BANKS with large exposure to industries such as tourism may face risks amid the prolonged spread of the coronavirus disease 2019 (COVID-19), according to an official of the Bangko Sentral ng Pilipinas (BSP).

“The BSP recognizes that it can potentially impact banks, particularly those with significant exposures to certain industries such as, for instance, tourism,” Lyn I. Javier, BSP managing director for policy and specialized supervision, said in an e-mailed response to BusinessWorld on Friday.

“Banks may also face operational risks due to potential disruption in operations resulting from quarantine procedures for employees, temporary closure of certain offices with affected personnel, or possible supply shortages,” she said.

The BSP official said the assessment of the risks of the COVID-19 outbreak for banks is still in progress.

Ms. Javier noted that the central bank is closely monitoring developments related to the spread of COVID-19 in the country and how these can affect the banking industry. “BSP is also coordinating with the industry on measures that may be implemented,” she added.

The Department of Health on Saturday announced the first case of transmission of COVID-19 in the country, a 62-year-old Filipino who has not traveled abroad. His wife has also contracted the disease. This brought confirmed cases in the Philippines to six.

The National Economic and Development Authority estimated foregone revenues worth P22.7 billion per month in the tourism sector amid the COVID-19 outbreak.

Socioeconomic Planning Secretary Ernesto M. Pernia last week said the economy could take an even bigger hit if the outbreak persists until yearend, estimating a one-percentage point reduction in 2020 gross domestic product (GDP) growth.

The NEDA chief said the assessments were made based on a scenario where there won’t be inbound Chinese tourists and foreign tourist arrivals will be reduced by 10%, while trade will be “drastically reduced” and there could be indirect effects on other industries.

The government is targeting 6.5-7.5% GDP growth this year.

Ms. Javier said banks have sufficient safeguards against unforeseen events that may disrupt their business.

“The BSP has earlier required banks to have a sound business continuity plan and to provide sufficient financial and human resources associated with business continuity initiatives,” Ms. Javier said.

“In this light, we believe that banks have adopted measures in preparation for cases that may potentially disrupt their operations,” she said.

Ms. Javier added that the central bank has already granted regulatory relief packages to banks and quasi-banks affected by the COVID-19 and the African Swine Fever outbreak, even though this assistance was previously only available to those hit by calamities.

These relief packages come in the form of staggered booking of allowance for credit losses, non-imposition of penalties on legal reserve deficiencies, and non-recognition of certain defaulted accounts as past due, among others. The BSP said it will evaluate banks applying for the measures on a case-by-case basis.

BAD LOANS MAY RISE
Sought for comment, credit raters said banks’ nonperforming loans could see an uptick due to the spread, with some sectors expected to be worse off than others.

“We expect bad loans to rise but the quantum of the impact will depend on the duration of the outbreak,” Tamma Febrian, associate director of the Financial Institution Group of Fitch Ratings, said in an e-mail.

“Should the outbreak be contained within the next few months, we believe that the direct impact on the banks would be manageable as hospitality/tourism sector accounts for less than 2% of the banks’ loan portfolios,” Mr. Febrian said.

Mr. Febrian also said other sectors “vulnerable” to the virus outbreak are the manufacturing and transportation industries.

“The real estate sector could also be impacted as Philippine Offshore Gaming Operators (POGOs), which are largely fueled by Chinese operators and customers, have been a key driver of demand in the sector,” he said.

Tengfu Li, an analyst at the Financial Institutions Group of Moody’s Investors Service, also said bad loans may rise if the outbreak persists. He, however, noted that banks’ larger exposure to local conglomerates can offset the effects of the virus.

“A prolonged outbreak will lead to a rise in bad loans but at this stage, we expect the impact on banks to be muted because the banks are largely exposed to the domestic conglomerates that are able to withstand short-term negative pressure on revenues,” Mr. Li said in an e-mail.

Likewise, Mr. Li pointed out that local banks are more equipped in terms of loan-loss buffers compared with their regional counterparts.

“The strong buffers are driven by the implementation of PFRS 9 (Philippine Financial Reporting Standards 9) — which leads to higher loan-loss coverage — and regulatory capital requirements that are higher than international norms,” he said.

Last month, the central bank implemented tighter capital requirements for smaller standalone rural and thrift banks in a move to strengthen their guard against possible losses.

Under the new rules approved by the policy-making Monetary Board, standalone thrift, rural and cooperative banks must provide for minimum capital ratios including a common equity Tier 1 ratio of 6%, a Tier 1 ratio of 7.5% and a capital conservation buffer of 2.5%, which used to be only applied to universal and commercial banks.

Such requirements are aside from the minimum capital adequacy ratio of 10%. The local bank rules are at par with international standards under Basel 3. — Luz Wendy T. Noble

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