Banks' non-performing loans seen manageable at 3.5%

Fitch Ratings said corporates’ sufficient financial buffers and economic recovery are seen to offset the expected impact of elevated inflation and higher interest rates to the asset quality of the Philippine banking sector, according to a report by Philippine News Agency.

In a commentary dated March 5, 2023, Fitch Ratings forecasts domestic banks’ non-performing loan (NPL) ratio to remain steady at 3.5 percent this year “as risks are largely offset by the adequate financial buffers of large corporate borrowers and a supportive economy”, with the latter seen to expand by 5.5 percent this year.

“Ample loan loss coverage of 167-180 percent also limits impairment risks at the rated privately owned banks,” it said.

The commentary said while retail lending rose during the pandemic, corporates continue to have the bigger share at around 75 percent.

“Corporate earnings remain resilient relative to debt service,” it said.

Fitch Ratings estimates that only around 4 percent of the liabilities are held by companies that are listed with the local bourse and “have interest coverage ratio (ICR) of less than 1x even after factoring in higher financing costs.”

“The majority of these are in the construction and hospitality sectors, whose credit risks are well-managed by banks; the latter is likely to benefit from an expected travel recovery,” it said.

Fitch Ratings said there is a large-borrower concentration in the country, “which raises risks of lumpy impairments.”

“Nevertheless, we expect the supportive economic conditions, robust earnings buffers, and the diversified business and entrenched market positions of conglomerates to support their debt servicing capacity in the near term,” it added.