‘Banks well positioned vs financial crisis’

The economic slump in Asia will not likely lead to a financial crisis as banks remain well-positioned to absorb losses arising from bad loans, said London-based Capital Economics.

In a new report, the economic think tank firm said the with the exception of India, banking sectors across the region headed into the crisis in good shape.

These include banks in the Philippines, Indonesia, Thailand, Malaysia, Korea and China.

“The economic recession now underway will cause a sharp rise in non-performing loans, but most banks are wellplaced to absorb the losses. This reduces the risk that a severe economic downturn morphs into a full-blown financial crisis and economic depression in Asia,” said Capital Economics.

Banks, however, can be expected to become more cautious in lending in the future following the spike in non-performing loan ratios which can pose a challenge to recovery.

“We expect regional GDP to contract by four percent this year, which would be the biggest fall in output since reliable records began,” the report said.

“A downturn of this size will lead to a jump in bankruptcies and a big increase in unemployment, that will lead to a rise in NPL ratios. A big increase in NPLs could lead banks to become more cautious about the future and reduce lending, which could drag on the economic recovery.”

Philippine banks have been preparing for a surge in bad loans by increasing their buffers and sacrificing higher earnings amid the coronavirus pandemic.

Data from the Bangko Sentral ng Pilipinas showed that earnings of Philippine banks increased by 9.3 percent to P59.66 billion in the first quarter of the year from P54.59 billion in the same quarter last year despite higher provisioning in preparation for the increase in bad loans.

The banking industry’s provision for credit losses on loans and other financial assets jumped by 43 percent to P14.09 billion from January to March compared with P9.85 billion in the same period last year.

Likewise, bad debts written off by Philippine banks surged by 28.7 percent to P1.24 billion in the first quarter from P961.48 million a year ago amid the outbreak.

The government announced that Metro Manila, Laguna, and Cebu City in Visayas will be placed under a so-called modified enhanced community quarantine beginning May 16 until May 31.