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Banks brace for bad debts



Local banks have increased their loan loss provisions to prepare for a possible threefold rise in credit expenses, amid a sharply slower domestic economy, according to Standard and Poor’s Global Rating.

The lenders, S&P noted, have revealed a large increase in provisions in their first quarter results, in anticipation of higher non-performing loans (NPL) in the coming quarters.

For full year 2020, S&P estimated credit losses to rise threefold, by P100 billion or equal to 1.3 percent of banking sector loans.

Losses can be spread

Banks increased prudent provisions despite forbearance by the Bangko Sentral ng Pilipinas (BSP) that allows them to stagger credit losses related to the effects of the coronavirus disease 2019 (COVID-19) pandemic over five years.

In addition, COVID-19 affected loans can be excluded from reported NPL ratio until December 2021.

The lockdown on the main island of Luzon started in mid-March, meaning the effects of the outbreak on the banking sector’s asset quality will only be apparent in the coming quarters. “The quarter ending March 2020 was largely business as usual for the banking sector,” S&P Global Ratings credit analyst Nikita Anand said.

Strain shows

There were, however, signs of strain in the first quarter in banks’ disclosed credit costs. Bank of the Philippine Islands’ reported credit costs increased to 1.2 percent (annualized) of gross loans for the first quarter of 2020, compared with 0.4 percent for 2019. Similarly, Metropolitan Bank & Trust Co. declared annualized credit costs of 1.4 percent compared with about 0.7 percent for 2019.

Security Bank Corp. reported a surge in credit costs to 4.9 percent on an annualized basis compared with 0.9 percent for full-year 2019. The bank has higher-than-industry exposure to consumer and midsize enterprise loans.

By way of comparison with our 1.3 percent credit loss estimate for 2020, this metric averaged 0.45 percent in the five years from 2015-2019