Wave of loan restructurings seen

Philippine banks are seen mostly willing to restructure, but not condone, debt incurred by businesses that are now under distress due to the COVID-19 pandemic.

During a recent Management Association of the Philippines meeting via videoconferencing, BDO Unibank Inc. president Nestor Tan said that given the challenging environment to date, banks would be “more understanding” and willing to make sure that viable companies could recover at the appropriate time.

However, the chief of the country’s biggest lender said “forgiveness” of debt was not the right word to describe how banks should deal with the current challenges.

“Let me start with the basic principle that we hold a fiduciary responsibility to take care of your deposits. So, if somebody says, are you willing to forgive debt, my retort will be: Are you the first one to give a portion of your deposits? And obviously the answer would be no,” the veteran banker said.

The implementing rules of the Republic Act No. 11469, or the Bayanihan to Heal As One Act, mandated a nationwide 30-day moratorium on all loan payments. The extension of the enhanced community quarantine automatically lengthened the mandatory grace period.

“At a time like this, the problem is actually tiding you over during this time when you don’t receive revenues from your business, so it’s a cash flow problem,” Tan said.

“Banks have always been there to restructure. We’ve gone through 1997 (referring to the Asian currency crisis) and we’ve gone through 2008 (US-epicentered global financial crisis) and we’ve always been able to recover with the economy. We have been able to support the economy for it to recover. And banks that had problems were able to recover,” Tan said.Debt restructuring involves an overhaul of the loan agreement, typically to give an illiquid but still viable borrower more breathing room. This could be in the form of a reduction in the interest rates on loans or stretching out the dates when liabilities fall due. It may also include a debt-for-asset swap wherein creditors agree to cancel a portion or all of the outstanding debt in exchange for certain assets.

“We are jointly together in this because if you are not able to recover, then we also have a problem so it’s up to us to help all types of businesses, not just small businesses,” Tan said.

Last March, credit watchdog Fitch Ratings revised its outlook on the Philippine banking sector for 2020 to “negative” from “stable,” citing rising asset-quality risks amid a deteriorating operating environment arising from the global coronavirus pandemic.

Fitch sees pressure on banks’ revenue from declining interest rates and the resulting economic slowdown, as enhanced community quarantine on Luzon Island—which accounted for more than 70 percent of the nation’s output—adversely impacts on business operations. The whole of Luzon is now on its fifth week of a government-mandated lockdown.

It noted that the Bangko Sentral ng Pilipinas, like many regulators in the region, was extending regulatory relief to banks with exposure to borrowers affected by the new virus.

“Notwithstanding such measures, the weaker operating environment is still likely to exert pressure on loan quality, especially as the quality of recent rapid credit growth has not been tested over the course of an economic cycle. Banks with higher exposures to SMEs (small and medium-sized enterprises) are more vulnerable to deterioration in asset quality. Those with outsized exposure to tourism and hospitality will also face extra pressures on asset quality, although this sector accounted for only around 2 percent of banking system loan exposure at end-2019,” Fitch said.

But Fitch said the balance-sheet strength of large corporations, which made up the bulk of Philippine banking system loans, could help cushion the impact on banks’ asset quality from a moderate slowdown in business operations. Nevertheless, prolonged business disruptions are seen to expose banks to lumpy asset impairments.