Philippine banks' asset quality face decay amidst region-wide lockdown

The monetary board’s 50bp policy cut will put additional pressure on NIMs.

The Philippine banking sector could face challenges in asset quality and revenue as the enhanced community quarantine on Luzon Island -- where capital Manila is located -- further hampers business operations, revealed a Fitch Ratings report.

There will be pressure on net interest margins (NIMs) from the 50bp policy cut by the Bangko Sentral ng Pilipinas (BSP) on 19 March following prior cuts in February and in 2019, with more cuts likely in the next few months. However, further slashes in the reserve requirement will slightly counteract yield compression.

Lower revenue and sluggish credit growth will drag profitability this year, the report noted.

The monetary board has extended regulatory relief for banks exposed to COVID-hit lenders which, once approved, will allow banks to stagger provisions for up to five years and exclude loans from being classified as past due within the prescribed time if restructured.

BSP also temporarily relaxed some reporting and single-borrower limit (SBL) requirements, as well as penalties for banks with reserve deficiencies.

The balance-sheet strength of large corporates, which make up the bulk of Philippine banking system loans, would soften the impact on asset quality for now, but longer business disruptions could expose the banks to lumpy asset impairments.

“The proportion of 'debt-at-risk'—or those owned by non-financial corporates with interest coverage ratio of less than 1.2x— would only rise marginally from around 1% of total listed Philippine non-financial listed corporate debt at present if corporates earnings were to fall by 30%, but could jump to 57% assuming a uniformed 75% shock in listed non-financial corporates' EBITDA, based on our estimates,” the report noted.

Philippine banks have satisfactory loss-absorption and liquidity buffers to weather moderate stresses, Fitch said. The international depository receipts (IDRs) of the three largest banks are at par with their support rating floors, indicating that their IDRs should still be anchored even if their viability ratings were downgraded unless state support also weakens, the report concluded.

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