Fitch Ratings on Tuesday revised its outlook on the Philippines’ banking sector for 2020 to negative from stable, saying the spread of coronavirus disease 2019 will test the lenders’ asset quality and earnings.
Fitch said in a report the revision was done in the face of rising asset-quality risks amid a deteriorating operating environment as a result of the global coronavirus outbreak.
“We also see pressure on revenue from declining interest rates and the resulting economic slowdown, as enhanced community quarantine on Luzon Island—which accounted for more than 70 percent of the nation’s output—dents business operations,” Fitch said.
“We expect pressure on net interest margins from the 50bp policy cut by the Bangko Sentral ng Pilipinas on March 19, 2020, adding to the 25bp in February and 75bp in 2019,” Fitch said.
It said more cuts were likely in the next few months, although further reductions in the reserve requirement would offset the compression in yields to some degree. The BSP reduced the RR ratio by 200 bps to 12 percent on Tuesday.
“Lower revenue, in conjunction with slower credit growth, will weigh on banks’ profitability this year,” Fitch said.
It said the BSP, like many regulators in the region, was extending regulatory relief for banks with exposure to borrowers affected by COVID-19. Once approved by the central bank, banks are allowed to stagger provisions for the said exposures by up to five years, and exclude these loans from being classified as past due within the prescribed time if restructured.
The BSP also eased some reporting and single-borrower limit requirements temporarily and the penalty for banks with reserve deficiencies. Fitch said such reliefs highlighted the authorities’ supportive stance to the banking system.
“In particular, the relaxation in provisioning requirement could considerably alleviate any rise in near-term reported credit costs,” it said.
“Notwithstanding such measures, the weaker operating environment is still likely to exert pressure on loan quality, especially as the quality of recent rapid credit growth has not been tested over the course of an economic cycle. Banks with higher exposures to SMEs are more vulnerable to deterioration in asset quality,” it said.
It said those with outsized exposure to tourism and hospitality would also face extra pressures on asset quality, although this sector accounted for only around 2 percent of banking system loan exposure at end-2019.
Fitch said the balance-sheet strength of large corporates, which make up the bulk of Philippine banking system loans, would for now help to cushion the impact on banks’ asset quality from a moderate slowdown in business operations.
“Nevertheless, prolonged business disruptions could expose the banks to lumpy asset impairments,” it said.
Fitch said it looks into the debt profile of listed corporates to estimate the potential impact on banks’ asset quality.
It said the proportion of ‘debt-at-risk’ or those owned by non-financial corporates with interest coverage ratio of less than 1.2x would only rise marginally from around 1 percent of total listed Philippine non-financial listed corporate debt at present if corporates earnings were to fall by 30 percent, but could jump to 57 percent assuming a uniformed 75-percent shock in listed non-financial corporates’ EBITDA, based on estimates.
Fitch said the strength of large corporates was therefore a key factor in assessing banking-system asset quality.
“We believe that Philippine banks have satisfactory loss-absorption and liquidity buffers to withstand moderate stresses in the system. Any negative rating implications, therefore, would depend largely on the extent the operating environment is likely to weaken and any material and sustained deterioration in asset quality, profitability and balance-sheet buffers,” it said.