PAL Fallout: Banks' Sickly Loans to Rise

People’s Journal
Saturday, September 19, 1998
OPINION

THE CLOSURE of Philippine Airlines would raise local banks' non-performing loans by 0.5 percent to one percentage point, according to Deogracias Vistan, President of the Bankers Association of the Philippines.

The airline on Thursday said it would shut down after unions rejected its equity offer plan.

PAL owes about $2 billion to a group of local and foreign banks led by the Philippine National Bank and Chase Manhattan Bank.

Suzanne Felix, Executive Director of the Philippine Chamber of Thrift Banks, said the worst in terms of rising NPLs had passed.

"The big reclassification of loans has happened already, especially following the central bank's redefinition of past-due from six months to three months late last year," Felix said.

"Because of that, the impact (of the Asia crisis) has been felt earlier this year, and in the months to follow, this will no longer be the case," she said.

"Capital adequacy, as measured by non-performing loans over total loans, was getting better until the end of1996 and early 1997, though now it is deteriorating because of the Asian crisis," said Jonathan Gotin, Senior Analyst at Thomson Bank Watch.

The Bangko Sentral has said non-performing loans for all banks fell to 9.7 percent of their total loan portfolios in June from 10.4 percent in May. For commercial banks alone, NPLs were at 8.95 percent in June versus 9.4 percent in May.

NPLs for total banks were just over five percent at the end of 1997.

Standard and Poor's Corp has said Philippine bank NPLs could easily exceed 20 percent in 1999, raising the BSP's ire. S&P's assessment was based on conjecture, while government figures reflected hard data collected from the banks, BSP Gov. Gabriel Singson has charged.

Francis Varela, Vice President for Corporate Planning at Asian Bank, said differences of opinion over the outlook for NPLs may be due to uncertainty on how to classify restructured loans.

According to BSP rules, restructured loans are removed from the past-due roster as long as they are backed by real estate collateral. But some analysts said restructuring loans can hide the extent of asset quality problems.

Restructured loans as a percentage of total loans were just 1.19 percent in June 1998 compared with 1.07 percent in May 1998 and 0.83 percent in June 1997, the central bank has reported.

Varela said the Asia crisis had hurt the Philippine economy and weighed on banks' profitability. But to say it posed a threat to the banking system was overdone.

Local banks' asset quality surely will come under pressure as the economy slackens, but the industry remains in much better condition than other Asian banking sectors, analysts yesterday said. "Our general view is that Philippine banks are in pretty good shape," Thomson Bank Watch's Golin said.

"As long as NPLs stay at the present level, or even a little higher, the banking system should remain stable. It definitely would be in much better shape than (those) inThailand, Malaysia, and Indonesia, where NPLs are expected to reach 25 percent to 35 percent."