'Superior' capital buffers to help PH banks absorb losses – Fitch

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Metro Manila (CNN Philippines, December 1) — Philippine banks are likely to weather the recession, Fitch Ratings said in a report Tuesday, but warned that falling yields and real estate prices could be causes for concern.

The debt watcher gave a "stable" rating and sector outlook for local lenders, seeing them on better footing compared to banks in India, Malaysia, and Sri Lanka.

Philippine banks, together with those in Indonesia and Thailand, are seen to maintain "superior" capital buffers that provide strength to absorb losses.

"Profitability in the Philippines' banking sector is likely to be broadly stable, as the benefits of higher loan growth and lower credit provisioning will be offset by compressed margins and the absence of extraordinary trading gains," the Fitch report read.

The country's biggest banks have reported lower profits as of end-September as they set aside provisions for the delays or possible non-payment of these balances. This is seen as a "preemptive" move as the debt watcher expects the share of overdue loans to spike by 2021, with grace periods expiring by mid-December of this year.

The Bayanihan to Heal as One Act, which was in effect from March to mid-June, allowed debtors to pay their dues up to a month after enhanced community quarantine restrictions were lifted nationwide. Its successor, the Bayanihan to Recover as One Act, added a two-month grace period for bills falling due between September to December. 

READ: BSP: About 60% of bank loans benefited from grace periods

Fitch also drew confidence from the strong likelihood of a government bailout should any of the major banks in the country need it.

The debt rater assesses the creditworthiness of BDO Unibank, Metrobank, Bank of the Philippine Islands, Philippine National Bank, China Banking Corp., and the state-owned Land Bank of the Philippines and Development Bank of the Philippines. They are rated regarding their capacity to pay their dues as they issue debt notes to investors.

Key risks to the fate of the industry are the swift drop in property prices as well as narrowing margins, following the decision of the Bangko Sentral ng Pilipinas to trim key interest rates to a record low of 2% last month.

Fitch said the plan to also trim banks' reserve requirement – or the share of total deposits which have to be kept intact – would partly offset the impact of ultra-cheap loans.

"A moderation in Philippine property prices, which have appreciated strongly in recent years, is likely as remittance flows ebb and job market conditions remain weaker than pre-pandemic levels," the credit rater added.

Business closures, including the shutdown of Philippine offshore gaming operators or POGOs, have led to vacancies in commercial and even residential space in the country's biggest economic centers.

While the biggest clients of big banks remain to be conglomerates, vigilance is still needed. "A sustained or significant decline in property prices would have wider repercussions on the banks’ balance sheets, given the sector’s high correlation with the broader economy and as it accounts for 20% of the banks' loan portfolios," Fitch added.

Across developing Asia-Pacific, Fitch noted that there will be "swifter" economic recoveries by next year, which should ease pressure on banks. A better economic outlook would also whet banks' risk appetites, spurring a stronger rebound in economic activity.