FITCH Ratings has identified the Philippine economy as one of the most challenging operating environments for banks among emerging markets in Asia.
In its recent commentary on emerging market banks across the world, international credit watcher Fitch Ratings said the Philippines, along with India and Sri Lanka, face the greatest challenges for banks this year.
“The operating environment (OE) remains challenging—though to varying degrees—in most emerging market banking systems in Asia, excluding China. This is because most jurisdictions’ OE have weakened in the past 12 months even if their outlooks are now stable,” Fitch Ratings said.
“Challenges are greatest in India, Sri Lanka and the Philippines,” it added.
Fitch Ratings identified the ”stubborn infection rate” as the main challenge in the country as it is “testing past years’ underwriting standards” of banks.
For India, the surge in new coronavirus cases are exacerbating pre-pandemic issues and are affecting banks’ asset quality and capital shortfalls. For Sri Lanka, sovereign and macroeconomic risks are the problem.
Earlier this month, Fitch Ratings had warned of “diminished revenue growth opportunities” and “worsening non-performing loans ratio” for Philippine banks, as the economy continues to grapple with recession.
Banks will particularly be hit, the credit watcher said, because the weaker economic outlook translates to low revenue growth opportunities for banks as credit demand remains muted and as set yields are capped by excess liquidity amid a dovish monetary policy.
In their Thursday report, Fitch said among the nine emerging market economies in the region under their watch, the Philippines—along with Sri Lanka and Thailand—posted the largest rise in nonperforming loans since 2016.
Also, among the nine emerging market economies, only the Philippines and Indonesia’s bank lending contracted in 2020.
Fitch expects the Philippine banking industry’s nonperforming loan ratio to worsen to nearly 6 percent by end-2021.
“Consumer and business sentiments remain dampened by high coronavirus infection rates and consequent social distancing measures, and we expect more business failures in the mid-market segment,” Fitch Ratings earlier said.
The Philippine economy plunged into recession in 2020 due to the disruption caused by the global health crisis. Last year, the country’s gross domestic product (GDP) shrank by 9.5 percent on average. For the first quarter of the year, the economy remained in recession with a contraction of 4.2 percent.
Image courtesy of (ADB photo)