that have been put in place over the past year have caused gross domestic product to contract for five quarters, including a decline of 4.2% in the first three months of 2021..
“The number of infections has remained high, which has led to one of the toughest lockdowns in the world,” said Sian Fenner, senior economist for Asia at Oxford Economics. “It really weighed on household spending in an economy driven by domestic demand rather than exports.”
As of June 10, the country had 1.29 million cases of Covid-19 and 22,312 deaths.
The economic fallout from Covid-19 has led to a sharp decline in pre-tax profits and return on equity at major commercial banks. “Philippine banks had to contend with a fundamentally weaker operating environment,” said Willie Tanoto, director of Asia-Pacific financial institutions at Fitch.
Past areas of growth, such as consumer loans, have declined significantly as rising unemployment eats away at household incomes. Unemployment stood at 8.7% in April, up from 4.5% at the end of 2019, according to the Statistics Authority of the Philippines.
The central bank, Bangko Sentral ng Pilipinas (BSP), cut its policy rate five times in 2020 in an attempt to limit the economic damage and reduced the reserve requirement ratio of banks to 12%. In an interview with Nikkei Asia posted on June 2, BSP governor Benjamin Diokno said he was “open to doing more”, suggesting new measures this year.
Credit growth has been disappointing, suggesting weak demand for loans despite accommodating monetary conditions
Capital Economics expects the BSP to cut rates by an additional 25 basis points in the second half of 2021. “This is a pretty unfavorable outlook for the banking sector,” says Alex Holmes, Asia economist at Capital Economics . “Credit growth has been disappointing, suggesting weak demand for loans despite accommodating monetary conditions.”
Bank loans contracted 5% year-on-year in April, according to the BSP. “On the demand side, not many people want to borrow right now because the economy is so weak,” Mr. Holmes said.
Rising credit risk
Economic pressure will impact credit growth, asset quality and earnings for Philippine banks this year, said Nikita Anand, Philippine bank analyst at S&P Global Ratings. “For the banks, we see a high credit risk due to the delay in the economic recovery.”
S&P Global and Fitch predict that the non-performing loan (NPL) ratio for the Philippine banking system will reach 6% by the end of 2021, due to the degradation of loans to small and medium businesses and consumers.
Despite the negative outlook, the country’s major banks are well positioned to weather the storm, Ms. Anand said. Many of the leading Philippine banks are part of large conglomerates with diverse business profiles and good access to liquidity. “The Philippines is a very conglomerate-driven landscape. There is abundant liquidity in the banking system, ”she adds.
Banks built up substantial provisions of 2% of total loans last year, compared to a historical average of 0.4%, according to S&P Global. “A Tier 1 capital ratio of 14% and adequate provisioning on stressed loans provide downside protection,” says Anand.
Still, the banks are in good shape, says Fitch’s Tanoto. “They have enough profitability to take a huge hit on the credit depreciation last year and have been a big buffer. The NPLs are growing at a pretty rapid rate, but they still have sufficient reserves. They are fundamentally weakened, but they’re not in crisis mode, “he said.” The long-term fundamentals of the Philippine banks and economy remain intact. We expect a relatively strong economic rebound this year that will put the banking sector back on track. . “