S&P: Pandemic to weaken asset quality of AsPac banks

The ongoing coronavirus disease 2019 or COVID-19 pandemic will weaken the asset quality and take a big chunk out of earnings of banks in Asia Pacific in the next two years, according to S&P Global Ratings.

In its latest industry report card titled “Top 60 Asia-Pacific banks: COVID-19 drives downside risks as credit losses jump and earnings fall,” S&P said the extent of defaults from borrowers and banks’ credit losses would become clearer when government unwinds fiscal support and banks end their loan repayment moratoeconomic rium.

“We expect most institutions in the region will show a multifold rise in credit losses and a sharp drop in earnings in the next two to three years due to the COVID-19 induced economic downturn.

Sharad Jain, director and lead analyst for financial institutions at S&P, said Asia Pacific’s recovery would stretch to 2023, weakening banks’ asset quality and taking a big chunk out of bank earnings in the next two years.

The debt watcher expects $2.7 trillion of economic output would be lost in Asia Pacific this year and next year, hitting the performance of banks in the region.

It added the ratings on lender are clearly linked to the region’s economic health, with the gross domestic product (GDP) of the region normalizing by 2023 at the earliest.

“We expect most banks in the region to be able to absorb the hits from COVID-19, but we may downgrade some lenders, particularly if economies deteriorate more severely than we now assume,” Jain said.

S&P pointed out the main risks are that the pandemic lasts longer and is more severe, and that no vaccine or treatment would be available before the second half of 2021.

The international credit rating agency warned a more severe and prolonged hit to the economies in Asia Pacific would almost certainly push banks’ credit losses higher, drive earnings lower, and amplify other risks.

“We consider that many large banks in Asia-Pacific demonstrated strong metrics at the onset of COVID-19.

Nevertheless, we forecast that banks in the region will account for about 60 percent of credit losses globally during 2020 and 2021,” S&P added.

According to S&P, non-performing loans would remain elevated in several countries beyond the next two years as it would take some banks years to resolve problematic loans as economies start to recover.

Likewise, bank earnings would be suppressed at least for the next year amid steep rise in credit losses and a sizeable drop in interest margin as well as fee income.

“We believe banks in many countries in the region will struggle to struggle to return to pre-COVID earnings levels amid persistently low interest rates, weak household and business spending, and heightened competition, including from non-traditional players,” S&P said.

Latest data from the Bangko Sentral ng Pilipinas (BSP) showed the NPL ratio of Philippine banks rose for the fifth straight month to hit a fiveyear high of 2.43 percent in May from 2.31 percent in April amid the sharp rise in past due, as well as restructured loans amid the containment measures to prevent further spread of the deadly COVID-19.

On the other hand, earnings of Philippine banks grew 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 to prepare for the onslaught to bad loans due to the pandemic.

The debt watcher expects the Asia Pacific economy to contract by 1.3 percent instead of growing by 4.7 percent this year before bouncing back with a growth of 6.9 percent instead of 4.8 percent next year.

“While we expect GDP trends to revert to pre-COVID levels by the end of 2023, we believe the outbreak will have permanently reduced the region’s economy by two to three percent,” it said.