Philippine banks’ nonperforming loan ratio (NPL) is projected to jump to 6 percent this year from the 3.6 percent at the end of last year as loan moratoriums and fiscal support are phased out, a report published by S&P Global Ratings on Monday said.
The report titled “Philippine Banks: Buffers Won’t Hold If Covid Comes Back” said NPLs would peak by the second half of the year if economic recovery stays on track.
The report pointed out that credit costs, a measure of provisioning for bad loans, will also remain elevated at 1.5 to 1.8 percent.
“Philippine banks are on a long road to recovery,” said S&P Global Ratings credit analyst Nikita Anand.
“Asset quality will deteriorate further in the coming quarters as banks recognize the full brunt of Covid-19 (coronavirus disease 2019) on borrowers,” Anand added.
The report said that consumer and small business loans will continue to see new high NPL formation.
S&P Global Ratings said banks will grapple with a sluggish revival of credit demand and increasing NPLs for this year, adding that profitability would only have a mild recovery.
It noted, however, that high provisioning in 2020 and capital buffers will help banks maintain credit standing as they repair financial metrics, assuming the economic revival stays on track.
According to the report, reviving economic activity would help banks.
“Relaxation of restrictions in Manila will support stronger activity in the second half. We estimate the country’s GDP (gross domestic product) will soar 9.6 percent in 2021.
However, this is off a low base, given last year’s sharp contraction. In our view, the output gap won’t likely close over the next three years,” it said.
The report likewise cited the importance of the availability of a Covid-19 vaccine but noted that the financial performance of Philippine banks are not expected to reach their pre-pandemic levels until 2023.
“Our negative outlook on rated banks reflects our view that financial buffers could not absorb the rapid deterioration in asset quality likely to ensue if the recovery is derailed. The emergence of yet more contagious Covid-19 variants with the potential to evade vaccine-derived immunity presents a major risk to normalization,” said S&P Global Ratings.