Credit watcher S&P Global Ratings said Tuesday the Philippine economy will likely contract by 9.5 percent this year because of the prolonged the impact of the COVID-19 pandemic—a development that could increase credit losses of the domestic banking industry.
The latest GDP projection is deeper than its previous estimate of a 3-percent decline for the whole year it made in June. This was contained in a report released by S&P to the media Tuesday.
The Philippines is seen to have the worst GDP decline in the Asia-Pacific region in 2020. S&P, however, said, the Philippines was expected to expand 9.6 percent in 2021, the third-best in the region behind Vietnam’s 11.2 percent and India’s 10 percent.
“We believe the risk of credit losses soaring for Philippine banks is higher than we previously expected, given our view that the economy will contract 9.5 percent in 2020, compared to our earlier forecast of a 3-percent dip,” S&P said.
“In our opinion, weak economic activity and tough employment conditions will dilute the Philippine banking sector’s asset quality, earnings, and capitalization over the next two years,” it said.
S&P said credit costs (the ratio of provisions for bad loans to total loans) will stay elevated at 1.5 percent to 2 percent in 2020 and 2021.
It said non-performing assets (including restructured loans) for the sector could rise to 5.5 percent to 7.5 percent of total loans, from 4.6 percent as of August 2020.
S&P said the economic risk trend for banks operating in the Philippines had turned negative, causing it to revise its rating outlooks on two Philippine banks to negative (Bank of the Philippine Islands and Security Bank Corp.) on Oct. 12, 2020.
S&P said Philippine banks should increase their investments in technology and innovation over the coming few years to remain competitive and to cater to the evolving preferences of an increasingly more digital-savvy customers.
S&P noted the Philippines was also taking a step toward a digital revolution with virtual bank regulations in the works. It said youthful demographics, a large untapped market, low costs and regulatory latitude would help the early entrants.
“And S&P Global Ratings believes the incumbent banks may have to make aggressive moves to hold off online rivals. The large banks we rate should retain their market share over the next three to five years supported by their strong brand recognition and longstanding customer relationships,” it said.
The Philippine economy went into a technical recession after GDP contracted by 0.7 percent in the first quarter and 16.5 percent in the second quarter.