PH banking system to recover in 2022

Debt watcher Fitch Ratings said the Philippine banking system's financial performance is expected to moderately recover next year.

In its "Fitch Ratings 2022 Outlook: Asia-Pacific Emerging Market Banks" report released on Monday, Fitch said the sector's outlook is improving.

"Loan growth is likely to accelerate with the resumption of business and consumer spending, buoying revenues and offsetting the pressure on margins stemming from excess liquidity," said Fitch Ratings.

"This, along with lower – albeit still elevated – impairment charges, should lead to better net overall profitability," it added.

Fitch Ratings said loan growth is expected to grow by 8 percent in 2022 from the 3 percent projected growth this year. The projection takes into account a low base effect and the gradual economic recovery.

The credit rating agency earlier forecast the Philippine economy to grow by 6.8 percent in 2022.

"Banks are poised to print higher loan growth rates, however, if the economy recovers more quickly than we expect. This takes into consideration the excess system liquidity and banks' large appetite to grow, as reflected in their rapid expansion before the pandemic where loans grew at a CAGR (compound annual growth rate) of 14.6 percent over 2015-2019," it said.

Fitch Ratings however warned that a premature return to high growth would leave banks with depleted buffers, and "vulnerable should the economy face a double dip." According to the credit rating agency, while high-risk appetite in prior years means asset-quality weakness will remain pronounced and challenges could linger until the first half of 2022, the non-performing loan ratio (NPL) will likely decline as the economy recovers and banks write off and sell bad debts.

NPLs are past-due loans with a principle or interest balance that has been unpaid for 30 days or more after the due date. This includes the outstanding balance of loans payable in monthly installments when three or more installments are in arrears.

Impact of FIST Act

The Financial Institutions Strategic Transfer (FIST) Act signed into law earlier this year allows banks to dispose bad assets through asset management companies, and help keep the banking system stable despite the impact of the pandemic.

Data from the Bangko Sentral ng Pilipinas (BSP) showed that as of September this year, banks' gross NPL increased by 29.71 percent to P485.53 billion from P374.30 billion last year.

"Banks are likely to spur sales of bad debt to FIST corporations in 2022 as regulatory procedures and supply and demand dynamics are elucidated. We expect the largest banks to use FIST tactically in most cases, disposing of modest packages of NPLs that have poor prospects of recovery so as to reduce their operational burdens," said Fitch Ratings.

Smaller and state banks with higher NPL stocks meanwhile are likely to offload aggressively to clean up their balance sheets and restore lending capacities.

Fitch Rating said banks' credit costs will also be kept relatively high due to the need to replenish provision buffers.

The report noted that net interest margins (NIMs) will continue to be pressured by lower asset yields due to repriced loans.

Fitch Ratings, however, said this could be mitigated by the faster loan growth and potential cuts to reserve requirements.

"We believe the central bank's monetary policy will remain accommodative, and any hikes in its policy rate in response to domestic inflationary pressures and higher global rates will be measured until the economy is on a firmer footing," it said.

The Bangko Sentral ng Pilipinas (BSP) in its last meeting maintained key interest rates at record lows.

Overnight borrowing, lending, and deposit rates were maintained at 2.00 percent, 1.50 percent, and 2.50 percent, respectively.