Philippine Banks' Asset Quality Challenges to Continue in 2021
The Philippine banking system's credit weakness is likely to persist in 2021 despite a slow economic recovery and the recent enactment of a law to resolve bad debt through SPVs, says Fitch Ratings in a report.
The system's non-performing loan (NPL) ratio rose to 3.7% by end-2020 from 2.1% a year earlier, although it would have been higher if not for regulatory forbearance accorded by the central bank last year.
The expiry of the repayment grace periods should lead to higher credit impairment in 1H21 and we expect the system's total non-performing-asset ratio, which includes real and other properties acquired, to rise to 5.5%-6.0% by end-2021.
The Financial Institution Strategic Transfer Act that was signed into law in February 2021 will allow banks to divest bad loans from their balance sheets and amortize any losses from these sales for up to five years. This could help to temper deterioration in banks' NPL ratios and smoothen the impact on profitability, while positioning banks to accelerate lending when economic conditions normalize. The rate of NPL disposal, however, is likely to remain influenced by the pace of recovery in the economic environment.
In this regard, the Philippines' economic recovery continues to be hamstrung by persistent coronavirus infections and prolonged curbs on economic activity, which are weighing on consumer and business sentiments. Extended weakness in the economic environment that increases the prospects of more severe credit impairment beyond our base case may cause us to downgrade the banks' asset quality scores. This would pressure their standalone credit profiles as we regard asset quality and risk appetite as high influence factors in the banks' Viability Ratings.
Source: Fitch Ratings