COVID-19 spells slow loan growth, higher NPLs for Philippine banks

Credit growth will likely be down to 8-10% in 2020.

The new year may bring slow loan growth and more nonperforming loans (NPL) for Philippine banks as the COVID-19 risk mounts over economic growth and financial markets, an S&P report said.

Whilst sluggish trade and private investments will drag on the lending business, strong fundamentals will protect banks from external pressures, said credit analyst Nikita Anand.

Credit growth is expected to be 8-10% in 2020 from the previous forecast of 10-12%, meaning that Philippines banks might see their second year of single-digit growth after a series of double-digit increments in previous years. Last year, credit growth decelerated to 8.8% versus 15% in 2018 as corporate loan demand was muted over a delay in passing the Philippine budget and the US-China trade tensions.

“In our view, the impact of COVID-19 could drag on demand for corporate loans—which make up 82% of the banking system's loans—and stifle momentum in the retail segment. Last year, retail loans were a key growth driver, expanding 16% year-on-year,” Anand said.

Further, Philippine banks’ exposure to hotels and catering, and retail trade may lead to higher delinquencies, Anand said.

Macroeconomic headwinds may lead to higher NPLs this year. In 2019, NPLs increased 2.1% of outstanding loans, a 30bp growth, owing to the large default by shipping firm Hanjin Industries and rising retail loans where credit quality is weaker than corporate loans.

"Banks may offer moratoriums on repayments for badly hit sectors if the health situation escalates, similar to in Singapore and Thailand," Anand noted.

Certain actions by the Bangko Sentral ng Pilipinas (BSP) and good capital buffers with an average Tier-1 capital adequacy ratio of about 14% will help the sector weather the risk. Banks posted an average 20bps increase in return on assets to 1.3% in 2019 boosted by a 400bp cut in reserve requirement ratios (RRR) and higher trading gains amidst a falling interest rate.

The BSP slashed policy rates by 25bp in February over the coronavirus outbreak, with possible further easing to lift the domestic economy. Profits could also benefit from good treasure gains, with more RRR cuts expected, as banks will channel funds to grow or pay down high-cost time deposits, the report concluded.

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