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Philippines: Banks see losses from loan defaults
MANILA, Philippines — S&P Global Ratings said credit losses of Philippine banks may reach $2 billion this year due to deteriorating asset quality arising from defaults amid the coronavirus disease 2019 or COVID-19 pandemic.
Credit loss arises from delinquent and bad debt or other credit that is likely to default. Banks are required to set aside provision for loan losses that are treated as an expense on a bank’s financial statements.
A higher provisioning for loan or credit losses translates to higher expenses for banks, which could result in lower profits.
In a report, Nikita Anand, credit analyst at S&P, said the country’s banking sector is also expected to incur an additional $3 billion in non-performing assets (NPAs).
“We currently estimate that coronavirus disease 2019 or COVID-19 and related market stresses could cause an increase to NPAs of $3 billion (an additional 1.8 percent versus gross loans) and credit losses of $2 billion (an additional 55 basis points versus gross loans),” Anand said.
According to Anand, the impact of the global virus outbreak on the country’s trade, tourism, private-sector investments and consumption would drag on banks’ lending business.
Last March, S&P lowered its credit growth forecast for the Philippines to a range of eight to 10 percent amid the expected uptick in non-performing loans (NPLs) as COVID-19 risk looms over economic growth and financial markets.
This means the country’s banks could see a second year of single-digit growth this year after a long run of double-digit expansions in previous years. Credit growth slowed to 8.8 percent last year from 15 percent in 2018 as corporate loan demand softened due to a delayed passage of the 2019 national budget and the US-China trade war.
The industry’s NPLs rose to 2.1 percent of outstanding loans last year, a 30 basis points increase, partly due to the large default by Hanjin Industries as well as a rising share of retail loans where credit quality is weaker than corporate loans.
Anand said Philippine banks would be able to manage the rise in risk due to good capital buffers, with an average Tier-1 capital adequacy ratio of 14 percent.
“We believe Philippine banks’ good capital buffers, with an average Tier-1 capital adequacy ratio of about 14 percent, will help them manage the rising risks. Stimulus packages and liquidity measures from the government and central bank should cushion the impact to affected borrowers,” Anand said.
Source: https://www.philstar.com/business/2020/04/24/2009327/banks-see-losses-loan-defaults