Bad loans now nearly 50% of government’s estimate

Banks’ ballooning bad debts are expected as the economy struggles amid the coronavirus pandemic; and these have become more evident when nonperforming loans (npls) reached nearly 50 percent of the government’s full-year estimate even before the halfway mark of 2020.

According to the latest preliminary data of Bangko Sentral ng Pilipinas (BSP), gross NPLS amounted to P262.68 billion as of end-may, which is 20-percent more than the P218.89 billion notched in the same period last year.

This is already 47.19 percent of the estimated amount of bad loans computed by BSP for this year.

The Central Bank in May said that the financial system is expected to book P556.6-billion worth of NPLS in 2020 amid the economic downturn. This is equivalent to 5 percent in NPL ratio (the portion of NPL to total loans), which is more than double of what the sector has been dealing with in the recent years.

The banking industry might not be able to recover 50 percent to 80 percent, or P278.3 billion to P445.28 billion, of the estimated bad loans, BSP added.

The great lockdown

ING Bank Manila Economist Nicholas Antonio T. Mapa was not surprised with the NPL surge. It was expected because both businesses and households were hit by the financial crisis, he explained.

“The great lockdown, spanning

March through to May, helped contribute to the rise in these loans souring,” Mapa said.

He explained that the lockdown measures resulted in numerous job losses. This prompted cash flow problems, making it more challenging for borrowers to settle their financial obligations, Mapa said.

Unionbank Chief Economist Ruben Carlo O. Asuncion agreed, noting that the current situation weakens the earning capacity of businesses and individuals.

Asuncion said he expects April, May and June to be “the months NPLS will be rising because these are the months when the economy is limited and highly restricted.”

The slump in business activities was reflected in the country’s “worst” economic data such as imports, exports and manufacturing, among others, in April and May, RCBC Chief Economist Michael L. Ricafort observed.

“Thus, this could have led to some pick up in NPL data as many businesses experienced sharp reduction, if not complete stop, in production, operations, and sales, as well as some restrictions on some businesses especially those that are considered non-essential,” Ricafort said.

Joblessness

MAPA earlier flagged the sharp increase in joblessness amid the lockdown would weigh on the ability of borrowers to pay their debts.

According to the Philippine Statistics Authority, at least 5 million Filipinos lost their jobs in April after the Duterte administration placed key economic centers under lockdown beginning March 17. The number translates to 17.7-percent growth in unemployment year-on-year.

The ING economist said unemployment would still be a concern, noting that even the country’s biggest companies were laying off employees.

Several aviation firms including Cebu Pacific, Philippine Airlines and Airasia Philippines reported they were having mass layoffs. The Aboitiz Group was also on the same track.

However, Ricafort remains optimistic that the unemployment rate may slow down after the lockdown began easing mid-may. This allowed more business and individuals to resume work, which could lift jobs data, he said.

“The worst in the unemployment data may have already been seen at the full month of the lockdown in April 2020,” he added.

While unemployment rate could still be in double digits in succeeding months, Asuncion said that it could be better than the April figure as the economy gradually reopens.

Continue its restart

ASUNCION said that further increase of NPLS is highly likely in the second half. The government’s efforts to contain the spread of Covid-19 infection will affect how the economy moves forward, he said, noting this could dictate how the borrowers’ cash flow would fare in order to pay off their debts.

“It would depend on the ability of the government to contain the virus, at this point,” Asuncion said. “Virus infections that are continually rising pose a big hindrance for the economy to continue its restart, and a sluggish reopening would not bode well for individuals and firms trying to get back to work and earn accordingly.”

Mapa agreed that bad loans would continue to rise, considering the anticipated steep economic decline in the second and third quarter. Gross domestic products contracted by 0.2 percent in the first quarter.

Ricafort, meanwhile, said that the relief measures provided by regulators—including trimming of policy rates and credit guarantees—would help cushion the impact of the economic slump to the banking system’s loan portfolio.

Potential losses

S&P Global Ratings forecast shows that banks across the world will incur credit losses amounting to $2.1 trillion for 2020 and 2021 due to the economic slowdown amid the pandemic.

Of this amount, $1.3 trillion is expected to be booked this year, which is more than double the 2019 level, S&P Credit Analyst Osman Sattar said.

Majority or 60 percent of the potential losses in loans portfolio is seen to arise from the Asia-pacific.

“The duration and severity of the global downturn and the strength of the recovery will shape bank asset quality, and key drivers and differentiators will be effective fiscal support from governments to their economies, as well as banks’ forbearance measures and financial reporting transparency,” S&P said.

The debt watcher said it was expecting a robust recovery for the economy in 2021, anticipating that losses will dwindle to a “manageable” level.