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Philippines: Slow economy risks bank’s credit profiles
THE Philippine economy’s continued underperformance puts pressure over banks’ near-term business prospects, which could also weigh on their standalone credit profiles, according to Fitch Ratings.
In its latest forecasts, Fitch Ratings was eyeing a considerably lower Philippine economic recovery in 2021 as compared to the early stages of Covid-19 pandemic. This can translate to diminished revenue growth opportunities for banks, it said.
“Banks face a challenging operating environment as the country enters a second year of heightened unemployment and economic downturn. This is reflected in significant deterioration in banking asset quality and very high credit costs over the past year and a muted profitability outlook over the next 12 to 18 months,” Fitch Ratings said.
“Most of the major Philippine banks have weathered the crisis relatively well, so far, but their viability ratings may come under pressure as the slowdown increasingly proves to be protracted,” the international credit rating agency added.
The country’s gross domestic product (GDP) shrank by 4.2 percent in the first quarter of 2021, extending the recession to five straight quarters as the Covid-19 pandemic dragged on. The unemployment rate worsened at 7.1 percent, the highest in Southeast Asia as of March 2021.
Meanwhile, Philippine economic performance lagged compared to regional peers since the third quarter of 2020, confirming Fitch Ratings’ forecast that the economy will recover much slower than expected.
“The weaker economic outlook translates to diminish revenue growth opportunities for banks, as credit demand remains muted and asset yields are capped by excess liquidity amid a dovish monetary policy,” Fitch Ratings said.
It predicted that banks would see “lackluster” revenue growth until at least mid-2022. “We expect the system’s nonperforming loan ratio to worsen to nearly 6 percent by end-2021 from 4.3 percent at end-March.”
Also, more business failures are expected in the mid-market segment, Fitch Ratings said, as consumer and business sentiments remain dampened by increasing Covid-19 cases and consequent social distancing protocols.
“The pace of credit deterioration and credit provisioning is likely to slow relative to 2020 levels as the economy recovers but we expect credit costs to remain significantly above pre-pandemic levels this year,” it stressed.
Based on the current economic trajectory, major banks are expected to remain profitable “as slower loan growth and continued profitability helped to prevent capital impairment and increased balance sheet leverage,” according to Fitch Ratings.
The agency noted that for the country’s three largest banks, namely BDO Unibank Inc., Bank of the Philippine Islands and Metropolitan Bank and Trust Co., which are all rated “BBB- with Stable Outlook,” are “one notch” above the operating environment score of “bb+.”
“This is because they continue to outperform local peers, thanks to dominant market positions, consistent execution and somewhat lower risk appetite. We expect the banks’ asset quality stress to peak by end-2021 and their financial metrics may begin to gradually recover from 2022,” Fitch Ratings explained.
“However, challenges in the operating environment have intensified and persisted, putting pressure on their viability ratings,” it added.
Source: https://www.manilatimes.net/2021/06/02/business/top-business/slow-economy-risks-banks-credit-profiles/1801604