Despite rising bad loans, local banks’ growth prospects remain intact amid an economy that is struggling to recover, weighted down by a resurgence of COVID-19/Delta cases when vaccination drives are still slow, according to Moody’s Investors Service.

Moody’s Investors Service

Moody’s said the well-capitalized, sufficiently-buffered big banks can provide loan loss covers even if these expenses will get more costly as the pandemic rages on.

In a report “Banks – The Philippines: Loss buffers will shield sector from growing asset risks amid coronavirus resurgence”, the credit watcher said Philippine banks are maintaining “strong buffers sufficient to absorb new loan losses.”

Despite the spike in NPLs (non performing loans) in the past 18 months, rated Philippines banks maintain sufficient buffers to cover new loan losses after proactively increasing loan-loss provisions in early 2020 in anticipation of increases in problem loans caused by the pandemic,” said Moody’s.

Likewise, it said that local banks have sufficiently strong capital to absorb or resolve any unexpected loan losses. “Their capital ratios will remain high in the next two years as their internal capital generation is likely keep pace with loan growth,” the report said.

In a stress scenario where 50 percent of loans become NPLs, it said its rated banks’ asset-weighted average for common equity ratios would still remain above 15 percent in 2023, which it said is “a strong level.”

Moody’s reiterated that beyond the pandemic, local banks’ long-term growth prospects “remain intact.”

“While the pandemic has severely disrupted the Philippine banking system, its long term growth prospects remain intact because the country has a large, young population that creates a pool of future customers,” it said.

In the first six months of 2021, the combined bank profits increased year-on-year. But Moody’s said the increased provisions as well as weak economic conditions “will keep banks’ core profitability below pre-pandemic levels, until the end of 2022.”

“Provision expenses will remain above pre-pandemic levels, in tandem with growing problem loans. Net interest margins are likely to contract as banks gradually reprice loans lower amid weak credit demand and low interest rates,” it further noted.

Moody’s also said that the impact of the Financial Institutions Strategic Transfer Act (FIST Act), supposed to take care of banks’ non performing assets, will be limited. This is because asset management companies “are typically used to resolve large corporate loans and may not be as effective in resolving granular retail and SME (small and medium enteprises) NPLs.”

With the low vaccination rate and an economic recovery that is always in danger of interruption due to lockdowns, Moody’s said the defaults by individuals and SMEs could only lead to higher NPLs.

It will be different for conglomerates, it added, since these have diversified revenue sources to “help avert a sharp drop in cash flow.”

“However, the default risks of undiversified mid to large-sized companies operating in sectors severely affected by the pandemic, such as hospitality and retail, are increasing due to prolonged lock downs and uncertainty surrounding the easing of restrictions,” said Moody’s.

Source: Manila Bulletin (