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Banks’ soured loans decline in Dec.

SOURED LOANS held by big banks edged lower in December, reflecting the impact of a temporary grace period for borrowers affected by the coronavirus disease 2019 (COVID-19) pandemic.

Analysts, however, warned banks will see a steady rise in bad loans in the coming months as relief measures expire and borrowers continue to struggle with debt repayment amid the crisis.

Preliminary data from the Bangko Sentral ng Pilipinas (BSP) showed the gross nonperforming loan (NPL) ratio eased to 3.61% from 3.78% as of end-November, but higher than the 2.08% logged in 2019. 

The NPL ratio was better than the 4.6% projection by the BSP for end-2020. The bad loan ratio peaked at 17.6% in 2002 in the aftermath of the Asian Financial Crisis.

Soured loans in December slipped by 2.34% to P391.657 billion from P401.054 billion in November, but a 74.8% surge from the P224.1-billion level in the previous year.

NPLs include credit left unpaid at least 30 days beyond the due date, which are considered as risky assets as these have high risk of default.

The decline in bad loans in December ended 10 consecutive months of growth. 

A one-time 60-day loan grace period was mandated under Republic Act No. 11494 or the Bayanihan to Recover as One Act. However, the law expired on Dec. 31, 2020, which means borrowers will have to resume repayments or incur penalties. 

“We are actually expecting NPL ratios to trend higher as the protection from Bayanihan [II] expires, which could result in more loans going bad, with consumers and firms alike facing challenges in making payments on time,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail. 

Tamma Febrian, Fitch Ratings associate director for banks – APAC, said the NPL ratio in December follows the historical trend of a seasonal dip in the bad loan ratio during the month, partly due to the yearend’s higher loan denominator and pickup in repayments and write-offs.

“Write-offs could be particularly pronounced this year in the credit card and micro-finance sectors, where growth has been rapid in recent years and where repayment capacity was under extra pressure in 2020,” Mr. Febrian said in an e-mail.

Despite easing from its end-November level, the bad loan pileup continued to outpace the growth of the industry-wide credit portfolio which inched up by 2.26% to P10.862 trillion from P10.621 trillion. Year on year, the total loan portfolio of banks slipped 0.9% from the P10.966 trillion as of end-December 2019. 

Meanwhile, BSP data showed past due loans dropped 4% to P482.115 billion as of end-December, from P502.355 billion in the previous month. However, this was still 62% higher than the P297.249 billion logged a year ago. This brought its ratio to 4.44% as of end-2020 from 2.71% in 2019. 

On the other hand, restructured loans continued to increase by 49.4% to P207.278 from P138.69 billion in November, and by 380% from the P43.156 billion a year ago. With this, the restructured loan ratio as of end-December stood at 1.91%, up from 0.39% as of end-2019. 

In response to weaker asset quality, banks increased their allowance for credit losses by 4.1% to P367.094 billion from November’s level and by 77% from a year ago. This pushed the ratio to 3.38% of the total loans against the 1.89% in the comparable year-ago period.

Industry-wide NPL coverage ratio, which gauges the allowance for potential losses due to bad loans, rose to 93.73% from 92.59% as of end-December 2019.

PRESSURE ON ASSET QUALITY

Despite relative improvement in banks’ asset quality in December, analysts said banks will continue to feel the pressure this year, as the country has yet to emerge from recession.

“We expect NPL ratios will continue to rise in the first half of 2021 as the prolonged curtailment of business activity continues to strain borrowers’ debt repayment capacity,” Joyce Ong, an analyst at the Financial Institutions Group of Moody’s Investors Service said in an e-mail.

Although the bad loan situation will not likely surpass the aftermath of the Asian Financial Crisis, analysts said the banking industry will still see the impact of the downturn in its loan book and profitability.

“Even if we do not expect a surge to the double-digit levels, we do expect bank lending to be impaired for some time given the sharp drop off in economic prospects,” Mr. Mapa said. This will, in turn, dent investments, he added. 

Bank lending fell by 0.7% year on year in December, the first decline in over 14 years following the already tepid 0.5% credit expansion in November.

In a separate note, S&P Global Ratings warned that further “stress in large companies could set off a sharper deterioration in banks’ asset quality,” given big businesses make up a big chunk of lenders’ credit portfolio.

“Growth prospects remain a challenge for Philippine banks amid low interest rates and a weak domestic operating environment,” Moody’s Ms. Ong said.

The Financial Institutions Strategic Transfer (FIST) Act is awaiting the signature of President Rodrigo R. Duterte. When enacted, the measure will allow banks to transfer nonperforming assets to asset management companies.

“The FIST’s special purpose vehicles may allow for faster resolution of legacy bad assets and position banks for a quick recovery than two decades ago,” Mr. Febrian said.

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