Pandemic to cause more loan defaults, but not as bad as 1997 crisis — BSP

MANILA, Philippines — Soured loans in the local financial system will rise over the near term due to the coronavirus pandemic-induced recession, but the country’s top banking regulator assured that this expected increase in borrower defaults will be nowhere near the levels seen during the 1997 East Asian financial crisis.

In an online press briefing, Bangko Sentral ng Pilipinas Governor Benjamin Diokno said that the local banking system has more than amply provisioned with buffers in the unlikely event that bad loans reach their worst-case assumptions.

“As part of its supervisory surveillance, the BSP conducts regular stress tests and continues to monitor ongoing developments on credit exposures, reinforcing banks’ capability to withstand assumed stress scenarios across banking groups,” he said.

Diokno said that banks recorded high capital adequacy ratios going into the COVID-19 pandemic.

As of end-December 2019, the capital adequacy levels of the universal and commercial banking industry stood at 15.6 percent and 16.0 percent on solo and consolidated bases, respectively. This is against the BSP and global standards of 10 percent and 8 percent, respectively.

“It indicates sufficient capital buffer against unforeseen shocks,” he said.

The central bank chief added that bank lending is also expected to rise with the easing of the lockdown and as the national government carries out measures to buoy up the economy, including the resumption of the Build, Build, Build Program.

The latest BSP figures revealed that the banking system’s total loan portfolio grew by 7.8 percent year-on-year to PP11 trillion at end-April, about one and half months into the lockdown.

Amid sustained credit growth, the banking system’s loan quality remained satisfactory as banks’ non-performing loans represented 2.3 percent of total loans as of end-April 2020, he said.

Banks’ reserves for credit losses also remained robust at 94.3 percent of bad loans during the same period.

At the same time, universal and commercial banks continued to drive credit growth.

By economic activity, banks’ loans were granted to productive activities such as real estate (18.2 percent of TLP), households (11.6 percent), wholesale and retail trade (11.7 percent), and manufacturing (10.0 percent).

To date, the BSP has issued a range of measures to shore up market confidence and ensure adequate liquidity and credit; complement government programs through extraordinary liquidity measures; extend financial relief to borrowers;  incentivize lending; promote continued access to financial services; and support continued financial services delivery.

Diokno said the recent ‘A-‘ credit rating given to the Philippines by Japan Credit Rating Agency, along with the regulatory relief measures extended to banks, are expected to help sustain credit growth in the local banking system.

/MUF