Reminder from the experts: Selling APNs has a price for banks

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ALTHOUGH offloading bad debts onto asset management companies will help banks, it comes at a price that financial institutions should be prepared to pay.

The Financial Institutions Strategic Transfer Measure (FIST), which was enacted last month, can free up liquidity in banks by allowing them to sell their non-performing assets (NPAs) to FIST companies. But economists polled by BusinessMirror explained that the selling price of APMs is usually reduced, which means banks are likely to suffer losses in the process.

“I think that these are losses that all economic players have to face, especially if the said NPAs are said to be less superior,” Ruben Carlo O. Asuncion, chief economist of UnionBank, told this newspaper. NPAs refer to nonperforming loans (NPLs) and real estate and other property acquired in settlement of loans.

He explained that the valuations of NPAs for sale can also vary, but the end goal is the same: offloading the NPAs will allow banks to get immediate funding to expand more borrowing, which is needed to help the business. economy to recover.

ING Bank Manila economist Nicholas Antonio T. Mapa agreed that the selling price of the NPA varies as it depends on the agreement between the banks and the FIST companies.

However, in order to attract asset management companies, he said “significant” discounts should be given to them as they will take over bad debts and assets.

While NPAs are sold at a discount, which is in line with international practice, RCBC chief economist Michael L. Ricafort said banks that do so will receive tax benefits in return.

“In order to convince financial institutions to accept what will likely be substantial discounts, the government is prepared to forgo taxes collected, such as documentary stamp duties and capital gains taxes, just to start the sale.” , Mapa said.

Healthy capitalization

Ricafort said the banking sector can still withstand the impact of the potential increase in bad loans this year, citing its strong capitalization.

In addition, the RCBC economist believes that financial institutions are ready to manage anticipated credit risks. “This [healthy capital level] has also been aided by the adoption of risk management frameworks / systems, including better credit risk management, aligned with global best practices, ”he explained.

The banking sector’s capital adequacy ratio stood at 12.71% in January, according to data from Bangko Sentral ng Pilipinas.

For Asuncion, the worst is over for the financial sector, but warned that the potential rise in bad loans is still looming.

“This year, I think the worst for the financial sector is already in the rearview mirror,” he said. “At this point, banks can still pursue and continue the economic recovery this year despite all the challenges. “

Based on Central Bank data, NPLs reached 391.67 billion pesos at the end of December 2020, 74.77% more than 224.11 billion pesos year-on-year. This, as the total loan portfolio slipped 1% to 10.86 trillion pesos at the end of last year, from 10.97 trillion pesos in 2019.

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