Credit watcher Fitch Ratings said Philippine banks will face issues and threats to their profitability in the next 12 months with the rise in COVID-19 cases, the ensuing lockdowns, and its sensitivity to sovereign ratings pressure, which has turned “negative” from “stable”.

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“We expect the COVID-19 pandemic will continue to challenge banks’ business prospects, loan quality and profitability over the next 12 months,” according to Fitch in its latest commentary on local banks’ Issuer Default Ratings (IDR). Its analysis has remained the same from its June and July commentaries.

Fitch has negative outlooks on the IDRs of the three big banks, namely BDO Unibank Inc., Bank of the Philippine Islands and Metropolitan Bank and Trust Co. If Fitch downgrades the sovereign rating, currently maintained at “BBB/negative”, it will mean downward revisions as well to the banks’ Support Ratings Floors and its support-driven IDRs.

“We believe the state-owned banks are the most likely to receive sovereign support among the rated entities due to their full state ownership and unique and expanding roles as state policy intermediaries,” said Fitch, naming state-owned Land Bank of the Philippines which it noted has a “high systemic importance as the country’s second-largest bank by deposits.” Another rated bank, Philippine National Bank, has a sensitive IDR and on a watchlist for a downgrade in its Viability Rating.

“Loan growth will probably remain tepid in 2021, given the subdued economic outlook,” said Fitch.

“We believe there could be a robust rebound when the pandemic subsides, due to the low base effect and banks’ appetite for growth. However, the timeframe is uncertain, especially as many large corporates are sitting on ample liquidity. Household lending is also likely to remain challenged by the sluggish job market and weak property sector,” it added.

Last July, Fitch revised the banking system operating environment score for 2021 to “bb+/negative” from “bb+/stable” to “reflect the potential scarring effects the pandemic will have on the country’s medium-term growth potential and banking system.”

“We downgraded the Viability Ratings of the three large domestic banks to ‘bb+’, from ‘bbb-’, in July 2021, as we believe asset quality and profitability are unlikely recover to pre-pandemic levels over the next 12-18 months in light of the pandemic’s prolonged economic fallout,” explained Fitch.

The Viability Ratings of BDO, BPI and Metrobank are a notch higher than PNB and Landbank, because of they more “established franchises, better management and stronger financial performance over time,” said Fitch. “These banks maintain better underwriting standards and risk controls, complemented by more proactive credit provisioning, which underpin their stronger asset quality,” it added.

Based on Bangko Sentral ng Pilipinas (BSP) data as of end June, Philippine banks reported a combined net profits of P122.67 billion, up 42.88 percent year-on-year. The 46 big banks’ net profits reached P113.492 billion in the second quarter, up by 44.26 percent compared to same time in 2020.

Generally both the BSP and the banking industry continue to expect double-digit growth in assets, loans, deposits, net income, money and capital market investments for the next two years.


Source: Manila Bulletin (https://mb.com.ph/2021/08/19/ph-banks-profitability-to-be-tested-in-the-next-12-months/?utm_source=rss&utm_medium=rss&utm_campaign=ph-banks-profitability-to-be-tested-in-the-next-12-months)