Economic fallout from pandemic weakens banks’ optimism

The heads of the country’s banks are slightly less optimistic about the industry’s prospects over the medium term due to what they believe would be the lingering economic impact of the coronavirus pandemic, according to a central bank poll during the second half of last year.

In a statement, the Bangko Sentral ng Pilipinas (BSP) said its semi-annual Banking Sector Outlook Survey showed that chieftains of the country’s biggest financial institutions expressed more “subdued optimism” compared to previous periods.

This less optimistic view was attributed to disruptions in activities of the domestic economy due to lockdowns along with the global spillover from soft demand, weaker tourism and lower remittances from overseas Filipinos.

“Majority of the respondents projected that real gross domestic product growth will return to a range of less than 6-6.3 percent within the next two years,” the central bank said. “Respondents identified that economic sectors such as the accommodation, transportation, and wholesale and retail trade are the hardest hit sectors but believed that these sectors are poised to recover in the next six months to two years.”

Despite this, BSP Governor Benjamin Diokno noted that the outlook on the Philippine banking system remained relatively stable.

“Majority of the respondent banks projected growth in their loan portfolio over the next two years between 10 percent and 15 percent,” he said.

The survey—part of the BSP’s surveillance toolkit to promote the sustained resilience of the banking system—gathers the sentiments of the presidents, CEOs and country managers of universal and commercial banks, thrift banks and the top 20 rural and cooperative banks in terms of loan portfolio plus 60 randomly selected rural and cooperative banks related to their growth outlook and risk assessments, business performance strategies and insights on regulation and supervision within a two-year horizon.

Over this period, banks anticipate a more active participation in the money and capital markets over the next two years as growth in financial assets, excluding loans, was projected to not exceed 10 percent by more than half of respondents, while the remaining banks estimated a double-digit growth. A double-digit deposit growth was also expected by most of the banks to fund financial asset and loan expansion.

Meanwhile, majority of respondents expected the non-performing loan ratio of the industry to exceed 3 percent in 2021 to 2022, while almost half of banks expected the ratio of restructured loans to total loans to average from 3-5 percent of total portfolio. The respondent banks also intended to maintain their capital and liquidity ratios at levels higher than domestic and global standards to promote institutional stability.

Bank CEOs also recognized the need to integrate technology in achieving business objectives and disclosed that they would leverage on financial technology for strategic efficiency in the next two years. Moreover, mindful of cyberthreats following the lockdown and remote working arrangements, more than half of the respondent said they were prepared to handle and manage cyberthreats.

Almost 60 percent of banks viewed sustainable financing as a highly important strategic objective. Likewise, 73 percent of respondent banks were planning to finance sustainable projects in the next two years covering agriculture, transportation, water supply management and solar power.

The Philippine financial system is also projected to withstand the legacy risks and challenges posed by the COVID-19 pandemic within the next two years on account of its relatively stable and sound capital, leverage and liquidity buffers, ample loan loss reserves and buoyant earnings performance.