Non-performing loans in banks rise sharply, says Fitch

Non- performing loans ( NPLs), credit where loan takers are delaying payments, is becoming a serious problem for commercial banks.

According to Fitch Ratings, NPLs grew sharply by 64 per cent in 2018 – the sharpest increase since the pawning debacle in 2013 – driving the sector NPL ratio to 3.4 per cent (2017: 2.5 per cent).

This trend continued in 1Q19, with the sector NPL ratio rising further to 4.2 per cent broadly in line with Fitch’s expectations for 2019. The adoption of SLFRS 9 saw loan-loss allowances/gross loans increase to 3.7 per cent (2017: 3 per cent), Fitch said in a media release.

Fitch Ratings said its expectation of continued pressure on banks’ financial profiles due to the challenging operating environment – as reflected in its negative outlook on the sector – is being borne out in their results.

Heightened risks, largely on the macro front, are being manifested in the form of a sharp rise in NPLs.

“Our expectation is for loan growth to decelerate in 2019 (down by 0.4 per cent in 1Q19) on muted private- sector credit demand. Loan growth remained subdued through 9M2018 at 13 per cent, but closed at 19.6 per cent for 2018, due largely to increased state borrowings. Three large state banks contributed about half of the incremental lending in 2018 ( 2017: 42 per cent),” Fitch said.

Pressure on profitability is likely to remain in 2019 from rising credit costs, with SLFRS 9 implementation and weaker asset quality. In addition, the debt-recovery levy imposed in late 2018 should push effective tax rates for the Fitch-rated banks even higher, squeezing profits further.

Fitch said weaker earnings and asset-quality stress will add to capitalisation pressures despite the capital injections made ahead of Basel III implementation. Capital-raising plans could face execution risks, with recent rights issues of banks being significantly undersubscribed, it said.

Tighter Liquidity: The loans/ deposits ratio edged up to 91 per cent during 2018 but dipped marginally to 89 per cent in 1Q19 as loans contracted. The funding profiles of banks are fairly stable as deposits remain the main source of funding.

The loans/deposits ratio edged up to 91 per cent during 2018 but dipped marginally to 89 per cent in 1Q19 as loans contracted. The funding profiles of banks are fairly stable as deposits remain the main source of funding.