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October 01, 2022

Moody’s sees bad debts of Philippine banks declining, profitability improving

Moody’s Investors Service sees the soured loans of Philippine banks declining further, paving the way for improved profitability on the back of easing COVID-19 restrictions in the country.

The credit rating agency said in its latest assessment on the Philippine banking sector that the growth in new non-performing loans (NPLs) would slow down this year as economic activity resumes and sentiment among businesses and consumers improves.

“Banks in the Philippines recognized most of defaults by pandemic-hit small and medium-sized enterprises and retail borrowers in 2021. Hence, a lifting of forbearance measures related to the pandemic will not lead to a sharp deterioration of banks’ asset quality,” Moody’s said.

Data from the Bangko Sentral ng Pilipinas (BSP) showed the NPL ratio of Philippine banks rose for the second straight month to hit a three-month high of 4.24 percent in February from 4.14 percent in January as bad debts almost booked a double digit 10 percent growth to P472.66 billion in February from P431.27 billion in the same month last year.

Moody’s said big banks remain resilient because the diversified revenue sources would help avert a sharp drop in cash flow.

However, it warned that conglomerates are a key source of systemic risk because bank loans are heavily concentrated among them.

“The default risks of undiversified mid-size and large companies operating in sectors severely affected by the pandemic, such as hospitality and retail, remain high, although the easing of restrictions has eased stress for them to some extent,” Moody’s said.

According to Moody’s, the profitability of Philippine banks are expected to improve as loan-loss provisions decline and fee income grows.

It said the loan-loss provisions as a percentage of gross loans would decrease to an average of about 0.8 percent in 2022 as asset quality stabilizes.

“Loan-loss provisions will still remain above pre-pandemic levels as banks continue to set aside provisions to cover lingering asset risks,” Moody’s added.

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