Philippine banks' credit weakness to persist throughout 2021

Non-performing assets ratio is expected to rise to 5.5%-6% by the end of the year.

Philippine banks’ credit weaknesses will likely persist through 2021 despite the government’s recent enactment to resolve bad debt through SPVs, reports Fitch Ratings.

Also Read: Philippine banks' bad loans to rise in Q1 2021 as support fades: S&P

The system's non-performing loan (NPL) ratio rose to 3.7% by end-2020 from 2.1% a year earlier, although it would have been higher if not for regulatory forbearance accorded by the central bank last year. The expiry of the repayment grace periods should lead to higher credit impairment in the first half of 2021, according to Fitch.

“We expect the system's total non-performing-asset ratio, which includes real and other properties acquired, to rise to 5.5%-6% by end-2021,” the report stated.

This is despite the signing into law of the country’s Financial Institution Strategic Transfer Act in February 2021, which will allow banks to divest bad loans from their balance sheets and amortise any losses from these sales for up to five years.

The law could help to temper deterioration in banks' NPL ratios and smoothen the impact on profitability, whilst also positioning banks to accelerate lending when economic conditions normalise.

The rate of NPL disposal, however, is likely to remain influenced by the pace of recovery in the economic environment, Fitch said.

Future economic conditions remains uncertain, with recovery continuously hamstrung by persistent coronavirus infections and prolonged curbs on economic activity, which in turn are weighing on consumer and business sentiments.