Global debt watcher Fitch Ratings said Tuesday the continued weakness of the Philippine economy will impact banks’ near-term business prospects and could weigh on their standalone credit profiles.
“Banks face a challenging operating environment as the country enters a second year of heightened unemployment and economic downturn. This is reflected in significant deterioration in banking asset quality and very high credit costs over the past year, and a muted profitability outlook over the next 12-18 months,” Fitch said in a report.
It said while most major domestic banks weathered the crisis relatively well so far, their viability ratings might come under pressure as the slowdown increasingly proved to be protracted.
The Philippine economy posted a fifth quarter of GDP contraction in the first quarter this year when it declined by 4.2 percent following a 9.6-percent contraction in 2020, the worst since the end of World War 2.
Unemployment rate continued to be the highest in Southeast Asia at 7.1 percent as of March 2021.
“Economic performance has lagged regional peers’ since third quarter of 2020 and fell short of our expectations in the past year. Fitch now expects a considerably shallower economic recovery in 2021 than in the early stages of the COVID-19 pandemic,” it said.
“The weaker economic outlook translates to diminished revenue growth opportunities for banks, as credit demand remains muted and asset yields are capped by excess liquidity amid a dovish monetary policy,” it said.
“Revenue tail winds that underpinned banks’ pre-provisioning profits in 2020″•including major savings on cost of funds and revaluation windfalls on banks’ bond portfolios”•are dissipating and we expect revenue growth to be lackluster until at least mid-2022,” it said.
Fitch also expects the domestic banking system’s non-performing loan ratio to worsen to nearly 6 percent by end-2021 from 4.3 percent at end-March.
It said the pace of credit deterioration and credit provisioning would likely slow relative to 2020 levels as the economy recovers, “but we expect credit costs to remain significantly above pre-pandemic levels this year.”
Fitch said the major banks’ capitalization and liquidity buffers were resilient, as slower loan growth and continued profitability helped to prevent capital impairment and increased balance sheet leverage.
“We expect this to continue as our forecasts show banks staying profitable based on the current economic trajectory. Ample banking system liquidity gives banks some flexibility in asset liability management, but may also point to a longer runway before credit growth recovers, as businesses first tap on extant liquidity,” it said.
The viability ratings of the three largest banks in the Philippines”•BDO Unibank Inc., Bank of the Philippine Islands and Metropolitan Bank & Trust Co., all rated investment grade or ‘BBB-’ with stable outlook”•are one notch above the operating environment score of ‘bb+’.
“This is because they continue to outperform local peers thanks to dominant market positions, consistent execution and somewhat lower risk appetite. We expect the banks’ asset quality stress to peak by end-2021 and their financial metrics may begin to gradually recover from 2022. However, challenges in the operating environment have intensified and persisted, putting pressure on their viability ratings,” it said.
Fitch said any downgrade of the three largest banks’ viability ratings would not automatically influence their issuer default ratings, as their high systemic importance drive its assumption that sovereign support is likely to be forthcoming, if needed.