Philippine banks are not only strong but resilient enough to withstand the pandemic-hit financial market and to help prop up an economy in recession, said Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno.
“While the impact is still unfolding, the good news is that the financial system is in a strong position to both weather the adverse effect of the COVID-19 pandemic and support the country’s economic recovery,” Diokno told members of the Money Market Association of the Philippines in a virtual event. “At the outset of the pandemic, the banking system had significant capital and liquidity buffers, built up due to both the strict BSP regulatory requirements and many years of favorable banking conditions.”
Based on the BSP’s Comprehensive Baseline Survey and from various stress tests employed by the central bank, banks have enough steam to continue to lend and service borrowers, and even “prosper through a broad range of adverse scenarios”.
Diokno said all the BSP has to do now is to “strike a balance between enabling banks to lend to the firms and households” and to make sure banks’ risk exposures are contained as banks handle the challenges of the pandemic.
Despite that banks’ profitability were affected by the lockdown and other restrictions brought on by the health crisis including the necessity to beef up their loan loss provisioning, the loan growth amid the expected increase in bad loans ratio continues.
“Based on the baseline survey, the banking system may grow by 3.6 percent by end- December 2020,” said Diokno. “This expected growth, however, represents the top 20 banks across universal banks, thrift banks and rural and cooperative banks.”
Diokno said their latest assessment of the banking system indicate that eight months into a community quarantine situation, banks’ core funding remains relatively strong and bank lending is slowly inching up.
He said the loan quality has slightly weakened as “borrowers experience cash flow interruptions and sustain losses due to the pandemic” but he said the BSP “don’t see this trend to extend in the long-run, however.”
“Financial assets continue to grow but at a slower pace as banks opted to reduce treasury activities to be liquid,” said Diokno. And, as expected, banks’ net income has declined due additional provisioning. “However, this is likely to be offset by lower operating expenses and deferment of capital expenditures and non-essential expenses,” he said.
Diokno also noted that banks’ liquidity and capital buffers remain intact.
The BSP chief reported that the banking system’s credit growth continued amidst the pandemic, with gross total loan portfolio rising by 1.6 percent year-on-year to P10.7 trillion as of end-September.
Diokno expects loans to the micro, small and medium enterprises (MSMEs) to continue growing, particularly as lending to MSMEs is an alternative compliance to the reserve requirements. We expect loans to the MSME to soar,” he said.
As of the reserve week of October 22, new MSME loans used for compliance with the reserve requirements averaged P127.5 billion, up from just P9.3 billion end-April this year.
Diokno said banks’ loan quality has remained satisfactory, so far. As of end-September, banks’ non-performing loan (NPL) ratio is still “manageable” at 3.4 percent. NPL ratio is higher than same period last year of 2.1 percent. The NPL coverage ratio were lower as of end-September at 91.7 percent.
“We expect the banking industry to book additional provisions as they continue to reassess the quality of the loan portfolio,” said Diokno.
The BSP chief said that based on their review, banks’ financial assets decreased as banks reduced trading activities to remain liquid. He cited survey results as showing that banks’ investments was reduced to maximize portfolio returns.
“The top universal and commercial banks did not introduce major changes in the composition of their portfolios as they assess liquidity risk. Exposures are mostly concentrated in highly-liquid and investment grade instruments. As a natural consequence, profitability declines,” said Diokno.
The net profits of banks as of end-September fell by 25.93 percent year-on-year to P126.78 billion, but Diokno said they expect other operating expenses “will likely be reduced due to lower business volume and capital expenditures and non-essential expenses, will be deferred.”
He said as surveyed, banks’ 2020 net interest income, other fees, and operating expenses will decrease due to provisioning.
“To mitigate the adverse impact of the pandemic on profitability, banks plan to impose cost-cutting measures (deferred capital spending and freeze hiring of non-critical positions); intensify loan collection activities, stricter in loan monitoring; exercise prudence in loan releases; reduce cost of funds and boost marketing campaigns for new loans and deposits,” said Diokno.