Philippine banks remain in good standing despite rising bad loans, as many clients face financial difficulties because of the repeated lockdowns and mobility restrictions.
Results of the latest Banking Sector Outlook Survey for the first semester of 2021 show that banks expect double-digit growth in assets, loans, investments, deposits and net income in the next two years.
Bangko Sentral ng Pilipinas Governor Benjamin Diokno said the upbeat expectations of the banking system was a “testament to its confidence in the strong medium-term prospects of the country’s economy.”
Local lenders also intend to maintain their Basel capital and liquidity ratios at levels higher than domestic and global standards to promote institutional stability and strengthen capacity to support requirements of a growing economy.
Meanwhile, majority of the survey respondents expect their non-performing loan ratio to exceed 5 percent in the next two years.
Universal and commercial banks see their NPL ratio settling between 3.0 percent and 6.5 percent in the next two years.
This is, however, accompanied by greater prudence in the management of credit risk by the industry as a higher number of banks intend to report NPL coverage ratio of more than 50.0 percent to 100.0 percent.
“The banks’ projections are consistent with the BSP’s NPL estimates for the year 2021. The enactment of the Financial Institutions Strategic Transfer Act as well as the issuance of its implementing rules and regulations in the first semester of 2021 will help limit build-up of NPLs in the financial system,” Diokno said.
Banks also anticipate restructured loans ratio to be higher than 5.0 percent from earlier projections of between 3.0 percent and 5.0 percent of loans. This reflects continued efforts of banks to grant financial relief to their borrowers through modifications in their loan payment terms.
Banks now recognize the need to integrate technology in achieving their business objectives and prioritize the digitalization of products and services for strategic efficiency in the next two years.
Mindful of cyberthreats following the lockdown and remote working arrangements, more than half of the respondent banks are ‘prepared’ to handle and manage cyberthreats.
Lastly, the survey results show a distinct shift in organizational focus towards sustainable financing. A high proportion of banks consistently view sustainable financing as an important strategic objective.
As such, around 71.3 percent of respondents plan to finance sustainable projects on agriculture, transportation, water supply management and solar power in the next two years.
The Philippine banking system is projected to withstand the legacy risks and challenges of the COVID-19 pandemic within the next two years on account of stable and sound capital and liquidity buffers, ample loan loss reserves, good earnings performance and prudent risk governance.
The survey provides insights of bank management on the strategic direction of the industry and emerging risks and trends. This is a part of BSP’s surveillance tools to promote the resilience of the banking system.
BSP data show that total assets of the Philippine banking system increased by 6.5 percent year-on-year, albeit with decelerated growth, to P19.3 trillion as of end-February 2021. Asset expansion remained positive and was funded by deposit generation, bond issuances and capital infusion.
By banking group, universal and commercial banks had the biggest share of the total assets of the banking system at 92.8 percent (P17.9 trillion), followed by thrift banks at 5.8 percent (P1.1 trillion) and rural and cooperative banks at 1.4 percent (P0.3 trillion).
The BSP said the tepid credit growth of the banking system was expected, as the pandemic-induced recession in the real sector caught up and weighed on the financial sector.
Gross total loan portfolio declined year-on-year by 3.0 percent to P10.6 trillion as of end-February 2021, slower than the 10.2 percent growth rate posted in February 2020
Meanwhile, the bank credit-to-GDP (annualized, nominal) ratio stood at 60.5 percent as of end-December 2020.
As a result of the BSP’s monetary policy easing through reduction in key policy rates and reserve requirements, the overall mean and median interest rates on loans of banks also showed a general downtrend from end-March 2020 (start of the enhanced community quarantine) to end-February 2021.
The banking system’s overall mean weighted average interest rates declined to 4.9 percent as of end-February 2021 from 8.2 percent as of end-March 2020 and 7.0 percent as of end-June 2020. Banks’ median WAIR similarly declined to 4.4 percent as of end-February 2021 from 5.8 percent as of end-March 2020 and 5.4 percent as of end-June 2020.
A consistent declining trend was generally observed specifically in both mean and median WAIR of loans to private corporations, agrarian reform and other agricultural loans, small and medium enterprise loans and loans to individuals.
NPL loan ration
Amid the COVID-19 pandemic, the banking system’s non-performing loan ratio widened to 4.1 percent as of end-February 2021 from 2.2 percent a year earlier.
The increase in NPLs was matched by higher loan loss provisioning. Banks began recognizing loan loss provisions since the start of 2020 to provide cushion in anticipation of the adverse impact of the
pandemic on their loan portfolios. This resulted in a high NPL coverage ratio of 86.6 percent as of end-February 2021.
Across banking groups, U/KBs posted a high NPL coverage ratio of 95.3 percent. Meanwhile, the expected credit losses of TBs and RCBs remained well-covered, with NPL coverage ratios of 51.9 percent and 55.5 percent, respectively.
The banking system’s funding mainly came from deposits at 76.9 percent (P14.9 trillion), capital at 12.7 percent (P2.5 trillion) and bonds payable at 3.6 percent (P0.7 trillion).
Total bank deposits increased by 9.0 percent year-on-year to P14.9 trillion as of end-February 2021.
By banking group, U/KBs had the largest share of deposit liabilities at 92.9 percent (P13.8 trillion), followed by TBs at 5.7 percent (P0.9 trillion) and RCBs at 1.4 percent (P0.2 trillion) as of end-February 2021.
The U/KB industry posted a high year-on-year deposit growth of 10.0 percent, above the PBS deposit growth of 9.0 percent during the period. Meanwhile, the TB industry reported a decline of 5.0 percent in deposit growth during the same period.
Bonds payable went up by 15.0 percent year-on-year to P0.7 trillion as of end-February 2021.
The capital adequacy ratios of the U/KB industry on solo and consolidated bases are well above the minimum thresholds set by the BSP at 10 percent and the Bank for International Settlements at 8 percent.
As of end-December 2020, the CARs of the U/KB industry stood at 16.6 percent and 17.1 percent on solo and consolidated bases.
While the banking system remained on positive bottomline, net profit declined by 32.7 percent year-on-year to P155.2 billion in 2020. Net profit was weighed down by the increase in the
provision for credit losses on loans and other financial assets amounting to P211.6 billion for the year-ended December 2020.
Banks’ physical network continued to expand. The number of bank offices grew to 13,056 as of end-February 2021, composed of 532 head offices and 12,524 other offices.