BSP wary of possible bad loan spike

The Philippine financial system weathered the coronavirus pandemic relatively well in the second half of 2020, although the central bank noted that it was closely guarding against a possible increase in bad loans and the ill effects of weak demand, going forward.

In a statement, the Bangko Sentral ng Pilipinas (BSP) said its latest report confirmed that the country’s banks and financial institutions entered the COVID-19 crisis in a relatively strong position and weathered its effects while ensuring relevant delivery of financial services upholding its critical role to the domestic economy.

“The COVID-19 pandemic tested the resilience of the banking system and the robustness of the financial ecosystem as the country reacts to the global health crisis,” the central bank said the report released last week.

Adjustments

“This novel crisis significantly affected the banking operations as the community quarantine and social distancing measures prompted banks to adjust their daily banking services,” it added.

In support, the BSP deployed “targeted and time-bound” regulatory relief packages that facilitated the uninterrupted flow of financial services in the country especially during this challenging time of the pandemic.

Resilience

“The relief packages strived to address the critical requirements of the economy while at the same time ensuring that financial stability is not compromised,” BSP Governor Benjamin Diokno said.

Financial soundness indicators—which assessed the banks’ strengths and weaknesses—affirmed that the banking system was resilient during the pandemic year 2020, but implied that consequent risks from lending should be monitored, including emerging risks from demand side and supply side factors, which might amplify impact on the economy.

The report said the quality of the banking system’s loan portfolio remained “satisfactory,” with the nonperforming loan ratio manageable at 3.6 percent as of end-December 2020, albeit higher than the 2 percent ratio as of end-December 2019.

The increase in bad loans was matched by higher loan loss provisioning. Loan loss reserves have been increasing since the start of 2020 resulting in a high bad loan coverage ratio of 92.9 percent as of end-December 2020, as compared to the 92.6 percent ratio as of end-December 2019 as banks continued to increase provisioning in anticipation of the adverse impact of the pandemic on their loan portfolio.

Across banking groups, the universal and commercial banks’ bad loan ratio of 3.1 percent as of end-December 2020 was higher than the 1.6 percent ratio as of end-December 2019. The bad loan ratios of thrift, rural and cooperative banks stood at 7.9 percent and 15.5 percent as of end-December 2020, higher than the 6 percent and 10.5 percent ratios, respectively, as of end- December 2019.

The report also highlighted that foreign currency deposit system, trust entities, foreign banks in the country, quasi-banks and other nonbank financial institutions all showed positive performance during the review period.

Meanwhile, the pawnshops and money service businesses proved their role as critical access points for the improved service delivery of the financial system in 2020.

“Moving forward, the BSP stands committed and ready with its enhanced onsite and off-site surveillance tools and prudential policy toolkit to promote the financial sector reform agenda for sustaining the sound and stable financial system conducive to a strong, dynamic and inclusive economic growth recovery for all Filipinos,” the central bank said.