PHL banking system gets 2nd warning on asset quality

Fitch Ratings put a negative outlook of the Philippine banks’ asset quality, as further deterioration is likely on the back of expected rise in bad loans for the year.

this comes after the S&P Global Ratings recent assessment that the local banking system will continue to be under pressure in 2021 on account of rising bad loans.

“Fitch Ratings expects the quality of Philippine banks’ credit portfolios to deteriorate further in 2021. this is driven by the expiry of a debt moratorium that will prompt more non-performing loans [NPL] to be recognized and lingering challenges in the operating environment amid an anemic economic recovery,”fitch Ratings Associate Director tamma Febrian said.

the credit watcher further said that the recent passage of the Financial institutions Strategic transfer (Fist) Act may help banks to offload NPLS, though pace of disposal will likely hinge on implementation and economic recovery.

NPLS are also known as soured loans as these are credits that remain unpaid 90 days after their due date, while NPL coverage ratio is the amount of provisions banks set aside to cover for unpaid loans so their balance sheets and operations won’t be gravely affected by the consumers’ inability to pay.

Just last month, S&P Global Ratings made a similar assessment, saying the Philippine banking system’s financial performance is not expected to“return back to normal”in the next two years, as bad loans are expected to start rising in the first quarter of 2021.

their assessment was also on the back of an expected “jump” in NPLS in the first three months of this year as loan moratoriums and fiscal support are phased out.

Fitch Ratings expects NPLS to rise to 5.5 percent to 6 percent of the total banking system’s loan portfolio for 2021. this is around the same level as S&P’S 6-percent NPL ratio projection and a strong acceleration from the 3.7-percent actual NPL ratio towards the end of 2020.

“We expect Philippine borrowers to have a harder time meeting their debt obligations after the expiry of the moratorium than borrowers in more developed markets where aggressive fiscal stimuli have resulted in larger cash handouts and stronger employment support,”fitch Ratings said.