Philippine banks can weather their largest corporate default

The combined loan exposure of Korean shipbuilder Hanjin to its five creditors is at $412m.

The massive loan default by the local shipbuilding unit of Korean conglomerate Hanjin is unlikely to threaten Philippine financial stability due to the strong capital buffers and low volume of bad loans of the country's banks, according to a report from Fitch Solutions.

After Hanjin Heavy Industries and Construction Philippines declared bankruptcy, its five creditors have joined forces to recover $412m in combined loans. The five banks are Rizal Commercial Banking Corp (RCBC).; Land Bank of the Philippines; Metropolitan Bank and Trust Co.; Bank of the Philippine Islands (BPI), and Banco de Oro Universal Bank (BDO).

Estimates from local media outfit Philippine Daily Inquirer calculates the loan exposure of RCBC at $140m followed by Land Bank with an estimated $80m; Metrobank, $72m; BPI, about $60m and BDO, $60m, highlighting the little concentration risk.

Also read: Bloated corporate loan books drag down Philippine banks

The combined loan exposure represents the largest corporate default in the country’s banking industry as Hanjin’s loans are larger than the $386m of losses banks had to declare as a result of the global financial crisis in 2008.

The Philippine banking system, however, remains on strong financial footing to recover the losses as Hanjin’s debt only accounts for about 0.24% of the Philippines’ total loans and 2.48% of foreign currency loans, according to central bank data.

“This represents less than 1.25% of the total assets of RCBC, which could be the worst hit, whilst the impact is even smaller for the least affected BDO bank, constituting just 0.11% of total assets, according to our estimate,” Fitch Solutions noted.

“Even if in the event that the consortium of Philippine banks call for the forced sale of the Hanjin shipyard to strategic investors, the value of the company’s assets is said to outstrip its loan liabilities,” it added.

Asset quality also remains healthy as gross non-performing loans (NPL) as a share of total loans came in at 1.85% in November 2018, whilst the NPL coverage ratio stood at 108.25%, indicating adequate loan-loss provisioning. The capital adequacy ratio for the sector also stood at 15.36% in September 2018, far exceeding the regulatory requirement of 10.00%.

Also read: Philippine banks' bad loan ratio to hold steady at 3.5% in 2019

That being said, Philippine banks are set to face more difficulty amidst slowing growth.

“Nevertheless, we maintain our expectation for credit growth to slow and asset quality to weaken over the coming quarters, as the operating environment becomes more challenging due to slowing economic growth momentum and tightening monetary conditions,” concluded Fitch Solutions. 

In the worst case scenario when banks are left with no choice but to make provisions for their full exposure, credit costs as a percentage of the banks’ pre-provision income is set to increase to between 20 and 140 basis points, from 6 to 26 bp, Moody's Investors Service said in a report.