They will lean on buffers built, but this won’t provide any shield if the pandemic worsens again.

Nonperforming loans (NPLs) at Philippine banks will see a rise in the first quarter of 2021 as loan moratoriums and fiscal support are phased out, says S&P Global Ratings in their latest report. It is expected to peak at the second half of the year should economic recovery stay on track.

"Philippine banks are on a long road to recovery," said S&P Global Ratings credit analyst Nikita Anand. "Asset quality will deteriorate further in the coming quarters as banks recognize the full brunt of COVID-19 on borrowers."

The industry's NPL ratio is sighted to increase to 6% in 2021 from 3.6% at end-2020. Consumer and small business loans will continue to see high new NPL formation, adds S&P.

The banks’ high provisioning in 2020 and their capital buffers will help maintain credit standing as they repair financial metrics—assuming the economic revival stays on track.

However, should the pandemic situation worsen once more, things will likely turn for the worse for banks. Lenders’ buffers won’t be able to hold back negative effects, warns S&P.

For 2021, Philippine banks’ credit costs—a measure of provisioning for bad loans—are sighted to stay raised at between 1.5% up to 1.8%.

On the upside, S&P expects sector-wide profits to improve slightly in 2021, with return on assets increasing to 1% on the back of relatively better growth and lower credit costs in 2021.

Vaccination will be key to sustain the economy’s revival. Relaxation of restrictions in Manila will support stronger activity in the second half.

Overall, the country’s GDP is estimated to soar by 9.6% in 2021. However, this is off a low base, given last year's sharp contraction. Furthermore, the country’s output gap won't likely close over the next three years.